Nora Brownell, Commissioner,
Federal Energy Regulatory Commission, USA

The United States stands at a historic crossroads in the restructuring of its electric industry. The outcome will determine whether we successfully develop the power markets necessary to support the future economic growth of the nation.

The decision we face is stark: Do we press ahead with reform in the $225 billion electricity sector and complete the transition from regulation to competition? Or do we retreat to cost-of-service ratemaking? At the Federal Energy Regulatory Commission, the decision to aggressively press ahead with competition in wholesale electricity markets was unanimous and bipartisan.

On July 31 2002, the Commission approved proposed rules to standardize the structure and operation of bulk power markets nationally. The Standard Market Design (SMD) represents a consensus framework based on the lessons learned from California’s market disaster, as well as successful competitive reforms in my home state of Pennsylvania and elsewhere in the country and the world.

It was a bold step and represents FERC’s determination that properly structured and policed competition, not heavy-handed regulation, is the best means of assuring customers pay the lowest prices possible for electricity.

The Department of Energy has determined that wholesale power competition lowers customers’ electricity bills by $13 billion annually.

In the PJM Interconnection, competition has reduced forced outage rates for generation by nearly five per cent. The same competitive pressures nationally have contributed to nuclear power plant operators establishing record capacity utilization rates.

Failure to follow through with a pro-competitive agenda puts these benefits at risk. Continuing today’s muddled, incomplete transition to competition also risks perpetuating problems that threaten our nation’s ability to maintain economic growth:

•Investment in new transmission lags behind electricity demand growth. During the next decade, construction of new high voltage transmission lines will grow only six per cent as electricity demand grows 20 per cent.

•Power outages and other power quality disturbances cost the US economy $119 billion annually, EPRI estimates. SMD provides the framework for regional cooperation in power grid planning and reliability.

•FERC has identified the top ten transmission bottlenecks in the country and concluded they cost customers more than $1 billion during the summers of 2000 and 2001. Congestion-based transmission pricing helps identify transmission constraints and assign the costs to those causing congestion.

•A third of US power plants are 35 years of age or older, and will need rehabilitation to remain competitive. Operators will need billions for emission controls to meet new Clean Air Act requirements. We need a standard competitive framework to allow rational investment decisions.

FERC’s market standardization proposal comes in the wake of the California crisis and the collapse of Enron. These developments have wounded the public’s confidence in competitive energy markets and soured investor bullishness.

Efforts to restructure retail electricity markets have slowed, and merchant power producers have been, in many cases, unfairly pummeled by Wall Street. The three-fold explosion in merchant power projects in recent years is in jeopardy, increasing the risk of power shortages and price spikes.

Given the public’s skepticism, concerns about our SMD proposal were not unexpected. But the Commission remains convinced that the objectives are sound, and that all customers will benefit.

There is no rational alternative to us buckling down and standardizing rules to make markets work. To reverse course and return to cost-of-service ratemaking is not an option – it would fly in the face of the recognition that regulation failed as a means of protecting customers from high energy costs. Equally unfortunate would be for us to prolong the transition from regulation to competition.

FERC’s SMD represents an effort to forge the necessary rules of the road for today’s evolving competitive power industry.

Properly constructed and vigilantly monitored, competitive power markets will provide billions of dollars in economic efficiencies that ultimately will get passed on to customers. And eliminating the residual barriers to competitive market entry promises to usher in new technologies and service innovations we can’t even imagine today.

As the nation enters the 21st Century, its economic growth is hampered by an electricity grid and regulatory structure that increasingly is a relic of the last century.

The aging electricity infrastructure is ill-equipped to accommodate today’s competitive markets, contributing to billions of dollars annually in unnecessary transmission costs. Regulatory uncertainty has contributed to underinvestment in critical energy infrastructure.

Through market standardization, with proper flexibility to accommodate regional differences, we can provide the regulatory certainty Wall Street demands to free up capital for investment.

FERC cannot complete the urgently needed transition from regulation to competition alone. State and federal regulators must work together so customers can reap the benefits of a national wholesale market.

Through the SMD, state regulatory authorities would maintain their role in determining key issues. Consistent transmission rules for all customers would provide a stable national framework in support of regional markets.

Regional power markets differ in geography, economics and resources, and the SMD proposes to balance the vision of a national market for wholesale power with the states’ interests and regional self-determination.

Through standardization state and federal regulators can assure adequate and reliable supplies of electric energy at just and reasonable prices while respecting the unique characteristics of regional power markets.