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EPSA HIGHLIGHTS STRENGTH OF COMPETITIVE MARKETS AND CHALLENGES AHEAD AT FERC CONFERENCE

"We commend the Commission for convening this series of conferences at a critical time for the future of wholesale power markets and the retail customers they serve across the country. EPSA particularly appreciates the Commission¡¦s reasoned decision to extend the scope of these conferences to all regions of the United States ¡V those with organized markets and those that lack the pro-competitive structures organized markets provide"

Excerpts from EPSA President and CEO John Shelk’s Written Remarks

Power Generation Is Not a Natural Monopoly

“The nation is one year shy of the 30th anniversary of the beginning of a series of three federal laws that, over time, allowed for increasing degrees of wholesale power competition. The inescapable and incontrovertible conclusion from the implementation of these laws is that the generation of electricity is no longer and never again will be a natural monopoly that justifies exclusive franchises for generation accompanied by traditional rate regulation.”

Wholesale Competition Is Lacking In “Bilateral Markets”

“Wholesale competition does not mean very much if power generators and marketers do not have access to consumers and the transmission to serve them. Competitive suppliers have invested tens of billions of dollars in generation resources in ‘bilateral markets’ in reliance on federal and state statutes and policies, and on the expectation that they would be vigorously enforced.”

Today’s Challenges in “Bilateral Markets” Are Largely Yesterday’s Challenges

“In truth, some regions of the country, particularly the Southeast, probably do not even qualify as ‘bilateral markets.’ A region dominated by monopsony buyers who can use their control over transmission to unfairly crowd out generation from unaffiliated sellers is more ‘unilateral’ than ‘bilateral.’ In addition, some regions are hardly what one normally thinks of as a ‘market’ – which requires multiple buyers and sellers free from the influence and distortion of unmitigated market power.”

“Federal appeals courts and the Supreme Court have also recognized this inherent conflict in the structure of vertically-integrated utilities which own both transmission and generation. Despite efforts to address these inherent conflicts in recent years, challenges remain and must be addressed to make these challenges yesterday’s news, not today’s imperatives.”

EPSA Is Hopeful Order 890 Will Tackle Transmission Access and Planning

“Order No. 890 is an important milestone that has the significant potential to substantially improve transmission access.”

“Vigorous FERC oversight and enforcement to the fullest extent of the law, including use of EPACT 2005’s civil penalty authorities, will be required to achieve Order No. 890’s significant potential.”

“When it comes to non-discriminatory transmission access, FERC should adopt a ‘three strikes and you’re out rule’ – Strike One was the need for issuance of Order 888, Strike Two is the need for Order 890, and Strike Three will come if transmission owners in bilateral markets avoid, evade and filibuster yet again. At that point, should it come, the Commission should not hesitate to exercise its authority to go beyond mere functional unbundling and instead institute the RTO-style structural reforms that have worked elsewhere to ensure non-discriminatory transmission access to wholesale competitors and customers in ‘bilateral markets.’”

Competitive Procurement and Rate Base Risks Are Pressing Challenges

“With transmission access, and regional coordination and planning being addressed under the Commission’s watchful eye as Order 890 is implemented, the most pressing challenges today are two sides of the same coin: competitive procurement and the risks to consumers of rate base investments. EPSA commends the recent announcement by FERC Chairman Kelliher and NARUC President Kerr resuming the joint federal-state dialogue on competitive procurement.”

Need for New Generation is Greatest in “Bilateral Markets”

“The critical policy questions revolve around who will build and operate these new plants in ‘bilateral markets.’ That will determine how risks and rewards will be allocated among investors and consumers. Which structure best serves consumers – the market-based approach successfully employed in the most recent build out of generation that started in the mid-1990s, in which almost all of the new generation was built by competitive suppliers deploying more efficient new innovative technologies largely at their own risk, or going back to the model when overruns were paid for by captive ratepayers?”

“In the competitive wholesale market, economics rule and profits are earned. Competitive suppliers are paid for performance – or they are not paid. In the rate regulated regime, politics can trump economics and profits are seen as an entitlement largely divorced from performance over the multi-decade life of the project. During the ‘good old days,’ rate-regulated utilities were paid if they could persuade the regulator that costs were ‘prudently incurred’ regardless of the economic outcome over time. I ardently hope that federal and state policymakers will ultimately resist the misguided, misinformed calls for a return to rate base regulation without competition. However, that will not happen unless competitive procurement becomes the law of the land and the actual practice in each state before these massive investments are made.”

Generation Costs and Risks Are Rising

“Competitive procurement is so important precisely because the risks to consumers of rate base investments are as high as or even higher than ever before.”

“…The New York Times (Saturday, February 17, 2007) under the headline, ‘Rising Price of Electricity Sets Off New Debate on Regulation,’ discussed a recent example of a utility seeking to rate base two 800 MW pulverized coal plants (not IGCC plants), the estimated price tag for which jumped from $2 billion as recently as last September to over $3 billion and climbing. Even a non-math major like me knows that a percentage rate of return on $3 billion in allowed costs yields much higher profits than that on $2 billion. Other public utilities announced similar expected cost overruns in late 2006 and more such announcements are sure to follow. If costs for proven technologies are rising, imagine the future actual cost curves for the new technologies which are expected to make up an increasing percentage of new power plants.”

Policy Alternatives for New Generation

“The answer for power generation should be identical to the answer in the private and public sectors: competition in lieu of an overt or de facto utility self-build on the basis of an exclusive franchise. As far as I know, every state has a law that simply says if a good or service is to be procured over a certain amount (usually a nominal figure well under $100,000) then the good or service must be competitively procured. When the Pentagon, or some other federal or state agency, fails to do so, the media drops a front-page headline, political outrage follows, and even criminal prosecutions are brought.”

Who is Afraid of Competitive Procurement?

“One is compelled to ask the simple question – ‘Why are some utilities afraid of competitive procurement?’ If their plan for meeting the needs of retail customers is the best option, after taking all other options into consideration, then – and only then – they should prevail. If, on the other hand, opposition to competitive procurement, evasion of existing rules, and exemptions for certain types of plants is wielded as an anti-competitive club against unaffiliated generators seeking nothing more than the opportunity to propose a less costly alternative to the utility’s self-build plans, then there must be a remedy. Absent a remedy, robust wholesale power competition in ‘bilateral markets’ is more of a mirage than a reality.”

Arguments Against Competitive Procurement Are Myths

“Those who oppose obtaining power generation through a competitive mechanism raise several myths that are easily refuted. The first myth is that only rate base utilities can and should build new base load coal and nuclear plants. The fact is that competitive suppliers are already operating a fuel diverse fleet of coal, natural gas, nuclear and renewables facilities. Furthermore, the track record of improved efficiency at facilities transferred from rate base to competitive status is a major benefit of competition.”

“The second myth revolves around the ability to finance new generation. I am confident from discussions with EPSA member company senior executives and experts in the financial community that ample capital is available to competitive suppliers if regulators will just allow them to compete to serve load. To be sure, there will likely be a mix of financing mechanisms – some more like the merchant financing used in the past decade, and others based to some extent on purchased power agreements. Different companies have different business models and the strategies will vary among them and by region. No other state should follow the misguided path chosen by Virginia on the basis of false claims that only rate base treatment will bring about new base load power plant investments.”

“The third myth is a natural segue to the challenge of price transparency listed on the agenda for this panel. The time has come to call a halt to the charade of arguing that higher rates in restructured states and lower rates in “bilateral markets” are evidence that restructuring has not worked, justifying rate base investments by default. The proof is in the recently issued FERC State of the Markets Report for 2006. The report concluded that ‘Price patterns were fairly similar across the United States, rising in 2005 and falling in 2006 in almost all regions for both on-peak and off-peak deliveries. Regional 2006 declines in on-peak power prices consistently ranged between a quarter and a third of 2005 prices, except in Minnesota where the 2006 decrease ranged from roughly 15 percent to 30 percent.’ [page 15.] Spot prices went up by the same percentage range in the Northeast and Southeast from 2004 to 2005, and down within the same range in the two regions from 2005 to 2006 (see Table 15). The report went on to note that, ‘Prices rose to very high levels at some times during heat waves in both bilateral and RTO markets, as is typical for electric power markets.’”

Challenges Between Organized and “Bilateral” Markets

“Power does flow between ‘organized’ and ‘bilateral’ markets. In fact, those who argue most vocally against ‘organized markets’ are not shy about taking commercial advantage of trading into them when it suits their purposes. EPSA commends FERC for scheduling the upcoming seams conference. EPSA continues to believe that further steps are necessary to bring about greater transparency in dispatch procedures.”

Conclusion

“Failure to swiftly address the challenges we and others identify in “bilateral markets” as the nation embarks upon the largest single set of investments in electricity generation, transmission and distribution in its history will be costly – extremely costly – for decades to come. If policy mistakes are made today, they will be difficult to reverse tomorrow once multi-decade, multi-billion dollar projects are underway without the benefit of robust competition to deliver the greatest value to consumers while protecting the environment and facilitating long-term investment.”

EPSA Highlights Strength of Competitive Markets and Challenges Ahead at FERC Conference.PDF
Shelk Remarks - FERC 2-27-2007.PDF

CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660

EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.