PRINCIPLES FOR WHOLESALE MARKETS

Electric Perspectives, Mar/Apr 2005

REGULATION

To reaffirm the shareholder-owned electric utility industry's commitment to wholesale power competition, Edison Electric Institute's board of directors released last January a framework for guiding the development of wholesale power markets and reinforcing generation and transmission adequacy nationwide.

The framework's purpose is to help clarify the industry's commitment to wholesale electric competition at a time of continuing uncertainty regarding the appropriate role of states and federal regulators in the evolution of those power markets.

"It is our hope that these principles can help inform the ongoing debate over the future of competitive power markets," said Wayne Brunetti, chairman and CEO of Xcel Energy. "Wholesale markets offer substantial benefits to customers."

The Current Situation

Regulatory authority over U.S. electricity markets is divided between state and federal authorities and is likely to remain so for the foreseeable future. The United States Congress, through the Energy Policy Act of 1992, endorsed the development of competitive wholesale markets, and the Federal Energy Regulatory Commission (FERC), through Order numbers. 888, 889, 2000, 2003, and 2004, created a roadmap for how to provide consumers with just and reasonable rates under wholesale competition. At the federal level, FERC is promoting policies for the development of competitive wholesale electric markets capable of serving large regions.

States are responsible for the regulatory structure for providing retail electric service but have different views on what the best model is, which largely reflect regional considerations. Currently, about one-third of the states provide for retail competition, and two-thirds do not.

States and FERC want to assure just and reasonable rates to their customers and to assure there are adequate electric generation resources. States want to continue to take the lead on policies concerning electric resource adequacy and procurement relating to fuel supply choices and environmental aspects of electric generation.

The industry supports pursuing more effective wholesale markets throughout the United States because properly structured competitive wholesale markets benefit consumers. Robust wholesale competition offers the potential of substantial benefits to consumers in terms of lower costs, greater efficiency in the use of generation and transmission resources, and enhanced reliability.

The benefits of robust wholesale competition can be achieved only if a strong, effective state-federal working relationship is established on all regulatory matters that provide the stability and certainty needed to attract investment.

Within this context, a framework for wholesale competition should include several elements.

Wholesale Competition Needs Reliable Transmission

All market participants should be subject to mandatory, enforceable reliability standards that are developed or approved by the North American Electric Reliability Council, with oversight and enforcement by FERC.

To attract the capital necessary to build sufficient transmission capacity,

* FERC'S transmission rate polices should be reformed to provide proper incentives and cost allocations;

* the Public Utility Holding Company Act should be repealed, with appropriate federal and state access to books and records; and

* the tax code should provide the appropriate incentives, including accelerated depreciation, to attract capital investment.

To facilitate the siting of transmission infrastructure,

* FERC should have backstop siting authority if states cannot or will not act on applications to build transmission to relieve critical transmission bottlenecks; and

* the Department of Energy should act as lead agency to coordinate all authorizations and environmental reviews reguired under federal law to site transmission facilities and to set deadlines for federal reviews.

To facilitate regional initiatives, like those involving new multistate transmission, resource adequacy or regional transmission organization (RTO) formation, there should be effective regional coordination. Regional state committees can play an important role but should not create another layer of regulation.

There Must Be Fair and Open Access to Transmission

All transmission-owning utilities should be subject to the same level of FERC regulation to assure fair, open access for all market participants to the transmission grid.

The transmission system should be operated in a fair and nondiscriminatory manner.

Many of the nation's transmission systems are under the control of an RTO or an independent system operator (ISO). States and FERC play a significant role in decisions relating to the formation and expansion of RTOS. Where RTOS are not formed, fair and nondiscriminatory transmission access should be achieved by state- and FERC-endorsed mechanisms, which might include independent transmission administrators, transcos [transmission-only companies], or similar organizations. Market monitors should also provide for oversight of matters such as the behavior of market participants and assurance of independence, transparency, and fair open access.