Energy Policy:

Electricity experts Massey and Showalter debate current state of power markets

Are consumers and industrial customers seeing the benefits from increased competition in the electricity sector? What does the energy bill mean for regional transmission organizations and standard market design? Has the Federal Energy Regulatory Commission been unfairly cast as the scapegoat for the California power crisis and blackouts in the Northeast? Former FERC Commissioner Bill Massey, now with the pro-competition group COMPETE, and Marilyn Showalter, executive director of the Public Power Council and co-chair of the Alliance of State Leaders Protecting Electricity Consumers, weigh in on these questions and more.

Transcript

Colin Sullivan: Welcome to OnPoint. I'm Colin Sullivan. Our guests today are Bill Massey, a former federal energy regulator who now represents the pro-competition group COMPETE, and Marilyn Showalter, executive director of the Public Power Council and co-chair of the Alliance of State Leaders Protecting Electricity Consumers. Also with us is Mary O'Driscoll, senior reporter for E&E Daily and Greenwire. Thank you all for being here.

Bill Massey: Good morning.

Marilyn Showalter: Thank you.

Mary O'Driscoll: Thank you.

Colin Sullivan: Mr. Massey I'd like to start with you. You've been involved at the Federal Energy Regulatory Commission extensively in the attempt to bring national open markets to electricity markets. Is competition dead, especially in the wake of the California power crisis, the Northeast power blackout and the congressional reaction to FERC's attempts to advance competition? What's your response? Is it dead?

Bill Massey: Oh, of course not, actually the markets -- the organized markets are bringing substantial benefits to consumers. Global Energy Decisions organization issued a study finding $15 billion in benefits over a five year period in the Eastern interconnection. They're not that at all. There's a debate about the best way to go forward, whether it is an RTO in every region, to update Order number 888. But I think the commission will stay focused on providing competitive benefits to consumers, and I believe Congress definitely supports that goal.

Colin Sullivan: But there has been a slowdown. Marilyn, would you talk about whether or not that slow down is justified and whether or not FERC was overreaching in its attempts to bring about open competition?

Marilyn Showalter: Well, I think there has been a slowdown. I think at the retail level, retail deregulation is virtually dead and at the wholesale level, I think the bloom is off the rose and Congress recognized that in the energy act. If you look at the bills three years ago, they were going to give FERC the authority to force organized markets and RTOs and there was a substantial retreat from that and for good reason. The empirical evidence shows that organized markets and RTOs are not delivering benefits to the end user. Some of the studies focus on wholesale prices, but the correct study is what is happening to the end user? And industrial customers and residential customers and the public officials who represent them and who represent directly the public interests, are deeply disappointed with competition thus far.

Colin Sullivan: Mr. Massey, I'll give you a chance to respond. Do you think that the consumer is not benefiting from competition?

Bill Massey: I strongly disagree with that. I think policymakers are mixed. There's some regions where they have embraced the RTO concept, other regions where they're taking a wait-and-see attitude. We want to ensure that this benefits consumers, but I see substantial benefits all over the country where competition has been allowed to flourish.

Marilyn Showalter: The problem is that it's the very areas that have tried organized markets whose consumers are most disappointed. So you look at the New England ISO for example and their recent attempt at the so called LICAP, a pricing mechanism, and here you have 100 percent of New England's governors, 100 percent of New England's regulators and 100 percent of its congressional delegation opposed to what the ISO is doing. If that's not a definition of something against the public interest I don't know what is. Finally FERC delayed implementation of the New England LICAP over the objection of the New England ISO itself. So, similarly PJM, just in the last week or two, the state of Virginia says its consumers are not benefiting by having joined the PJM. You have Penn Future, which was one of the original boosters of restructuring, saying this thing is a monster. We have to kill it. So I would say actually as these RTOs progress their consumers become much more disappointed. In areas of the country like mine, where we haven't gone there, our consumers and our public officials, by and large, don't want to go there.

Bill Massey: And yet Congress has now authorized Bonneville Power Administration to join an RTO or another transmission organization. So Congress was not persuaded that this was a mistake. As a matter of fact, the bill has a number of pro-competitive features; mandatory reliability rules, which are important in a competitive market; backstop siting authority for FERC to ensure that necessary transmission is going to be built; repeal of the Holding Company Act to eliminate some barriers to entry; transmission pricing incentives. Congress had the opportunity, if it had wanted to, to turn the clock back, but they did not. It's very friendly to emerging markets and very supportive of the market concept.

Mary O'Driscoll: Well, I wanted to get into that a little bit. You were at the commission for many years, about 10 years I guess, and you were there the last time that the commission started rewriting electricity rules. And you were there and very supportive of the standard market design that FERC was doing, that became very, very controversial and really was the basis for a lot of the flights that were going on with the energy bill. How did we get to this point where Congress essentially put a stake through the heart of standard market design? They terminated it. It's been recognized that it's done. It's not going to happen anymore. How did we get to the point where that came out, everyone was so optimistic about it, but it became pretty universally reviled? To the point where Congress had to specifically address that in the energy bill.

Bill Massey: Well, I think a number of the states felt like FERC had reached too far. The commission, and I voted for standard market design, was attempting to ensure that we didn't have another California crisis. Let's take the best market design. Let's look at advocates from around the world and see what they say and that's what we tried to do. But you know standard market design is over. I think we ought to be talking about what to do for the future to ensure that consumers have the benefit of the lowest cost power available. You've got regions of the country where you have combined cycle gas units, highly efficient, that aren't being dispatched. While dirtier generation, less efficient generation is being dispatched. That is not good for consumers and we need to resolve that with a good market structure that ensures that consumers have the benefit of the lowest cost available supply. And I think that's what FERC wants to achieve.

Mary O'Driscoll: Well, that's an interesting point that you bring that up in light of natural gas prices that are already -- the futures prices are $12. They're double what they were at this time last year. I mean, what happens to competition when you've got fuel prices going through the roof?

Marilyn Showalter: Well, I agree with Mr. Massey that the goal is to benefit consumers, but there are two fundamental flaws with the organized market designs. The first is reliability and the second is sustainability. You need a system that's going to be absolutely reliable and you have to have a system that will draw investment for over the long term. The problem is this, first, with respect to reliability you've got to have extra capacity. You've got to have reserves. Well it is that very excess capacity and reserve capacity that will have the effect of suppressing the so-called price signal that the economic model wants to see. And yet we all agree, I think, we've got to have the excess capacity. So then there are invented various designs to sit on top of that capacity to try to mimic a competitive market, auctions, LMP, LICAP, etc. But each one of those is complicated and leads to potential game playing and is expensive, so you begin to defeat the very model that you would hope to have, which is this free and open market. And the second is sustainability. What the competitive markets do is drive towards short-term profits and dissuades people from investing in the long term. I don't think the designers have figured a way out of that problem yet. Meanwhile if you look at the regulated model, and you look at it from an investor's point of view, you know where your money is going to come from its being paid off by a utility with good credit rating and customers to pay for it.

Colin Sullivan: Wasn't that what RTOs were trying to address, trying to draw investors back into investing in the transmission grid? I mean investors aren't interested in investing in a grid that's antiquated and needs to be upgraded -- what's the answer?

Bill Massey: Well, also what you get with an RTO-type market is a level playing field where all market participants, suppliers, transmission providers, demands, response, resources, have confidence that they'll be treated fairly. You really don't have that unless you have an independent entity that is operating the transmission grid, and I think FERC will face that dilemma in its Order 888 update. What will it do to ensure that there is no discrimination on the grid in areas that do not have an independent platform? We know that Chairman Kelliher is going to tee that up. He wants to make improvements. The commission has declared, several times, when I was there and since then, that the existing Order 888 tariff is simply not sufficient to mitigate market power and to eliminate discrimination. So they'll be working on that.

Marilyn Showalter: But that's theory, not reality. And the theory is that somehow these RTOs are going to build the trust that gets transmission built. In reality it's just the opposite. In the FERC state of the markets -- "2004 State of the Markets Report," they reported on transmission completed in the year 2004. And the Pacific Northwest, where I live, which does not have an RTO, was far and away the leader, had built more than twice as much as any other region. Meanwhile, New England ISO, zero. New York ISO, zero. MISO zero transmission lines built or completed. So it isn't working out and the reason is is that it does not attract investment because there aren't guaranteed customers. The problem with the level playing field is that the players are also not equal. If a utility has an obligation to serve as it's going to, it must for reliability and political and social purposes. It has an obligation to deliver the power, but the merchants do not and a system that is built for the merchants is not going to work for the end-use consumers. It's putting the wholesale market ahead of the retail market. The wholesale market should support the retail market, not the reverse. And what merchant power needs to do is fit into the system that works for real consumers. And I think there are ways that it can, but I think the RTO model or the standard market design model really, in the end, does not work for anybody.

Mary O'Driscoll: Well, what's the answer then?

Bill Massey: Well, I strongly disagree with that. It works for those that want to serve the customers and they have confidence in this system. They believe they get a fair shake. RTOs are very reliable. They coordinate across a broad region. They eliminate pancake transmission rates. They have professional market monitors. They send price signals. They have an excellent future. They may not spread all over the country, but my organization COMPETE is not trying to shove any particular market model down the throat of any region. But we do think that the RTOs are functioning well. Certainly there'd some interesting RTO costs and getting those down a bit. Although I read an ISO New England report in which they estimated that the average customer pays about 60 cents a month for the RTO's operations. So there are improvements that can be made. A number of organizations have suggested improvements. I think FERC is going to be looking at those, but it has the potential to be -- it already is and has the potential to be a highly successful model going forward.

Marilyn Showalter: There's only one metric and that is what is the end user paying? So if you look at Texas, for example, in the organized markets the end-use rates have gone up 47 percent. Whereas the public power there, which escaped that, rates have gone up 17 percent. The costs of RTOs are very disturbing, but that's only one part of the cost. It's what kind of system that produces. It is possible for everybody to lose because if you load on designs with enforcement, with possible gaining, therefore market monitoring, all of that costs money. And it's not just the transmission system it's the mechanism by which power is traded. So both transmission and power rates are swept up in an organized market.

Mary O'Driscoll: Well, onto that RTO, the cost of the RTOs and the operation that Chairman Kelliher has said that he really wants to look into this year. The commission did a report last year that showed that the start up costs weren't all that high. Although those were kind of the preliminary RTO structure figures, that they weren't what everyone calls the day two, which is when they really get into the market operation and the market oversight and the pricing and that kind of thing. So that really has not been established yet across the industry, about how much that costs, how much the participants, everyone from the utilities to the public power people are putting into it. Are you getting any indications that maybe these other costs, as you said in New England that they were only paying 60 cents on the dollar, are you getting any other indications that around the country these costs are not as high or maybe higher than people are thinking?

Bill Massey: Well, I think FERC is going to look closely at it, as I think they should. Now some of the functions that the RTOs provide used to be the provided by the utilities. So somebody has to pay for those functions. You have to pay someone for them. But I think the commission ought to look very closely, just as it does for every utility, to ensure that rates are just and reasonable.

Marilyn Showalter: Well, you had just -- I think it was just this week, the CEO of AEP saying I don't know what these costs are going for, but we're paying $55 million and I'm not sure for what. There are many costs on the utility side of organized markets. And by and large I think very few of the costs have been diminished, even though some of the operations have been transferred over to an RTO. I think you probably saw a graph from the Cambridge Energy Research Associates in the Wall Street Journal about a month ago, that showed the costs of RTOs year 2000 compared to 2004. Essentially what it shows is people go in thinking it's going to be a lean mean machine and for whatever reason, and there are many, and my own view is that it's for reasons -- for lack of political accountability, the RTO costs are exploding.

Mary O'Driscoll: OK.

Colin Sullivan: I'd like to actually go back to this issue of congressional reaction to what FERC has been trying to do over the last few years. You are on the front lines as Congress sort of had an increasingly heated reaction. Do you feel like FERC was the scapegoat at all, especially during the California power crisis and then after that during the Northeast power crisis? Was it unfair, the congressional reaction to FERC's policies?

Bill Massey: Well, I was at the commission. I voted for standard market design, as you pointed out. There's always been a robust political debate between FERC and the Congress and I think Congress was hearing from some constituents that they felt like standard market design push too far. So the commission backtracked on it. We backtracked on it when I was there and issued the so-called white paper, which was a softer and gentler approach. I don't think Congress was unfair. I think they were responding to their state commissions and some to their utilities, but I do think that in this energy bill Congress looked at all of it and they said, "Yes, we think competitive markets ought to evolve. They ought to grow. We're not going to force any particular structure in any region. We want them to be reliable. We want there to be enough transmission built, so we're going to give FERC backstop siting authority. We're going to insist on incentives to build transmission. We're going to repeal the Holding Company Act." All of those are very consistent with a competitive approach to wholesale markets. So Congress isn't trying to turn the clock back at all.

Colin Sullivan: So in the end the energy bill is good for open markets? Would you agree with that?

Marilyn Showalter: Well, I'd like to respond about the energy crisis. I was a state regulator in Washington, the chair of the Washington commission, during the energy crisis. And our state was the first to have to pay because we had public power utilities who could not absorb any costs. They had rate increases of 50 percent or higher to absorb the West Coast energy wholesale prices. Virtually all of the West Coast was pleading with FERC to step in and put in price caps and FERC said no --

Colin Sullivan: Which Mr. Massey supported, right?

Marilyn Showalter: Right.

Bill Massey: I did.

Marilyn Showalter: That's true, but they said no, no, no, no and finally yes. The lesson of the energy crisis, in my view, was a political one, which is that FERC is simply too remote from real everyday problems to be that kind of regulator. That's why you have state regulators and why you have local control for public power. They know what's going on on the ground and can respond to it. People like to think of state regulators as slow or cumbersome, but it's nothing compared to FERC. It's simply too remote. And so by transferring over ultimate authority, for the most important issues to FERC, I think that you will get a body of four or five people who are not able to run the country's electricity system. It's too complex and too differentiated among regions to do that.

Bill Massey: An individual state can't run it either. A disturbance in Ohio blacked out New York. Now you tell me what the New York commission could have done to stop that. Mandatory reliability rules, with a national reliability regulator, that has a broad view, because electricity does not respect state boundaries, can put in place fixes to stop that. We have a system of wholesale markets. Congress has said they're regulated by FERC. That's simply the law of the land and wholesale markets are the national policy of the United States. Now Marilyn may disagree with that --

Marilyn Showalter: I do.

Bill Massey: -- but that is the national policy of United States. So it's up to the commission to ensure that they work well and that there's no discrimination on the grid. And that's what the commission has been working on.

Colin Sullivan: We're going to have to leave it at that. I'm sorry, we're out of time. Bill Massey and Marilyn Showalter and Mary O'Driscoll, thank you all for being here. Join us tomorrow for another edition of OnPoint. Until then I'm Colin Sullivan for E&ETV.

[End of Audio]

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