Commissioner Jon Wellinghoff talks RTOs, regulation, and wholesale markets

With consumers around the country facing electric rate hikes, what is the Federal Energy Regulatory Commission doing to ensure customers that there are competitive, open and fair markets for electric utilities? And what role can conservation and efficiency play in future FERC policies? During today's OnPoint, FERC Commissioner Jon Wellinghoff discusses FERC's policies on regulation and wholesale markets. Wellinghoff also explains why he believes regional transmission organizations (RTOs) can be positive for consumers.


Mary O'Driscoll: Welcome to OnPoint. I'm Mary O'Driscoll. Our guest today is Jon Wellinghoff, a new member of the Federal Energy Regulatory Commission. Jon, Thanks for joining us.

Jon Wellinghoff: Oh, you're welcome Mary. Thank you for having me here.

Mary O'Driscoll: You have a very extensive background in the consumer portion of the electric utility industry, you have it being a consumer advocate and working on the consumer end of things. Yet consumers, in the face of rate hikes around the country, have been not very enamored of FERC's policies on competition and promoting competition in wholesale electric power markets. How do you, as someone with that kind of a background, try to convince those consumer groups that FERC's policies are worth pursuing?

Jon Wellinghoff: Well, you can't convince them. You have to demonstrate to them that, in fact, they are receiving some benefits. And I think that's what FERC is attempting to do now, is ensure that there will be benefits in these wholesale markets. We've seen a number of studies come out and it seems like we have dueling studies come out every other day as to whether there are benefits or there are not benefits. I'm convinced that there is potential for benefits for consumers in these markets, but only if we structure them in a way that can properly allow for full competition from both sides; the supply side and the demand side of those markets. And so that's what I'm looking at right now, is to ensure that we can demonstrate to consumers that there will be benefits if we make those markets fully competitive with demand side management and other aspects.

Mary O'Driscoll: I wanted to get into that in a minute because it's very interesting that there's been a lot of talk, even for the past 10 years since markets were made competitive, but there's been so much talk about different things that were going to be done for consumers and these different products and these different services. But nothing has really ever materialized.

Jon Wellinghoff: No.

Mary O'Driscoll: And so, I mean, can you blame the consumers for ...

Jon Wellinghoff: No.

Mary O'Driscoll: ... feeling a little cheated?

Jon Wellinghoff: No, you can't. And I think one of the problems is, is I think the economic theory got ahead of a couple things. Number one, it got ahead of the technology. We're only now starting to get the technology available to allow and enable consumers to fully participate in these markets on the demand side, to be able to adjust their demands in ways and to do it so it's transparent and doesn't harm their lifestyles, but yet take advantage of the benefits from the market of adjusting those things, such as usage at off peak times and so forth. And right now that's only possible if consumers have in the proper metering equipment and they have in the proper technologies to be able to do that. And those technologies are now just starting to roll in the market at prices that are reasonable for consumers.

Mary O'Driscoll: OK. You spoke at the American Public Power Association recently and they've been very critical of the FERC policies as well, particularly the regional transmission organizations, the organized markets that FERC has instituted. And you said that you were there to neither praise nor condemn the RTOs. What's your view of the RTOs?

Jon Wellinghoff: I think the RTOs generally can be a good thing. I mean I think there's a number of benefits outside of even the competitive wholesale market aspect that I think few people can deny. One is doing away with pancaking of rates across transmission areas. The more you can have a consolidation across territories where transmission generation can flow among transmission areas for one uniform rate, then that's going to benefit consumers. Also economic dispatch across larger areas I think are going to help consumers where you obviously have the ability to draw on more generation that may be more economical for consumers to utilize in a wider area. That's going to help consumers as well. And that's even outside of the competitive market aspect of it. So there are a number of aspects of RTOs that I think can continue to be positive, but of course we've got to watch RTO costs. We've got to be concerned about what those costs are and make sure that the cost on outweigh the benefits. And I think, so far, from all the studies I've seen collectively, I think we can say that's the case, but that doesn't mean we have to stop looking at those things and we have to continually be vigilant about what those costs are to ensure that consumers continue to see benefits.

Mary O'Driscoll: Well, a lot of people are saying that the consumers are bringing up problems and that they're mostly complaining and that they're not really coming up with any solutions to any of these problems, to the high prices, the way that they're organized. You know, that they're just saying, you know, just throw it out and let's go back to agreeing with the rate of return regulation. How should consumers try approaching this and enjoining?

Jon Wellinghoff: Well, I think actually a minority of consumers are saying go back to rate base cost of service regulation. I think the majority of consumers who came to our competitive workshops at FERC last month clearly indicated that there are some ways to look at further solutions and improvements to the markets. And I think the uniform one was demand response. In fact, if you looked at those panels it was almost unanimous that if we can put more demand response into these markets they will become more competitive and they will drive more benefits for consumers. We saw that from Wal-Mart. We saw that from representatives of the RTOs. We even saw those kinds of suggestions from utilities as well who were at our competitive workshop. So it told me that I think I'm on the right track with trying to promote demand response and expand it within these RTOs and ISOs.

Mary O'Driscoll: Well, in talking about demand response, that's really become your signature issue, your signature topic. You always find time or an opportunity to bring up demand response whenever you're talking about any of the orders that you're voting on at FERC, on any of the market issues or anything that you bring up. How do you bring demand response into the FERC policies? So that's been kind of a question that a lot of utilities have brought up, a lot of people that I've talked to who say that's really not FERC's job. That's something the state should be doing.

Jon Wellinghoff: Well, it's a joint job, I believe, between the states and FERC and that's been recognized by NARUC agreeing to, with FERC, collaborate on a joint FERC/NARUC demand response committee that we have that works on those issues. The states have some level of responsibility certainly over the load serving entities to the extent that those local utilities want to develop and participate in programs. But to the extent that there are organized markets, certainly with RTOs and ISOs, those entities also have the ability, through their tariffs, to specify in those tariffs certain economic payments for demand response participants. And whether those participants are the local utility or an individual customer will be up to a state to decide. In some instances individual customers will be able to participate up into the RTO ISO based upon the state's own laws and jurisdiction. And in other instances it will be the load serving entities that will aggregate their customers and participate up. But in either case, there will still be tariffs at the regional level with the RTOs and ISOs that will provide for economic payments back to whatever entity is participating to, in fact, give them what they are entitled to because they bid demand response into the market. So there is very much of a joint jurisdiction here between the feds and the state entities to make this all work and we can only make it work if we work together on it.

Mary O'Driscoll: But once again it's one of those things that people are looking at rate hikes and that kind of thing on the state level and wondering what they can do. And this sounds plausible. It sounds very interesting and very pro-consumer, but, once again, this is something that clearly isn't going to be happening for a few more years at least.

Jon Wellinghoff: Well, it's going to take time, certainly one thing that's going to take time and that's to get in the advanced metering. It's going to be necessary all the way down to the residential consumer level to have those consumers participate in these markets and be able to then adjust their activities in such a way, vis-a-vis those meters, so that they can see differences in their bills. But at some point the consumers can start getting consumption off peak, which is the most expensive times of the day during the summer periods primarily. Those consumers are going to see reductions in their bills. Right now a lot of consumers are seeing increases in their bills primarily because we've seen increased natural gas prices and much of the marginal price of electricity is at the price of natural gas units. So that's been a big driver in what's been the result of increasing consumer prices. But I think we're going to see a change in the next three to five years where consumers are going to take more control of their energy usage and being able to take that control, they're going to be able to stabilize their prices on their own. And that will help to stabilize the electric rates throughout the country and also improve the efficiency of the system as well.

Mary O'Driscoll: OK. Now you're also a member or working with the special Department of Defense science board that is looking at the Defense Department's use of energy and how to make it more efficient, how to conserve their use of energy. I guess they're the largest energy user in the country.

Jon Wellinghoff: Yes they are.

Mary O'Driscoll: Due to the sheer number of facilities that they have and their extensive use of vehicles and that kind of thing. What is it that this group is working to do?

Jon Wellinghoff: Well, it's really something that has evolved out of the need for the military mission of security and reliability. I mean they're very concerned that, certainly with respect to bases, in the continental United States, that those bases can be energy independent if they need to be in a time of a crisis, whether it's a terrorist event or a domestic crisis of natural events, hurricanes, etc. They need to ensure that those bases can maintain the military mission. So they're looking at such things as energy efficiency, renewable energy, and determining how they can implement those things as quickly as possible on a domestic basis to ensure that those bases can be maintained in those times of emergency, and maintain the security, reliability, and mission of the military.

Mary O'Driscoll: OK. Well, we're going to have to end it there, so many things to talk about and so little time. Thank you so much for joining us today. And thank you for watching. I'm Mary O'Driscoll and this is OnPoint.

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