Will competition in deregulated electricity markets help facilitate the transition to a carbon constrained economy? Is a competitive, unregulated system a better way of achieving technological advancements? During today's OnPoint, Mark Crisson, CEO of the American Public Power Association, gives his group's take on the success of regional transmission organizations. He explains why he believes there is a lack of competition in deregulated markets. Crisson also addresses how the financial crisis will affect grid infrastructure and renewable energy investments.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. With us today is Mark Crisson, CEO of the American Public Power Association. Mark, thanks for coming on the show.
Mark Crisson: Yeah, my pleasure, thanks.
Monica Trauzzi: Mark, with all the talk of regulation versus deregulation that we're hearing about on the campaign trail these days, the deregulation of the electric power industry is back in focus and it's being talked about quite a bit. There are some passionate arguments emerging from both sides of the aisle. Is there enough evidence yet to really assess if regional transmission organizations have been successful or not?
Mark Crisson: Well, we think there's a significant body of evidence largely put together by APPA's efforts in the last two years to at least warrant a further look into this. We have petitioned the Federal Energy Regulatory Commission late last year, along with 40 other load-side interests, including many consumer groups and industrial consumers in particular, including groups like AARP for example, to ask the commission to take a look at this to ascertain whether or not there weren't some things that could be done to improve the functioning of these markets. We feel that given all the challenges facing the electric utility industry today, the higher costs of construction and fuels for example, the potential risks and costs posed by climate change legislation which we think is coming sometime in the not-too-distant future, the concerns about maintaining reliability of the system. All those challenges are made more difficult, in our view, in the restructured markets for a variety of reasons including the fact that they add an additional and, in our view, artificial layer of cost to costs that are already high and rising.
Monica Trauzzi: So this means that the consumer is paying more in those areas?
Mark Crisson: This means the consumer is paying more in those areas. The proponents of these restructured markets refer to them as competitive markets, but in fact, in our view, there's really nothing competitive about them. These are basically bureaucratic, centrally administered organizations, and about the only thing they're very efficient at, frankly, is transferring a lot of money from the consumer to the electric suppliers. Our analysis indicates that in the last five or six years you've seen, of course, an increase in power costs around the country due to a number of factors including fuel prices. But then in the states that are served by these restructured power markets you've seen a significant increase, twice the rate of increase to the point now where the difference at the retail level between consumers in these restructured market areas and the other states where there wasn't the deregulation, it was approaching 57 percent, a very significant increase, which we're concerned may not be very sustainable in a weak economy and in a situation where the power costs are likely to rise in the future.
Monica Trauzzi: One of the points that proponents would make is that the electric power industry is in a very interesting position right now. The infrastructure is aging, it's in need of many improvements, we need technological advancements as well, and they would say that a competitive system is going to get us there faster. It's going to promote technological advancements. Would you disagree with that?
Mark Crisson: Well, I would disagree with their assertion that these markets are competitive, number one. If we actually achieve competition, which is very difficult to do in any market, much less electric power industry, you might see some advances and improvements. But the kind of technological innovation we're talking about, I think, is probably going to require, under any scenario, some assistance and incentives from the federal and perhaps state governments to achieve those kinds of efficiencies, but, frankly, no. Take the issue of infrastructure, the need for additional generation and transmission; these markets have a woeful record of producing new capacity in either one of those areas. And, frankly, we're concerned that with the uncertainty created by this current financial crisis that that just exacerbates an already very difficult situation. There's an increasing focus on credit quality and, frankly, a lot of the players in these markets, as private companies, quite often independent of any traditional utility structure or organization, are much riskier credits. And I think you're going to have a much more difficult time getting the capital that's necessary. So I mean that's just one example, I think, of the difficulty posed by the continuation of these markets in addressing our future challenges.
Monica Trauzzi: And, specifically, what should FERC be doing right now to analyze the situation?
Mark Crisson: Well, we have a couple of thoughts on that. One is, as I indicated earlier, because FERC has the resources and the authority and the access to the data that would make a meaningful investigation of these markets to try to improve them, but we're not suggesting that RTOs be dismantled or anything. We recognize they're institutions that are here to stay. We want to make them better. We want to strike a better balance between the interest of the supplier and the consumer. Right now we have a situation where virtually every load-side interests that are served by these RTOs are frustrated or concerned or just downright angry about the situation. So, we think an investigation by FERC, one that's balanced and takes a look at the interests of both sides of this equation and tries to improve these markets would be a step in the right direction. And then secondly, we're in the final stages of working on a very specific proposal that we intend to make public here probably before the end of the year, about some very specific changes that could be made to these markets to make them more consumer friendly and we think more viable in the long term.
Monica Trauzzi: You mentioned cap and trade earlier and I want to touch on that because former FERC Commissioner Bill Massey was on the show recently and he said that he believes a competitive electric industry will facilitate a cap-and-trade program better than a regulated system. How do you see that scenario playing out? How do you see a cap-and-trade fitting into the electric power industry and is a regulated versus deregulated system, which is going to be more successful with a cap-and-trade program?
Mark Crisson: Well, I have a high regard for Bill Massey, but I respectfully disagree with him on this point. Setting aside the concerns we have with a cap-and-trade system, I mean that's a topic for a whole nother day perhaps, we have some real concerns about what might happen to costs if those markets aren't structured and regulated properly. We've got to be very careful about that. But if you assume that we do have a cap-and-trade system and there is a price put on carbon through an allowance system, we're very concerned that the consumer is going to be disadvantaged even further in these restructured markets. And that's because, quite often, because of the way these markets are structured a fossil fuel source of generation sets the price for all power sold in an hour in that market, regardless of its actual source or cost. So if you have either explicitly or implicitly through these fuel costs, the price of these allowances now added to already very high production costs and then that sets the price for all power sold in that hour, that is creating yet another layer of costs in an already very difficult situation for the consumer, which raises, in my mind, its sustainability long-term, both politically and economically. So we have some real concerns about how viable the current market structures are in a cap-and-trade system, particularly if the price of carbon, of greenhouse gas emissions gets high.
Monica Trauzzi: You made some references to the economic crisis that we're facing right now and I wanted to get your thoughts on what this means for renewable energy projects, in particular wind power, because that's something that the electric power industry is talking a lot about these days. Do you see a scenario where many projects are not going to go along as quickly as they were first intended to because of lack of credit, lack of loans, lack of capital?
Mark Crisson: Yes, I mean I think this could be a problem.
Monica Trauzzi: And this means what for your industry?
Mark Crisson: Well, I think that question is sort of unanswered and an open one and one of concern right now. What we're seeing, and it's just been a few weeks really that we kind of have an opportunity to assess this, is that there is a focus on quality. You're seeing that in the credit markets and, for example, in a municipal bond market, which our members are very active in, there wasn't a significant difference between an A rating and an AA rating in terms of what you typically saw the market respond to in the past. As long as you had an investment-grade quality rating you could be assured of a competitive price on your bonds. Now you're starting to see differences between an A and an AA, for example, which are both very high credits. Some recent numbers we've seen from some reliable financial sources suggest that the cost of credit for my members all in, may increase here in the next few months by as much as 200 basis points, depending on the mix of short-term and long-term capital that's sought. In the investor owned sector the estimate is much higher, 300 to 400 basis points. For independent power producers, folks that may rely more on other sources of nontraditional capital or venture capital, I think it's much iffier even still, which I think raises more questions, frankly, about the participants in these restructured markets. But for the industry as a whole, I think it's a concern. The good news, I think, is that the electric utility industry is viewed traditionally as a less risky investment, one with a fairly high degree of credit quality. And that's certainly true in the municipal and cooperative sectors I think. What we're seeing right now though is a lot of members just cut back their capital expansion programs and wait for hopefully things to settle out a little bit, both to kind of maintain their rates and hopefully get better interest rates in the future.
Monica Trauzzi: It sounds like we might be seeing some rate increases as consumers coming down the line.
Mark Crisson: I think that even absent this credit crisis, financial problem, that you're going to be seeing, as new plants come onto line, given the construction cost estimates we've seen in the last year or so, I guess you'll see rate increases and of course with the higher cost of capital that might exacerbate the situation even more.
Monica Trauzzi: OK, we're going to end it right there on that note. Thanks for coming on the show.
Mark Crisson: My pleasure, thanks for having me.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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