WHY IS ELECTRICITY COMPETITION NOT WORKING? The principal reason is the failure of Order 888 to accommodate the economic and technological constraints of wholesale power markets.
It's as significant for what it does not do as for what it does.
Order 888 marks a significant, yet limited, step in deregulating the U.S. electricity supply industry. Most important, for utility shareholders, the Federal Energy Regulatory Commission (FERC) has now apparently established a right to recover costs prudently incurred under the old regulatory compact (if not contract) that may become stranded by the Order. But (em and this is an important but (em the FERC is not going to hand out the money easily. The Commission warns that the level of stranded assets from wholesale access "may be small relative to that of retail stranded costs," which the FERC leaves to the state public utility commissions (PUCs) to determine.
In essence, the FERC has got out from under the problem of stranded assets.
The title of the Order, Promoting Wholesale Competition Through Open Access Nondiscriminatory Transmission Services by Public Utilities, both describes and delimits its scope. It's as significant for what it does not do as for what it does. The Order tidies up a significant part of the regulatory mechanics of opening transmission systems, including a requirement for reassignment of capacity, rules for curtailment, and the like.
It defines the ancillary services that a transmission provider must offer, both to 1) all basic transmission customers that wheel across a system, and 2) transmission customers serving load in its control area. Ancillary services must be offered and priced separately and, where possible, bought competitively. However, when that is not possible, ancillary services must be based on costs, unless the seller is shown to lack market power in such services. Although the transmission provider must offer ancillary services at cost-based rates, other competitors may offer such services at market rates, but the FERC will only approve such proposals on a case-by-case basis. And here is a major point: The Order continues with extensive regulation. The only reference to market-based rates is that sales from new capacity need not demonstrate a lack of generation dominance, provided there are no barriers to entry and no other party presents evidence of market dominance. It will be interesting to see how the FERC reacts to proposals for locational pricing, which is not based on costs.
Pools, Tariffs, and ISOs
The Order requires tight power pools to open their memberships and to provide nondiscriminatory transmission service. It sets out the principles that the FERC believes appropriate for an independent system operator (ISO), a concept not mentioned in the Notice of Proposed Rulemaking (NOPR) issued last year, but which evolved during the California debate.
Some of the principles appear straightforward and relatively noncontentious (e.g., the ISO should provide open access on nondiscriminatory terms). To ensure that governance is structured in a fair and nondiscriminatory manner, the Order requires that its management "should be independent of any individual market participant or any one class of participant" (e.g., transmission owners or end users). This point raises immediately the issues of who is really responsible for keeping the lights on and who will be blamed if they go off. The