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Power Pools & ISOs: Monitoring Market Power in a Restructured Industry

Fortnightly Magazine - March 1 1998

the growing ambiguity as to how far public utility regulation will afford antitrust immunity is compounded further by the shifting line between federal and state regulation. The "bright line" that the courts had sought to find in the Federal Power Act between the two (em never crystal clear (em is now blurrier than ever, as the FERC asserts new authority over utility activities now "unbundled" and removed from the scope of traditionally broad state rate regulation.

Who, for instance, will regulate to ensure "reliability" (em a mantra within the industry, and an article of faith with Congress and regulators (em is currently up in the air, as the FERC asserts jurisdiction over ISOs, and the Department of Energy re-examines the industry's self-regulatory role, carried out through the North American Electric Reliability Council and the regional reliability councils.

THE NEW MATRIX. In the wake of the Otter Tail decision, the FERC turned its attention to the principal antitrust concern in that case: how to control the inherent market power or natural monopoly characteristics of utility-owned electric transmission and system control, still largely integrated and generally viewed as an "essential facility." Here, for a quarter century, lay the primary policy battleground.

That all changed in 1992 with passage of the Energy Policy Act, which gave authority to the FERC to order nondiscriminatory transmission service. Within a few years, FERC had ensured open access through Orders 888, 888-A and 889. Much remains to be done, however, to develop transmission pricing principles and to ensure that these new systems, such as California's, provide equitable and efficient access, pricing and transmission planning regimes. Yet the fundamental debates over access that dominated the 1980s are over.

The FERC has encouraged industry players to deal with these inter-utility and interstate issues through regional transmission groups and independent system operators. Such institutions, FERC signaled, could create a self-regulatory role for the industry. The industry responded positively with a raft of RTG and ISO proposals.

Nevertheless, in the wake of the 1992 Act, skeptics questioned whether the FERC could succeed with its policy of heavy regulation of transmission to permit competition in generation. They wondered whether structural separation of the generation and transmission functions, as occurred in England & Wales and other international restructurings, would prove necessary. In fact, the FERC's implementation of the 1992 Act, without direct legal authority to order divestitures but requiring "functional unbundling," may have gone a long way to release the genie from the bottle. "Voluntary" divestitures (usually under regulatory pressure) by integrated utilities of generation assets have already occurred in California and New England; others may follow. (Ironically, the most active restructuring phenomenon this decade had been horizontal mergers of vertically integrated utilities, probably best explained as utilities positioning themselves to compete more effectively, or to divest more profitably, in ever-expanding regional bulk power markets.)

The FERC's functional unbundling policy has encouraged the formation of competitive pools for wholesale bidding and ISOs to manage transmission. These new institutions promise competitive, real-time or short-term auctions or spot markets, both for energy or other electricity services. They