[BETA] Fortnightly

IF CONGRESS SHOULD CONSIDER LEGISLATION TO MANDATE retail wheeling - and even with a date certain - those states that have already opened their markets will still likely ask for reciprocity to guarantee that any competitor seeking entry will welcome competition in its own home territory. Why? Some states are moving more quickly than others. Second, others have indicated they do not intend to open at all.

Arguably, state lawmakers could enact a reciprocal covenant on their own. %n1%n Litigation would be certain to follow, however, so that the risk of losing such a suit undoubtedly would sway a state to ask Congress to install a reciprocity provision in federal legislation. %n2%n

Nevertheless, Congress must proceed cautiously. If it decides to add reciprocity guarantees to wheeling legislation, then Congress should achieve reciprocity through a system of self-certification. Each state would certify whether its own markets are open. This method of achieving reciprocity should be preferred over a checklist approach, as was employed by the Telecommunications Act of 1996. The checklist method could well prove problematic, since it could require one state to review the policy decisions of another.

A system of self-certification would provide states with flexibility while ensuring that states maintain the ability to make independent policy decisions.

Opportunities for Gaming

Generally, there are two types of reciprocal covenants: hard and soft. Hard reciprocity would strictly prohibit utilities in a closed state from participating in markets in an open state. Soft reciprocity, by contrast, simply would allow an open state to bar utilities from closed states. Soft reciprocity affords the retail wheeling state with the flexibility to determine whether a non-retail wheeling utility can sell power in its open retail market.

Unfortunately, states could use the flexibility of soft reciprocity to engage in political gaming. For example, if two states are rivals for economic development, the state with an open electric market could discriminate against the closed state, while allowing companies from other, similarly situated states (those also without retail wheeling) to participate in its open market. States with environmental concerns, such as Massachusetts, could decide to favor utilities from states with gas-fired generation, while denying entry to those relying more heavily on coal-fired power. The principal problem with both hard and soft reciprocity is that each requires states to decide whether another state has an open market.

If there are fundamental problems with reciprocity, then why would Congress seriously consider it? The underlying rationale for reciprocal covenants is twofold. First, without a reciprocal covenant, utilities from non-wheeling states will unjustly benefit from exporting electricity into other states' open retail markets. In turn, the non-wheeling state will economically benefit from the increased sales of electric. This situation leads states and utilities to ask why they should expose themselves to competition when other states and utilities will benefit at their expense.

Second, since the non-wheeling utility is still benefitting economically from captive customers, its regulated rate base will supply leverage to enter a competitive market in another state. This situation allows the entrant to cut prices, increasing the wheeling utility's exposure to