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Perspective

Some want a tighter grip on generators, but FERC should steer clear.
Fortnightly Magazine - October 1 2001

would chase away investment in new power plants. If any new form of regulation is needed in capacity deficient markets, it should come in the form of a price cap, low enough to prevent sellers from extracting scarcity rents, but still set high enough to induce new investment.

Reserve Requirements In Force? By suggesting this criterion, Massey appears to make reference to California's lack of any kind of a capacity market, such as the ICAP markets in New England, New York and PJM. While capacity markets exist in the regional markets that are considered to be the most successful markets, not everybody favors them. 10 Furthermore, it is the state regulators who typically impose such a capacity requirement on load-serving entities. The FERC's statutory authority extends to wholesale sellers of electricity, and not necessarily to wholesale buyers.

Uniform Interconnection Standards? As part of its regulation of interstate transmission, the commission could mandate uniform standards for the interconnnection of new generation to the transmission network. Still, there are parts of the United States where non-jurisdictional utilities, such as TVA and BPA, control large parts of the grid.

Available Plant Sites? Here is another matter of state law that lies outside FERC authority. And the fact that so much new generation will be coming on line in the next few years raises the question about whether a plethora of available plant sites is a prerequisite for workable competition.

Rules for Managing Congestion? Like interconnection standards, the Commission can require this as part of its regulation of interstate transmission.

Use of Hedging? This idea is an obvious reaction to California's market structure and the past reluctance of the California Public Utilities Commission to let the state's investor-owned utilities hedge their market exposure. Still, should not the goal be a market structure that does not create a bias one way or the other? Load-serving entities can get burned just as much by an over-reliance on long-term contracts as one can get burned by an over-reliance on the spot market. (Remember the interstate gas pipeline take-or-pay crisis?) Again, this issue lies largely outside the commission's jurisdiction, because state regulators review the purchasing practices of regulated, load-serving entities.

Rules to Prevent Gaming? The commission could achieve this result by acting within its authority to review wholesale market design. Still, if this idea implies that a workable market must have a centralized institution for managing anything beyond short-term reliability, there are those who will take issue. Some would suggest that such centralized market institutions by their very nature invite gaming. 11

Effective Demand Response? This idea might be the single most effective means for mitigating market power, while at the same time minimizing regulatory intervention. Demand-side initiatives have been viewed historically as falling within the province of state retail regulation. And politicians remain reluctant to see consumers exposed directly to market prices. Still, perhaps the commission can make at least some inroads here by requiring demand-side bidding in the exchanges administered by the RTOs (regional transmission organizations). If we are serious about competition, and want to minimize regulation, then