When economic reformers in the old Soviet Union searched for a metaphor to describe their move to a market economy, they a spoke of a horseman jumping a ditch. The true test of a strategy was that...
It's the Grid, Stupid!
Advanced grid technologies are needed to realize FERC's standard market vision.
Could there be light ahead at the end of the tunnel for the U.S. power industry? With its bold proposed rulemaking on Standard Market Design (SMD), FERC has brought the arduous restructuring process to a climactic phase. Moving well beyond the general principles of Orders 888 and 2000, the proposed rule could well represent-as Chairman Wood likes to characterize it-the "final book of the trilogy." Importantly, FERC's proposal brings welcome and overdue attention to the power industry's biggest unmet challenge: How to bring innovation and investment into our nation's overtaxed and antiquated transmission system. Indeed, if today's ongoing power crisis could be reduced to a bumper sticker, it might read: "It's the Grid, Stupid!"
Unfortunately, for most of the past decade, market participants and policymakers alike have pursued a range of half-measures and work-around approaches to deal with congestion. Local bulk generation, distributed generation, and energy efficiency initiatives have been put forth not only as supply resources, but as alternatives to avoid the need for politically unpopular, and financially unrewarding, transmission expansion projects. But in practice these local approaches have offered highly imperfect substitutes for a robust and flexible network. Instead, this "anything but transmission" approach has left a bitter legacy: A sharp decline in reliability, episodic shocks in wholesale power prices, vast shareholder losses due to a poor allocation of capital to unneeded generation projects, and squandered political support for competitive reforms. Through flawed resource expansion policies, we have effectively put too many cars on the road instead of adding lanes to the highway!
To its credit, FERC has not retreated from the laudable objective of fostering competitive markets in electricity. Instead, it has upped the ante with a highly detailed and prescriptive proposal that aims to tackle the core problem: It is simply unprofitable for incumbent grid owners to invest in relieving congestion. The proposed SMD framework mandates adoption of locational marginal pricing nationwide. Market actors' expectations of locational pricing differentials will form the basis for valuable Congestion Revenue Rights. Thus, anticipated price streams in the marketplace-rather than the closely held plans of utility transmission departments-will signal when and where solving congestion is worthwhile.
Will Consumers Lose the War?
Will FERC win the battle to enact the proposed rule? It may well have a winning hand. Procedurally, the agency has conducted a strong stakeholder outreach effort over the past year. Industry reaction is mostly positive, and FERC has won noteworthy, if qualified, support from key state regulators in areas with actual experience under SMD-type market structures. Technically, its proposal is comprehensive and coherent. It is based not simply on theory, but on proven practice, and reflects many lessons learned from experiences around the world. Jurisdictionally, the commission appears to be on solid ground. The Supreme Court's Enron decision clearly authorized and even implored FERC to assert universal jurisdiction over transmission, to bring order to the nation's balkanized power markets.
But will FERC and consumers win the war to bring about truly robust competitive