Break Out the Big Stick

Carrots haven't worked. FERC needs to get tough on backing its SMD vision.

The time for diplomacy is over. It is more than clear that if the Federal Energy Regulatory Commission (FERC) ever hopes to see its vision realized of a standardized market design, the agency will have to take a more aggressive stance with those who disagree. In particular, FERC should tackle head-on the utilities that want to protect their regulated home turf while playing in others utilities' competitive backyards, and the state regulators that do their political bidding.

It's time for FERC to come out swinging, especially because FERC Chairman Pat Wood's gentlemanly, collaborative approach, while it should be commended, hasn't attracted as much support from state PUCs as the market advocates had hoped for. In fact, the hardball politics that is being played by some state PUCs and congressional constituents can only explain, some say, the commission's recent backtrack on the SMD timeline.

Some observers feel that the announcement of an issuance of a "white paper" on SMD before moving forward on the plan is analogous to raising a white flag (see "FERC's Market Design: The End of a Noble Dream," p. 22). That would be disastrous, given the financial problems many utilities have been experiencing. Merrill Lynch's Steve Fleishman estimates that during 2002 the top 20 utilities had negative cash flow of almost $10 billion after paying dividends. Not to mention that some of that dividend money had to be financed externally at higher rates.

The Wall Street financial analysts, investment bankers and credit ratings agency reps that testified at FERC's January technical conference on capital adequacy all agreed that the industry needs regulatory certainty in wholesale markets to restore investor confidence. "Policy-makers must fix the legal and regulatory uncertainty. Each investment relies on a consistent regulatory framework. The industry needs standard rules for its markets," cried one investment banker. Merrill's Fleishman added that FERC and states must come together.

But it has been long known that coming together on the issue of standard markets would always be a tough battle between states and the federal government, and between the states themselves. It's common knowledge that a map of regulated and deregulated states would perfectly overlay a map of high-cost and low-cost states. If FERC is to get what it and other states want-a union on SMD-it will have to play hardball too. Ironically, the way that FERC might realize its vision is to give its opponents exactly what they want.

Repeal of Market-Based Rates: A Sword of Damocles

It's almost a given that following Order Nos. 888 and 889, FERC liberally gave market-based rate authority to almost anyone who applied for it. And why not? In theory, everybody had access to each other's markets. But very real market power issues have forced » our industry move toward functional unbundling for true competition to flourish. At the FERC conference, companies like Calpine reported that in states that are regulated, utilities there still make it difficult for Calpine to site plants and, on many