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Perspective

Commission policies need to recognize customer obligations and state commission decisions.
Fortnightly Magazine - July 2004

if a lower-cost market rate is available. Moreover, makes no reference to state commission actions that address transactions affecting state-regulated customers. It thus remains to be seen whether the commission will consider-and the importance it will give to-state commission decisions affecting choices to obtain electricity from affiliates to serve regulated customers.

It is noteworthy that SCE chose to structure the deal through a subsidiary rather than as a direct-ownership of rate-base plant because of the greater assurance of cost-recovery. SCE was concerned that it otherwise would be unable to recover its investment under traditional California Public Utilities Commission (PUC) jurisdictional ratemaking. The California PUC approved the proposal. Specifically, the state PUC found that "that ratepayers will be better off with Mountainview than without it."

More, Not Fewer Options

As these cases illustrate, commission action in the name of addressing the potential for market power can contradict or greatly restrict the best efforts of state PUCs and electric utilities to serve their regulated customers. The regulated customers benefit when more-not fewer-procurement options are available. In some cases, the acquisition option, or a power agreement with an affiliate, may be the most cost-effective and least-risky approach, and should be permitted.

Allowing regulated utilities to make these decisions will further the commission's efforts to revitalize the wholesale markets as well. It gives merchant generators who wish to sell surplus generation more potential buyers. This is particularly important now when many generators face financial difficulties, and integrated utilities have both the resources and the need to secure additional capacity. The sale of financially distressed merchant assets is also a critical part of the industry's restructuring efforts. Generally, these sales can help restore stability to the electric sector. They strengthen balance sheets and improve credit ratings for sellers as well as buyers, leading to greater financial stability for both.

Balancing Needs

America's electric companies support the development of competitive energy markets and protection against market power abuse. As FERC now prepares to begin a comprehensive analysis of the entire market power issue, it must give great weight to the views of state regulators on the best ways to serve the regulated customer.

This past April, the commission did state that its substantially revised interim screens to test for generation market power would recognize the need to account for the capacity a utility needs to serve its regulated customers. When such commitments of capacity to serve native load are ignored, the analysis will consistently overstate a utility's capacity to sell electricity in wholesale markets and its ability to influence market prices.

This approach is a start. However, the commission's order does not consistently apply this change in approach.

In fact, one aspect of the commission's approach continues to ignore commitments to serve regulated customers, despite the commission's understanding of the importance of these commitments. EEI has filed for a rehearing of FERC's recent market power order, asking the commission to address this and other concerns related to the new interim screens.

Furthermore, FERC needs to recognize a utility's need to serve regulated customers in all of its market