Commission Watch

Assimilating the best of the regulated-utility and merchant models.

Vertically integrated utilities (VIUs) have served us well and do not need to be dismantled in the name of competition. That said, VIUs need to address, once and for all, the legitimate, although sometimes unfounded, concerns of the Federal Energy Regulatory Commission (FERC) and a number of market participants over vertical market power and the incentive that some VIUs have to wield that power to foreclose competitive suppliers from accessing transmission and competing for the wholesale purchasers that this transmission serves. The largest among these purchasers are the VIUs themselves, given their often huge native load obligations.

In theory, a fully functioning RTO with well-structured markets is intended to eradicate both forms of foreclosure. Yet, in many areas, RTO development is stalled, if not dead, due in large part to concerns of state regulators that FERC needlessly has interfered with state prerogatives and inflexibly ignored regional differences.

Moving forward, VIUs can put the vertical market power issue behind them and immediately capture for themselves and their customers many of the benefits of an RTO by:

• Undertaking both short- and long-term competitive procurement processes, and integrating merchant generating plants into both, thereby creating well-defined and accessible markets from which no seller can be foreclosed; and
• Vesting an independent third party with sufficient oversight and decisional authority to ensure that all potential sellers and buyers have fair and equal access to the market.

We propose a market-access plan (MAP) that does not advocate sweeping changes; it instead builds on existing VIU frameworks with structural improvements that are technically feasible, cost-effective, and politically practicable. The result assimilates the best of the VIU and merchant models; benefits the industry investment climate; increases the level of low-cost, efficient, and environmentally friendly power supplies; and promises to save customers millions of dollars.

Two Market Models Can Co-Exist

In the spring of 2002, a comprehensive plan was coming together to support the merchant generation fleet that many believed eventually would become the centerpiece of competitive wholesale markets and customer savings. FERC was completing an extensive dialogue on its standard market design (SMD) and was about to issue a proposed rule for implementation over the coming year. At the same time, through its proposed rule to standardize generator interconnections and its newly announced Network Resource Interconnection Service, FERC was about to extend network service to merchant generation plants that usually don't know which specific customers they will serve at any given point in time, nor the location of these customers at all times over the life of the units.

The reality facing the industry now is strikingly different. FERC has issued its rules on standardized interconnection, but its other initiatives are paralyzed by controversy, attributable not so much to the major principles underlying those initiatives as to their breadth and complexity. Many state regulators recognize the value of price transparency, liquid day-ahead and real-time regional markets, and the benefits of long-term competitive procurement, but they are concerned that some of the changes necessary to realize such benefits cannot be