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Commission Watch

Assimilating the best of the regulated-utility and merchant models.
Fortnightly Magazine - August 2004

achieved without undermining their jurisdiction or their jurisdictional utilities.

Indeed, in places like the Southeast, many would contend that the vertical integration model has served customers well, and regulators are understandably reluctant to dismantle this model or redesign it from top to bottom. On the other hand, consumers should not be denied the benefits of thousands of megawatts of efficient, environmentally friendly merchant generation that already has entered, or soon could enter, commercial operation.

Our MAP proposes neither the sweeping changes of SMD, with its one-dimensional focus on establishing a single market platform centered on the disaggregation of electrical supply into its component parts, nor a continuation of the ().

Co-Existence Requires Change

FERC intended RTOs the means to prohibit a VIU from exercising vertical market power through either denial of the transmission needed to reach wholesale markets, or by otherwise foreclosing those markets from competition by refusing to purchase from merchant generators, even when those generators offer less expensive, reliable energy.

Market foreclosure is a particular concern in areas where a lot of distressed but highly efficient, low-cost merchant power sits idle. No doubt many VIUs do not engage in market foreclosure, and if challenged, readily could claim they were incapable of exercising market power. Membership in a fully functioning RTO should serve the same purpose. In theory, a properly structured RTO, which is independent of market participants, ensures fair and equal access to transmission and administers organized markets from which no seller could be foreclosed. These markets are liquid and provide vital price transparency. By contrast, outside of the three RTOs, there are no organized markets, little price transparency, and usually no structural mechanisms to prevent a VIU from foreclosing merchants from the market, or that would allow a VIU to demonstrate that it could not do so even if it wanted to.

Indeed, in areas where the vast majority of the wholesale market consists of the VIU itself, given its obligation to meet its native-load requirements, the VIU is vulnerable to attack when it refuses to purchase economical wholesale power from merchants. The concern is that the VIU is attempting to use its position as the dominant wholesale buyer in a given market, together with its large fleet of generation assets, and its control of the transmission system to prevent competitive entry. Increasingly, this concern has led to claims that certain VIUs possess and have exercised monopsony power, and that their decisions to dispatch their own more expensive generation, while refusing to purchase from their less expensive competitors, amounts to market foreclosure, harms competition, and ultimately raises costs to customers.

It is at least reasonable, therefore, to conclude that VIUs and state commissions should adopt structural changes that eliminate these concerns. The MAP proposes the structural changes needed to accomplish this in regions where these concerns may be legitimate, with minimum effect on the VIU model overall.

A Partnership That FERC and Regulators Can Embrace

One of the lessons learned from the collapse of the SMD initiative is that making markets work is about saving customers money-not debating the