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New England: A Critical Look at Competition

Seven years after restructuring, challenges remain. Should the region stay the course?

Fortnightly Magazine - November 2005

For the past seven years, the New England electric power industry has been transitioning to a competitive market structure. Electric restructuring—identified in some quarters with Enron, California, and the August 2003 blackout—has brought significant, measurable benefits to us in New England.

The introduction of competition into the wholesale electricity markets has resulted in a more reliable, economical, and environmentally friendly power system. New England's wholesale electricity prices, after adjustment for fuel costs, have declined by 5.7 percent since the first full year of operation (2000) and 11 percent since 2001. New power plants are producing cheaper, cleaner electricity, and five major transmission projects are underway to enable power to flow more efficiently throughout the region. Moreover, the lights stayed on throughout most of New England during the massive 2003 Northeast Blackout.

This progress has not come without controversy. There are some who continue to question whether the promise of deregulation is being realized and whether we should reinstate some form of regulation. Others fight each new initiative without considering the immediate impact of inaction or weighing the potential long-term benefits to consumers.

Seven years after restructuring began, it's a good time to assess the challenges that remain and gauge whether to stay the course toward continued restructuring. The best way to explore this question is by considering the current state of the industry in New England. We need to look at where we started, what we've done, and where we are going.

The Genesis of the Markets

The goals for restructuring are clear: increased supplies, reliable delivery, efficient and clean production, and lower prices, all based on competitive markets that provide reasonable returns for investors. How do we get there? The steps already taken help define our future direction.

In New England, where electric rates are among the country's highest, five of the six states passed restructuring laws that required utilities to divest their power plants (Vermont did not). With 88 percent of its electricity generation unregulated, New England has the most disaggregated electricity marketplace in the nation and a strong foundation for achieving successful competitive markets.

Actively managing the transition has been the key to its progress. The Federal Energy Regulatory Commission (FERC) recognized that independent oversight was needed to ensure open access to the transmission grid and a competitive marketplace. An independent system operator (ISO) was formed in 1997 to oversee New England's six-state region-a highly integrated, tight power pool with a tradition of regional cooperation. ISO New England (ISO-NE) is a not-for-profit corporation that oversees a system of 350 generating units, 8,000 miles of high-voltage transmission lines, and 12 interconnections to neighboring systems serving 6.5 million New England businesses and households.

When ISO-NE was created, formal wholesale electricity markets did not exist. Electricity was dispatched from generators based on longstanding power pool practices. Working with regulators, the industry, and other stakeholders, ISO-NE developed and launched "interim markets" in 1999, and thus began the evolution from regulation to functioning markets.

The introduction of competitive markets

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