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An Unacceptable Outcome

Mixed signals leave developers wary of building new infrastructure.

Fortnightly Magazine - November 2006

Policy Act of 2005 (EPACT), with its many provisions specifically designed to encourage investment, succeed in restoring power supplies to reliable levels?

The Soul of a FERC Chairman

At a speaker’s dinner hosted by Day Berry & Howard, as part of ISO New England’s annual conference in September, I talked with FERC Chairman Joseph Kelliher. To paraphrase George W. Bush, I looked Kelliher in the eye and found him to be very straightforward. I was able to get a sense of his soul. Kelliher is a man deeply committed to the advancement of the energy industry.

But I believe he may have a troubled soul, given his clear desire to affect positive change, while appearing to argue for policy decisions that are politically safe but arguably inconsistent. The result is mixed signals that leave developers wary of committing to investments in new infrastructure.

At the conference, Kelliher said the debate over competition was over and that the country has affirmed competition through EPACT-2005. “I don’t mean deregulated markets, I mean competitive markets,” he said, making clear what was affirmed. During his speech, Kelliher outlined four different kinds of markets operating in the United States.

The first category is a “Day-Two” market, such as found in regional transmission organizations (RTOs), such as PJM, the Midwest Independent Transmission System Operator (MISO), or as now planned for the California ISO. The second is a “Day-One” market, as in the Southwest Power Pool, where market forces are designed more for physical system balancing than for price discovery. Bilateral trading denotes the third market category. Fourth and last comes TVA, where wholesale competition is actually illegal, as Kelliher pointed out.

His next statement, however, raises several questions: “We have four kinds of electricity markets. … We do not favor any model.”

I caught up with Kelliher a few weeks later to follow up. I asked how he believed FERC’s duty to ensure just and reasonable rates could be accomplished if different market structures attract investment differently. Kelliher answered that infrastructure development incentives have been distributed uniformly across these different markets. I’ve shared his answer with some of the top energy regulatory minds (who asked to remain anonymous), and they all simply disagree with this premise.

I suspect that Kelliher has had to develop this four-market construct to avoid a renewed and (in my opinion) necessary debate over the best market model. When appointed FERC chairman, Kelliher may have been ordered to fall back after federal and state relations became too heated over market models.

Whatever the case, investors need more visibility and consistency. That is why investments are falling behind. A power-plant developer in New England attending the ISO New England conference said, “Everybody needs to be at the table. A more comprehensive approach to siting is needed, and everything must be considered, such as nuclear, coal, oil, and renewables.” Furthermore, he added that everyone must agree on load growth and the pace of economic development. He wondered how the industry might bridge the gap between economics and the environment.

But David K. Garman, under-secretary, United States