A Continuing Reign of Incoherence
How EPACT fails to address key industry issues.
energy-efficient appliances, study the potential benefits of using “intermittent escalators,” and extend the duration of Daylight Saving Time by approximately three weeks. 3
In the absence of reforms that improve markets, utility executives and other stakeholders are left to consider commercial initiatives that may lessen risks of future oil price spikes. Among other things, purchase aggregation, fuel-price hedging, 3 and long-term contracting are potential industrywide strategies (all of which would either require or benefit from legislative support) that merit consideration in this regard.
On a policy front, market successes to date may be expanded to create a springboard for additional reform. For example, a recent decision 4 by the Wisconsin Public Service Commission recognizes investments in energy efficiency as equivalent energy generation. In effect, according favorable regulatory treatment for demand-side reduction and energy efficiency investments should create additional space in utility reserve margins and may facilitate resource planning. However, as discussed below, it remains to be seen whether utility resource planning decisions will be guided by market pricing signals or by command-and-control regulation.
Insufficient and Erratic Capital Investment
Investment is the lifeblood of a capital-intensive industry, yet restructured ( i.e., disaggregated) generation and transmission companies have yet to demonstrate that they can raise private capital on a sustainable long-term basis. Though EPACT was touted as improving the climate for attracting investments in transmission reliability, most of its reforms actually are quite modest and provide little in the way of substantive incentives for new investment.
The “regulatory compact” that once guaranteed utilities a return on their investments is in tatters today. Deregulation has unbundled transmission and generation systems into separate business units, yet markets for generation and transmission services remain inefficient and balkanized.
In its transmission provisions, EPACT reflects an effort to catch up with changed circumstances. While there are incentives for technology innovation ( i.e., research and development), the act adds little in the way of reforms to promote efficient markets. Of the approximately 70 pages in the act devoted to transmission matters, fewer than 10 deal with investment incentives, and even those establish strategic objectives and do not promote structural improvements.
Subtitle D of EPACT sets out “Transmission Rate Reform” provisions. 5 These are intended to “promote capital investment” in transmission facilities, “provide a return on equity that attracts new investment” in such facilities, and encourage “deployment of transmission technologies” to increase the capacity and efficiency of existing facilities. 6 Unfortunately, the act omits any substantive guidance regarding how these objectives are to be be attained.
Equally important, the act’s provisions generally ignore the competitive environment in which electric sector participants operate and fail to confront key problems in financing generation and transmission. The generation sector continues to require large, economically “lumpy” investments to purchase expensive equipment that can achieve economies of scale. Financing such investments requires either a healthy balance sheet or the ability to demonstrate firm long-term revenues, and most of today’s independent generation companies have neither.
Transmission companies suffer from similar shortcomings in their business model and have an added handicap: under current open-access rules, there