Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

A Continuing Reign of Incoherence

How EPACT fails to address key industry issues.

Fortnightly Magazine - December 2005

is substantial doubt that owners of transmission facilities can exercise control over how their facilities are used. Incumbent utilities understandably insist that they should exercise greater control over the transmission lines funded by their ratepayers, while independent power producers argue that transmission facilities are a “public commons” that must be widely available to facilitate free trade in power. EPACT provides no path for resolving this tension.

Electricity is a specialized, value-added commodity (in essence, processed BTUs). The current environment limits the geographic range of electricity markets and heightens pricing, disposition and regulatory risks. If policymakers want transmission investment to be driven by the private sector, reforms to expand the scope and efficiency of markets will be necessary to reduce the minimum risk-adjusted return demanded by private investors. If not, a resurgence of “command and control” alternatives may be unavoidable.

Meaningful reform can be achieved in the area of market integration and value capture for transmission investors, but such reform faces substantial hurdles. FERC’s withdrawal of its standard market design illustrated opposition by incumbents to changes that threatened their economic interests. Moreover, the current administration increasingly is hide-bound by ideological inconsistencies—most notably, its commitment to reduce federal government regulation at the same time it supports legislation (EPACT) that largely pre-empts state authority in liquefied natural-gas siting matters.

Budding Consensus?

Nevertheless, there are reasons to believe that a consensus on market reforms may develop. Competitive markets have broad support in the industrial sector, where large consumers see it as the only way to discipline the market power of incumbent utilities. In fact, some regions (most notably the Northeast) appear committed to regional transmission organizations (RTOs) for the long term.

Stakeholders favoring open access, the RTOs, and the Electric Reliability Organizations mandated by Title XII of EPACT likely will create additional momentum toward open access. If this occurs (and barring any California-like market aberrations), the success of such reforms in facilitating competition and expanding markets will create an end-game in which the benefits of open access become self-validating, thereby consolidating public opinion and political support behind the model. However, the industry may face yet another round of “stranded-cost” proceedings as transmission owners cede control of their assets to independent system operators.

The evolving investment climate no doubt will reflect the repeal of the Public Utility Holding Company Act (PUHCA). Under EPACT, the ponderous and arcane rules governing the definition of utility holding companies and the exemptions to those provisions ( e.g., the “integrated service territories” exemption) will be replaced by application of more up-to-date FERC competition “screens” that focus on market power to achieve objectives similar (albeit not literally identical) to PUHCA. In simplifying investors’ economic analysis, PUHCA repeal is a good thing.

However, even this reform is not without nuanced consequences. A substantial consolidation of the industry is likely to follow in the wake of PUHCA repeal, preceded by substantial litigation related to FERC implementation of the market screens. While consolidation will produce larger and more efficient utilities in many respects, the true test of market reforms will lie in the ability of