The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Bill Hogan, Unbundled
A candid commentary on current topics in electric restructuring.
Energy planners and utility owners are hearing rumblings about tsunamis of change in the electricity market, triggered by earthquakes of uncertainty. Where does the uncertainty arise? The growth of renewables, the emergence of regional electricity markets, innovations in energy technology, changes in distribution systems with smart metering, demand management, and global economic upheavals all contribute to this tectonic shifting.
The lack of a clear national energy policy hasn’t helped to add clarity, as Fortnightly Editor-in-Chief Michael Burr pointed out in a recent “Frontlines” column (see “ Mitt Romney and You ,” September 2012) . The Federal Energy Regulatory Commission (FERC) has contributed to uncertainty with controversial regulations that some view as confiscatory. While investors try to preserve and protect traditional energy sources and maintain profitability, they oppose plans for investment in new renewable innovations.
Since technology developments will dictate the future, resistance to change isn’t productive. Yet, keeping electricity on all the time is much more complex with a stream of less-reliable renewables.
In the ever-changing world of energy markets there are still several constants. One is the consistently reliable counsel of William W. Hogan, the chief architect of wholesale electric market design in the United States. His thoughts and models have shaped energy policy for decades. Currently the Raymond Plank Professor of Energy Policy at the John F. Kennedy School of Government, Hogan recently spoke with Fortnightly about electric market reform and its effect on electric industry restructuring. He discussed the successes and challenges of deregulation, market models, and the problems encountered on the path toward organized wholesale power markets.
Of course, this path hasn’t been altogether smooth. Along the way, a number of different industry sectors and institutional actors have questioned whether Hogan’s ideas on electric market reform have aided overall industry efficiency or produced notable consumer benefits. The American Public Power Association, for example, has for some time now maintained a section on its website (www.publicpower.org) that offers analytical studies by industry or academic economists that seek to answer the question of whether ratepayers are better off now—what with electric restructuring, regional grid operators, and centralized wholesale power markets—than they would have been under a parallel, but different universe.
Anyone with more than a passing interest in these subjects should take a look at the APPA site, starting with the APPA’s own Electric Market Reform Initiative (EMRI), and APPA’s web link to various investigative studies of the nation’s restructured RTO-operated wholesale electricity markets. The student also should note the APPA’s own proprietary study: APPA’s Competitive Market Plan: A Roadmap for Reforming Wholesale Electricity Markets (2011 Update).
In that context, Hogan started by addressing some of the ideas he presented in his article, “Electricity Market Reform: APPA’s Journey Down the Wrong Path,” co-authored with John Chandley in 2009.
Fortnightly: What are the two or three biggest successes