Hoecker, Trebing see advantages in economies of scale.

Will New York's proposed independent system operator fall victim to the FERC's evolving RTO process?

"It has some conceivable drawbacks," FERC Chairman James J. Hoecker told attendees at the 30th Annual Institute of Public Utilities Conference. "One is that it's a single-state ISO and in the final analysis, regional transmission organizations probably need to cover broader geographical areas."

Hoecker used the forum at the Dec. 9-11 conference in Williamsburg, Va., to promote the commission's federal-state effort to develop guidelines for RTOs. The Federal Energy Regulatory Commission issued a Notice of Intent to consult with states after U.S. Department of Energy Secretary Bill Richardson gave the commission authority under Section 202(a) of the Federal Power Act to partition the nation into regional grid reliability districts and regional transmission organizations.

Hoecker also took issue with the title of the conference - "Competition in Crisis: Where Are Network Industries Heading?" - and pundits who insist electricity restructuring has failed.

"The argument reflects yet another kind of impatience with the current state of affairs," he said. "And maybe this is why the Institute called the conference 'Competition in Crisis.' My view of the situation is not dismal."

While markets may feel chaotic, they offer great potential for public good, notably innovation and technology, the chairman said. For state regulators, competition means markets are expanding. Hoecker quoted National Association of Regulatory Utility Commissioners president Jim Sullivan: "'No longer can we sit behind our respective desks in our respective offices in our respective states and fully serve our respective constituents. Too many changes, too many influences governing our destinies now occur outside our state lines.'"

Hoecker then offered his own perspective: "I believe the most important thing that we as regulators can do to bring lower electricity rates to all Americans is to ensure that competition is as vibrant as it can be. We can do so," he added, "not by dictating all of the outcomes from our comfortable precincts in Washington, but ¼ by attending to those key factors that will determine the ability of market participants to fashion their own commercial solutions."

He said that means addressing market structure, the conduct of market participants and the performance of the market itself. Transmission planning, for instance, built on a regional basis, can minimize cost and maximize system efficiencies. Transmission congestion can be managed over a larger area.

He cautioned that Section 202(a) is not a silver bullet. "One could not promote RTOs based simply on that provision," he said. "Any inquiry into RTOs will require us to plumb the depths of all our authority to ensure a non-discriminatory electricity marketplace."

Inevitable questions FERC will face, he said, include:

How large can a regional control area be?

How do you get utilities to join an RTO?

What role do state commissions play?

"Voluntary industry initiatives in this area are both welcome and necessary," the FERC chairman said. "I see no reason to resort to regulatory sticks when strategic and economic necessity or perhaps even a few carrots will get the job done."

Hoecker congratulated the "pretty courageous" attempt by California regulators to reinvent wholesale and retail markets simultaneously, while also creating a trading system and addressing stranded costs.

"They have suffered for that level of ambition," he said. "It has soaked up a tremendous amount of FERC resources. And we are still engaged in ¼ debate about whether this animal out there is subject to FERC. ¼ That kind of confusion can be very costly on the marketplace. And it can be deadening to people's enthusiasm for competition, period."

But even while California's residential participation in electric competition has been mediocre, everyone stands to learn from the experience, he said.

Harry M. Trebing also talked about fearing market chaos and the movement of the commodity component toward the control of very few.

In a session on "The Electricity Commodity Market: Is it Working?," Trebing, professor of economics emeritus at Michigan State and the founder and former director of the Institute, said short-term commodity events such as price spikes are "doughnut holes." They're not the real concern of evolving markets.

"What I see is this moving market, not toward competition, but moving towards the phenomenon called tight oligopoly," he said. He defined oligopoly as four firms controlling 60 to 100 percent of the market. "For the rest of you who think that tight oligopoly is something you take Metamucil to get rid of, you have to seriously consider this problem of growing concentration."

Trebing said there are several developing factors that will lead to more tightly controlled markets.

The commodity market has skyrocketed from 234 million megawatt hours traded in 1996 to 1.2 billion MWh traded in 1997.

The trade ratio - the times a given electricity bundle is traded between speculators before it reaches the final customer - is five times, as indicated by recent data, although some estimates place it at more than 10 times.

Price volatility has swung from $30 MWh to $7,000 MWh in the Midwest. By comparison, stock market volatility is 15 percent on an average annual basis; oil is 20 to 30 percent; and natural gas is 50 percent. Electricity is more volatile than natural gas.

There has been a rapid turnover of players. "The big ones are still there," Trebing said. "Enron, the Southern Co., Aquila/UtiliCorp and Entergy. But the concentration hasn't hit yet, the tight oligopoly level. The top four have 37 percent of purchases or sales ¼ The question is: will [the concentration] come?"

Other indications of oligopoly haven't appeared yet either, Trebing said. "Are the firms holding power off the market in anticipation of higher speculative prices?

"I don't see any overwhelming evidence that the merchant generators [are doing anything.] I think they're far too new, far too dumb, to discover the virtues of oligopoly behavior. What they're more inclined to do at this point is act competitive, which is pretty dense."

But he said alliances are emerging in the electric field that federal and state regulators should begin to worry about.

"EnergyOne was a dog," he said. "It was promoted by UtiliCorp, PECO and AT&T. It died this year, mercifully. It had nothing at all to commend it. What it was is they were going to hustle five services, everything from burglar alarms to natural gas ¼ those employees are now out with US West climbing mountains, probably. The point is, EnergyOne was a weak alliance. A tough alliance, where there's a tight number of people with an equity involvement and a clear, demonstrable market, that one will succeed."

He said when marketers emerge as dominant players, they will win more clout.

"The next alliance I can see, where I as a regulator would be worried, would be this one: What happens now when there is an alliance between a major marketer like Enron and the local distribution system?" Trebing said. "It's to both of their advantages. If Enron can give a high diversity factory, a high capacity factor to the local distribution system, what will happen? The local distribution system is in great shape, isn't it?"

Trebing said while the market participants hammer out strategies, there will be casualties.

"This big play among the giants is taking place," he said. "Big segments of the public are not going to be players. Consumerism is dead, I think. If it isn't, it's hard to take its pulse."

Meanwhile, as the giants do combat over commodity sales, other catalysts will be at play in their markets, speakers on a distributed generation panel pointed out.

Brent Gale, vice president and general counsel of MidAmerican Energy Co., said while most states have laws precluding sales by one utility in another utility's service area, most laws don't preclude customers from installing distributed generation on site. "It is a foot-in-the-door technique that is being used by many utilities," he said.

But Mark Siira, director of business development for Kohler Co., said it's not always an easy process.

"There is retaliatory pricing by utilities to discourage customer-installed equipment," Siira said. "I hear this from my distributors all the time ¼ they get a deal ready to go and at the last minute the rate base changes and all that effort they put in to save the customer money, it doesn't pay off."

Gary Mittleman, president and CEO of Plug Power, said his firm, developing 10-kilowatt fuel cells the size of dishwashers for residential applications, hopes to take advantage of the 75 million households that are near gas lines. Some 25 million of those will find fuel cells "viable" in the $3,000 cost range. That cost should decrease by 2010, Mittleman said. "By the time we hit those numbers, you and all of our neighbors will be going to Kmart and Wal-Mart and Home Depot and walking out with fuel cells underneath our arm and ¼ putting them in your house for 500 bucks."

He said his company plans to sell 1 million units by 2005.

"The fact is, there is demand all over the place and sometimes people say, well, your early systems, your first-year commercial systems are going to selling for seven, eight thousand dollars," he said. "Now that's too high, who's going to buy them? We don't have to sell to every single person in the United States for this thing to be a home run. There are individuals all over the place that are calling us up on a regular basis. Our web site gets 2,500 hits a day. In September we started taking a list of names and addresses of people who were just interested in buying and we're now nearing 10,000. The market's there."

Joseph F. Schuler Jr. is senior associate editor at Public Utilities Fortnightly.

But Will It Be Telemarketed?

"GTE is offering a new service. A premium service ¼ there will be an extra charge of course. Your phone does not ring."

- Virginia Sheffield, GTE Business Development & Integration

Hanging On To Obsolescence

"Contrary to some critics of the industry, the Holy Grail of competition doesn't mean there's something wrong with the regulated monopoly structure. It's only outgrown its usefulness."

- Anthony F. Earley Jr., DTE Energy Co. and Detroit Edison Co.

Psyching Up Regulators For Competition

"Get a food taster and a good shrink because it's going to be a long haul."

- Nora Mead Brownell, Pennsylvania Public Utility Commission

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