Regulators' Forum: A Fight Over Market Design

FERC's attempt to standardize markets have some state regulators up in arms.
Fortnightly Magazine - November 15 2002

FERC's attempt to standardize markets have some state regulators up in arms.

The fight over standard market design (SMD) looms large as regulators face the coming year. Passions are heightened on the subject-and everyone has an opinion.

In these pages, takes SMD and other questions right to the top policymakers in six states-Alabama, California, Massachusetts, Michigan, New York, and Texas-for a snapshot of what the thinking is on hot topics. And of course we included the man of the hour, FERC's chairman Pat Wood.

Presidents Jim Sullivan of Alabama and Loretta Lynch of California take off the gloves regarding SMD and leave us with some memorable words. Pat Wood, in his gentlemanly way, simply says "We are listening."

Meanwhile, the states that have moved forward with retail restructuring and RTO (regional transmission organization) development in some form, embrace SMD. As far as the chairmen of New York, Maureen Helmer, and Massachusetts, Paul Vasington, are concerned, FERC merely is catching up to what they already had the foresight to do.

Some issues touch all regions, as the regulators discuss fears over affiliate cross-subsidizations, the need for better customer service, and difficulties replacing aging infrastructures.

Furthermore, insiders at various commissions tell that because of recent events in the energy industry, such as energy marketers like Dynegy and Aquila leaving the business, commission staffs throughout the United States are left with some new difficulties. The exit of the power marketers have left utilities without their intermediary, and have forced utilities to increase their merchant role to include both the retail and wholesale aspects of doing business. So, instead of having marketers manage acquisition of commodities, the utilities now are entering supply contracts with producers themselves.

That has led to more interest on the part of commission staff in understanding and dealing with price-risk management and cost pass-through.

But outside of perhaps the chief economist, many commission staff members have a lot to learn about the new realities of doing business. Also, the greater role on the part of utilities to make deals themselves naturally results in more work for commission staff, and often the staff is too small for the new workload due to downsizing from deregulation. So, on many levels, the next year promises to be interesting for utility regulatory commissions. hopes you enjoy reading this year's Regulators' Forum.


FERC: A Bet on Markets

How are you promoting the SMD with state commissions?

We are undertaking an unprecedented outreach effort to explain our proposal and hear people's concerns. . . The feedback we are getting from state regulators is a critically important part of our effort to finalize the rule. We must achieve a state-federal partnership and realize the full benefits of effective wholesale competition. So we are reaching out and listening to state commissions and trying to build consensus with them on how we can make markets work for the customer.

We've extended the comment period and scheduled additional public meetings to allow everyone to fully review and comment on the SMD proposal. We will further refine the rule, based on the feedback we are receiving through this process. . . In some cases, we may not have been clear enough in explaining SMD. In other cases, we are open to alternative strategies that support our goals.

What do you want to say to the commissions, particularly in the South and West, who are reluctant to endorse the SMD?

We are listening. We've heard their concerns, in particular the need to maintain low-cost power, avoid cost-shifting, and protect native-load customers. We've proposed a number of safeguards for customers in the SMD. The entire package includes checks and balances that were created to safeguard the long-term interests of all participants in the market.

We've framed the proposal so that most power will continue to be bought and sold through long-term bilateral contracts. This is a key lesson learned from California, which saw its market implode after requiring its utilities to buy all their power requirements from volatile spot markets…

Another issue of concern to state regulators is how to pay for transmission lines needed in support of new merchant power plants … The SMD proposes that independent transmission providers allocate the cost of new transmission lines to those who will benefit from them.

We're also aware of state concerns that robust wholesale markets for electricity may limit energy deliveries from the generator to native load. However, our SMD proposal allocates congestion revenue rights, or CRRs, to native load through the power providers serving retail customers. As a result, SMD would allow native load to secure its transmission service. In the future, if CRRs are auctioned off, the load-serving entities would receive all sales proceeds on behalf of native load…

This flexible approach will allow states to consider options that reflect regional values and offer environmental benefits.

Of course, states have a pivotal role in regional planning for new infrastructure. Our proposed rule acknowledges that states have jurisdiction over transmission siting, resource planning and retail customer demand response programs. State and federal regulators need to work together to develop this new market framework, and assure benefits for all customers.

How do you feel about regional variations to SMD?

Recent experience has shown how opportunities for market manipulation arise whenever interconnected markets operate under different market rules. The SMD represents FERC's fulfillment of its statutory responsibility to tackle market inequities. The only way to do this is to create uniform market rules that everyone must abide by. Standard market rules will go a long way toward eliminating "seams" between regions, which are a major problem. These seams represent both opportunities for market manipulation, and stumbling blocks to the creation of efficient markets.

But at the same time, we recognize the real differences in energy markets in different regions of the country. We've built in flexibility to allow for regional variations, as long as general principles are adhered to. We are open to considering other variations of our plan, provided that it fits the overall objectives that we have laid out. Our approval of the RTO West plan is an example of the flexibility that we believe can be achieved.

Are you concerned about the pace of RTO formation?

There's no question the commission envisioned that RTOs would be up and running a lot sooner, and in more regions, than has been the case to date. But I am pleased with the recent developments of well-considered RTO plans from all regions of the country and am committed to moving forward with those Order No. 2000 filings expeditiously.

What other priorities are on the list for FERC next year?

Our other top policy objectives include reforming the hydropower licensing process and examining the regulatory changes needed to accommodate the natural gas industry of the 21st century. [At our October 25 conference, the] discussion included applying open access to LNG facilities, FERC's offshore gathering policy, and how to provide pipelines enough flexibility to meet expected new demand. That process will continue into the new year.

We also look to conclude the staff's fact-finding investigation of the Western energy crisis, conclude rulemakings on generation interconnection and affiliate code of conduct standards, and work through market-based rate issues.

Solid South

Dixie: Still Independent

-An interview with Jim Sullivan, President, Alabama Public Service Commission

Is FERC's proposed standard market design perceived as beneficial or detrimental to Alabama?

SMD will spawn winners and losers, but there are four major differences in SMD that have never occurred with any other industry restructuring. First, we believe that SMD will adversely affect customers in low-cost states. That's why we see such uproar in the Southeast and the West. Second, there are clear indications now that SMD will usurp long-term state regulatory authority-with the noticeable exception of Texas. That's simply not right. Third, SMD appears to favor power marketers and IPPs [independent power producers]-perhaps in an effort to alleviate their financial troubles-while penalizing the customers of vertically integrated companies. Fourth, SMD pointedly shifts costs to retail customers and away from those who caused the cost to be incurred. In other words, SMD, instead of eliminating subsidies, appears to create them and places that burden on retail customers.

I believe SMD, in its current form, is the most detrimental regulatory proposal I have ever seen… SMD is a FERC-created effort to fabricate an artificial national market. Our wholesale markets in the Southeast are functioning well, but if FERC's plans are forced upon us, then our markets could deteriorate to the same level as those in other areas of the United States.

What exceptions in the SMD should be made for your region?

Let's explore SMD within reasonable boundaries of logical application here in the Southeast. First, what's wrong? My colleagues around the Southeast have identified no particular constraints in transmission, have not complained about generation shortages, and seem pleased with just and reasonable rates that vertically integrated companies have provided for our ratepayers. I understand that FERC claims recurring inequities regarding market power and transmission access; however, no evidence has been provided to validate those assertions in our jurisdiction…

With that said, and to be prudent and fair, a responsible state regulator should look at the FERC SMD NOPR and ask: What is there within the 600-page plus SMD rules that will accomplish the full task of enhancing our respective economies, creating equity, assuring reliability, and lowering rates in our region? The answer, in the Southeast, is "nothing."

What do think of FERC's increased assertion of jurisdiction over transmission in the SMD?

This debate should not be just about who is right or whether FERC is usurping state authority. In my judgment, the debate should be grounded primarily in economics. Does the FERC proposal make sense for all parts of the country? … In my opinion, the high-cost electric states will benefit at the expense of the low-cost states. And large consumers could benefit at the expense of residential consumers. I am guilty of "just saying no" to all these economic inequities… In fact, although I don't believe SMD will solve high-cost problems long-term in any state, I do believe those states should have the option to participate in SMD if that is their desire.

We will gladly share our electric surpluses with others, but there is no justifiable excuse for FERC to take by edict what we do not freely give. To take by force that which is inherently an economic asset of any given state is fundamentally wrong. Through arbitrary, capricious, and discriminatory rulemaking, FERC is attempting to become the ultimate player to "game the system." That's not right, that's not fair, and that's not what our founding fathers had in mind when they wrote our Constitution.

What is the future of electric restructuring in Alabama?

I am a firm believer that a competitively based wholesale market is in the best interest of all electric customers in the United States … I believe that, as markets develop, we will begin to see a naturally resulting definition for our economic region, and evolving electricity market. As the wholesale market matures we will begin to understand better what retail restructuring could mean for our state, and then we can act prudently and in the best interest of all our citizens.

In a post-September 11 world, how is your commission handling utility security issues?

The tragic events of September 11 have obviously changed the world in which we live and have brought a renewed awareness of security issues… Specific actions taken in response to September 11 include: increasing security measures at generating plants; identifying and strengthening critical facilities across the state; and enhanced training of personnel. As a consequence, we do feel comfortable that our facilities are safe and secure. Our current policy is to mirror the national security provisions for securing all regulated industries seeking ways to contribute to Alabama's overall welfare.

In a post-Enron world, what issues are you dealing with regarding corporate responsibility and governance?

According to what I have read, Enron's trading strategies were designed to take advantage of flaws in California market design. As everyone knows, California has suffered through rolling-blackouts, price spikes, economic decline, and the financial crippling of traditional utilities. When the California market was restructured, they certainly never envisioned these problems. This is one of the reasons that I am so concerned with current federal efforts to change the regulatory landscape that has served my state well for many years…

As the facts surrounding the Enron debacle continue to surface, our commission has become increasingly disappointed in the behavior of leading companies in corporate America… Fortunately in Alabama we employ a regulatory process through which we continuously scrutinize the books and records of the major companies we regulate. We continue to hold high regard for the corporate hierarchy in all our jurisdictional companies, and have seen no reasons to alter that opinion. Still, vigilance is a virtue.

What is the issue of most concern to Alabama?

We are very concerned with federal initiatives to experiment with approaches that appear to expose the consumers in our state to unnecessary risks and cost increases…

Some claim that there are only a noisy few state commissioners who question FERC's policies. In fact, the current FERC agenda is under scrutiny by a diverse contingent of observers, including newspaper editorialists who have questioned FERC ties to Enron, governors from at least two sections of the country who have questioned FERC's agenda as an economic impediment, and congressmen and senators who have questioned FERC's authority to restructure the industry and arbitrarily preempt state authority. All these people have voiced serious doubts that FERC is representing positions that will lower electric rates across America-and that is troubling. Even more troubling to me is the unrefuted implication, direct or inferred, that the major beneficiaries of the FERC SMD proposal will be the Enron-type companies. Perhaps most troubling of all is the incredibly poor timing of such a risky experiment with our nation's most vital industry. SMD could exacerbate the uncertainties of a skeptical stock market, a tenuous economy, and the serious homeland security challenges we face today… My question to FERC is: Why are you pursuing this agenda, and what's the hurry?

Front Runner

New England: Best-Practice Model

An interview with Paul B. Vasington, Chairman, Massachusetts Dept. of Telecommunications & Energy

Is FERC's proposed SMD perceived as beneficial or detrimental to Massachusetts?

We think it's a good thing, but that largely what FERC is doing is really making the rest of the country look like Massachusetts and New England are going to look in a few months… We're looking at beginning implementation in the first quarter of 2003, and we read the FERC's SMD as really being based on that same model-so it's really playing catch up with what we are doing.

What exceptions to SMD should be made for your region?

What I'd like to see is FERC looking at SMD as a skeleton, with the bones being nondiscriminatory access to the transmission system, a market monitoring system, locational marginal pricing, and congestion revenue rights. And we have all those bones in our market coming forward. But there are other areas where we have made more progress, and I think FERC should allow us to continue to make that progress and not make us move backwards. Those areas, for example, are in governance, resource adequacy, and transmission planning.

What do you think of FERC's increased assertion of jurisdiction over transmission in the SMD?

I don't think they are going too far. It's largely academic for us because we did unbundling and restructuring four years ago. So jurisdiction over transmission services here in Massachusetts already transferred to FERC… That being said I do think it's a good thing because I think it reflects the reality that transmission is a matter of interstate commerce.

What is the future of electric restructuring in your state?

Electric restructuring has been in place for four years now in Massachusetts, and the restructuring itself has been a great success. All of the distribution companies in Massachusetts are now wires-only businesses-they are not in the generation business… [And a lot of ] clean, efficient, new combined-cycle units have come online. We got a better reserve margin looking forward than we have had in the last 15 or 20 years.

In a post-September 11 world, how is your commission handling utility security issues?

Security issues are a big concern these days. We've really beefed up our oversight in this area. We have fairly regular meetings with all the utility companies to review their security plans… [T]here is a large liquid natural gas (LNG) facility in inner Boston Harbor, and the city of Boston has been very concerned about the safety of the tankers coming into the harbor and crossing under a major bridge. That has been a major issue we are working through.

In a post-Enron world, what issues are you dealing with?

Actually, this is an area where there really hasn't been as much impact as you would think. If you look at Enron and WorldCom in particular, those two companies are not in the camp of the traditionally regulated utilities in most states-although Enron owned a utility in Oregon. But for the most part they are on the deregulated market side and we haven't really had a lot of oversight of WorldCom, or MCI before them, and not of Enron in the retail market. I think the lesson here is that the traditional utilities have always been subject to a heightened level of scrutiny. Their books are reviewed much more than happens with the Securities and Exchange Commission, so there hasn't been much of an impact there.

What issue is of the most concern to Massachusetts?

On the macro level our concern is to focus on consumer benefits as the end result, with competition being the best means to that end. There tends to be an argument out there that competition is an end in itself and you should be pursing that no matter what, even if it means higher prices for customers. We don't view that as the appropriate focus. We think you should focus on consumer benefits as the end result.

Another area where we have had a lot of focus is service quality in the electric industry in particular. That is both for infrastructure and customer service. We have had a lot of merger activity and we saw a real fall-off in reliability in the distribution system. Most people have focused on the generation market and whether or not there is enough capacity to maintain reliability there. Our problem has been on the distribution side and on the maintenance and repair practices of the wires infrastructure.

Once Burned

California: Never Again

An interview with Loretta Lynch, President, California Public Utilities Commission

Is FERC's proposed SMD perceived as beneficial or detrimental to California?

I don't think that it is perceived-I think it is detrimental to California. Basically, it cements all the deregulatory mistakes and allows California no way out of deregulation, which means that the economy will be even more severely damaged.

What exceptions to SMD should be made for your region?

We will fight it with our last dying breath. FERC's one-size-fits-all policy just will not work for the West and will not work for California. It doesn't have strong enough market controls, as the GAO [General Accounting Office] has found. FERC, even if it has the will, does not have the means to control this market or to regulate it effectively, and it will dictate to California not only what kind of energy we use-through the various FERC definitions of "reserves"-but also it will increase prices in California. We just don't have the money to continue to overbuild in California, which is the direction FERC is headed. And I believe it will clash specifically with state law-both state law in terms of ISO governance-because the ISO is a state corporation as much as FERC would like to think it is entirely within its control-but also with a new law that Governor Davis just signed, which really is a leader in the nation-SB 1078, which mandates 20 percent renewable power sources in California by the year 2012.

What do you think of FERC's increased assertion of jurisdiction over transmission in the SMD?

I don't think they have the statutory ability to do it, which is why they are so desperately trying to obtain more authority in the federal energy bill that is in conference [in Congress] right now. And of course, we'll be challenging them on that. In New York v. FERC, the U.S. Supreme Court left those questions open, and FERC presumes to answer those questions in its favor without-from my perspective-adequate statutory support.

What is the future of electric restructuring in California?

I find that an irrelevant question. The state legislature has already made the decision that we will go back to cost-of-service rate making, in its attempt to pick up the pieces from this disastrous experiment.

In a post-September 11 world, how is your commission handling utility security issues right now?

We are working closely with utilities on those issues, putting in more time and effort. But I don't want to get into the particulars.

In a post-Enron world, what issues are you dealing with regarding corporate responsibility and governance?

Everything. We have been battling the generators and the sellers in the California market for basic access to documents. We have gone to the California Supreme Court twice to establish our basic right as a governmental regulator to the same kinds of documents that are available to the market participants…

In term of corporate responsibility, we are reviewing our affiliate abuse rules for affiliated companies in order to strengthen them so that we can more accurately either prevent or detect affiliate abuses and gaming among affiliates… And we are coordinating more with other entities like the FTC and the CFTC to ensure that what Enron caused in California and nationally does not happen again. Namely, Enron came to California and pushed through a restructuring law on the argument that electricity was a commodity. Then Enron went to the CFTC and said, "Oh no, electricity is a service-you shouldn't regulate it like a commodity"' So there was no regulation. And I think that is a cautionary tale that both state and federal regulators need to be prepared for, and girded against, in the future… Just like Lord Voldemort in the Harry Potter novels, the deregulationists are not dead; they are just husbanding their strength.

What is the issue of most concern to California?

My personal view is that we not let our guard down against the reemergence of the Lord Voldemort of deregulation and the federalization of regulation-that it will be back in various permutations. We must recognize why the electric and natural gas markets were regulated in the 1930s to begin with. It's because the exact same thing happened in the teens and 20s, where electric and natural gas companies held the economies of the nation over a barrel. They withheld power and drove the price up and acted like cartels…

However, I still believe we are in the eye of the hurricane and I'll tell you why. As the Enrons and the Williams of the world have gotten out of the trading business, the merchant banks have stepped in. JP Morgan now has an energy trading business and some of the other merchant banks, like Morgan Stanley. Standard and Poor's-a supposedly neutral rating agency-has filed pleadings at the FERC against the assertion of regulation by California. So as the banking and Wall Street communities step in to make a buck, I am very concerned about the ability of the state to protect our citizens.

Cautiously Optimistic

Michigan: Willing to Try

An interview with Laura Chappelle, Chairman, Michigan Public Services Commission

Is FERC's proposed SMD perceived as beneficial or detrimental to Michigan?

Overall we are very supportive and optimistic that it will move forward…Obviously, there are going to be things in there that we will recommend-either will be changed or fleshed out a little differently… But we do think overall this is the direction that we have to move. I don't think you can move to a more regional wholesale market without having these very needed common rules of the game in place. So we fully support FERC in efforts to do this.

What exceptions in the SMD should be made for your region?

Michigan as a peninsular state has unique situations that we are looking at. But specifically we'll always look at cost-benefit type of issues. We're going to be looking at the very important role for states, even though we recognize that these markets are going to be much more regional in nature… We need to ensure that the state commission not only has a voice, but also has an independent, kind of elevated role in the SMD process…

Transmission obviously is a very, very important issue to us. In Michigan we also have loop-flow problems and other types of problems like that. We want to make sure we are at least setting a framework so that these issues can be resolved, albeit in a regional but nondiscriminatory nature for any particular state.

What do you think of FERC's increased assertion of jurisdiction over transmission in the SMD?

Michigan has played a crucial role not only on behalf of our individual state, but I am on both the Department of Energy's Electricity Advisory Board, and I am one of the co-chairs of the National Governor's Association (NGA) task force on electricity infrastructure… NGA is saying that because these markets are moving more towards a regional focus, that if you have a transmission issue that's either siting or planning that is regional in nature, then let the affected states work collectively to address that issue… States must be given a real opportunity to solve planning and siting issues collectively, other than FERC just coming in and taking over that authority. Actually one of the things we do like in the SMD is that FERC has recognized a very important regional dynamic here, and has gone a long way to supporting the NGA's call for these multi-state entities, and suggested that maybe these regional-state entities take on even more authority.

What is the future of electric restructuring in Michigan?

Overall we're very positive on it. Our market just fully opened to all customer classes this past January 1. Our legislation passed in 2000, and so far … we are moving ahead kind of cautiously and slowly… Right now our industrial customers are the most interested in switching. But our commercial customers are interested in switching, and we're even seeing that down to the smallest customers. Overall, statewide about six percent of the load has switched. A little smaller than we'd like, but it's going steady-there aren't major problems.

In a post-September 11 world, how is your commission handling utility security issues?

We have been working very closely with Michigan state police and with our affected industries. The governor of Michigan has set up a state homeland security entity. Measures are being taken-from basic measures to where do you put personnel at these big nuclear plants. New check-in devices-to all sort of other measures being taken to adequately address security. That's a very important issue for us because we do have several nuclear plants.

I am not as worried about pipelines. We just sited a very controversial pipeline in Michigan. Opponents tried to use the scare tactic that terrorists would try to target this heavily underground, heavily fortified pipeline… But the nuclear plants and our very important bridge and tunnel from Michigan to Canada are very important to the state and country for commerce-those are the kinds of things that the state has been very aggressive to make sure we're doing everything we can to be proactive and to guard against potential terrorist strikes.

In a post-Enron world, what issues are you dealing with regarding corporate responsibility and governance?

We're doing as much as we can. You know CMS had come under scrutiny because of their energy trading, and although we do not regulate CMS, we take that seriously. Through orders and meetings with companies we let them know we have a code of conduct in Michigan. In fact, it's one of the strongest codes of conduct in all the states. It has been sued on, but so far the Michigan courts have upheld it. We are continuing to flesh out certain aspects of that code of conduct through orders at the commission. We do look very closely at things like cross subsidization. We want to make sure the regulated company, which is Consumers Energy, is not improperly financing the holding company that is in financial trouble. I have said to Wall Street, "That is the beauty of Michigan," is that we took a lot of time to put this law together, and to think of all the potential downsides early and to address them very aggressively.

What is the issue of most concern to Michigan?

Infrastructure again, because we're a net importer in a peninsular state. Getting gas pipelines in here. Clearing up transmission bottlenecks, which we have been working on to a great deal of success. Just continuing to look out for aging transmission systems and getting investments in the system.

Voice of Experience

New York: Been There, Done That

An interview with Maureen O. Helmer, Chairman, New York Public Service Commission

Is FERC's proposed standard market design perceived as beneficial or detrimental to New York?

We perceive SMD as being extremely beneficial. First of all, there are numerous aspects of the SMD that appear to be modeled on the rules of New York, which have been developed after an awful lot of hard work-and I think good experience with wholesale markets… Obviously, increasing competition allows for efficient dispatch, and in addition, by increasing the standardization of market rules, it helps to prevent generators from gaming jurisdiction against jurisdiction. This is particularly true with respect to things like market monitoring rules.

What exceptions in the SMD should be made for your region?

I think there either should be some regional exceptions, or we need to make some adjustments to the SMD. For example, an issue that is going to be very controversial is that of long-term resource adequacy. I really don't think it's appropriate in New York. New York is a place that has adopted full retail access and more importantly has divested its generating units… . [I]t is more appropriate to have something that is more market-oriented than what essentially looks like old-fashioned integrated resource planning (IRP). We have ICAP [installed capacity] in New York. ICAP has had a spotted history because it's been extremely volatile and because of a number of implementation issues. What we would prefer to do, as opposed to taking a step backward to IRP, is to step forward, improve ICAP, reduce volatility, and make it a mechanism that generators can rely on when making decisions about whether or not to build generation in an area.

What do you think of FERC's increased assertion over transmission in the SMD?

In New York, I really don't think it's a huge issue. I do think it does require some clarification, as does a lot of the SMD. But if we're understanding it correctly-and that's an important caveat-all we think it is saying is that states cannot set retail tariffs that are less than the wholesale transmission rates that are set by FERC in the OATT [open access transmission tariff]. And in New York we can easily meet that requirement. Our sense is that the FERC is trying to ensure equal, nondiscriminatory access. And this is a principle that we've encouraged in New York for quite a long time.

What is the future of electric restructuring in New York?

A lot of progress has been made in New York and the experience has been pretty good, so we're looking very positively at restructuring. We're continuing to move forward with restructuring, not under a state statute but under a set of administrative orders and principles. We're in the process of unbundling gas and electric rates. That is a huge task, but we think it's going to be very important in moving the retail market… . We have developed interconnection rules for distributed generation and standby rates. But there still is work to be done to really encourage distributed generation in the state, especially for renewable technologies.

In a post-September 11 world, how is your commission handling utility security issues?

Needless to say, New York probably has more sensitivity to, and experience with, this issue than any other state in the country. I can tell you that I spend an enormous amount of my time on this issue right now. In October 2001, I established a utility security assessment team within the department and we began looking at both the physical and the cyber side of utility security at that point in time… Staff at this point has met with about 25 of the companies, and has gone into great detail in terms of what they historically have done concerning security and what additional measures needed to be taken. We are in the process of getting comprehensive vulnerability studies done for the utilities. We are working with the DOE on some of our critical infrastructure assets to have very in-depth vulnerability studies done of those assets. We've asked all the major utilities in the state to have third-party assessments done of the security measures they have taken, or will take, in their companies…

Probably the single biggest challenge with security, aside from the sheer scope and sheer expense of it, is coordination. You've got state entities, you've got the city of New York; you've got the Department of Energy, the FCC, FERC, NRC, and the President's Homeland Security Office.

On a post-Enron world, what issues are you dealing with regarding corporate responsibility and governance?

Probably the most significant step that we have taken is we have issued a policy statement for comment on utility cash management practices. One of the things we are dealing with in New York is that we have a number of holding companies that are involved with some of our utilities in the state. And between cash management practices and also things like cross-default provisions, we're taking a close look to ensure that our state's utilities are protected if there is a problem at the parent/holding company level…

From a state regulatory perspective, our big issues are what happens when a company does go bankrupt? … We're continuing to look at our own companies within the state. We are very pleased that all of the CEOs and CFOs that were required to file the certifications-the affidavits about their financial statements-were able to do so and we take that as a good sign.

What is the issue of most concern to New York?

Probably the issue taking the greatest amount of our time right now is the issue of wholesale competition, and working through the SMD with FERC. There are so many details that are involved in the SMD. We need to be on top of those issues, and we need to let FERC know how we feel about those issues, because we are a state that has dealt with a lot of those issues. Also, how to work on a regional level with commissions in other states. We are part of larger, regional markets, and we need to find mechanisms to be able to work with our fellow regulators to make sure that the public interest is represented as these markets evolve.

Home Field Advantage

Texas: On FERC's Team

An interview with Rebecca Klein, Chairman, Texas Public Service Commission

Is FERC's proposed SMD perceived as beneficial or detrimental to Texas?

I believe FERC's proposed SMD will help the people of Texas… I am very interested in helping ensure that prospective RTOs in our surrounding non-ERCOT areas incorporate the participation and interest of retail electric providers, in addition to other market participants. Moreover, I would like to see accelerated momentum in the development of fair and workable protocols that will mitigate market power and ensure a uniform, fair, and efficient business model upon which retail competition can take root.

What exceptions in the SMD should be made for your region?

I expect that the FERC rule as it is finally adopted will permit regional differences in wholesale market design and transmission pricing. Texas is a part of four regions-ERCOT, the West, the Midwest, and the Southeast-and we are in the process of implementing retail competition in the areas of Texas that are in the Midwest and Southeast. For the sake of more effective competition, we believe that these areas, where there is already a significant degree of interconnection, should have uniform rules. In other areas, it may not be so important to have uniformity. Where an area has made significant investment in energy markets and congestion management systems that are not fully compliant with the SMD, I don't think it makes sense to immediately implement the SMD. The costs of implementation need to be considered.

What do you think of FERC's increased assertion of jurisdiction over transmission in the SMD?

I think it is a necessary thing. We have learned though our experience with ERCOT that continuity is important and there needs to be a referee using the same rulebook for all the players. More importantly, the most effective way to overcome transmission constraints and develop a platform for more robust competition on a national basis is to set ubiquitous standards that ultimately create efficiencies for doing business.

What is the future of electric restructuring in Texas?

The future is now. We're restructuring in real time. Retail competition is underway and the numbers are impressive. So far, residential customers have saved more than $700 million in the areas of Texas open to competition. Twenty-five percent to 40 percent of small business customers (depending on the area of the state) are receiving electricity from a competitive retailer. And in the large commercial category, more than 80 percent of the load is under competitive contracts.

In a post-September 11 world, how is your commission handling utility security issues?

Specifically, for the electric and telecommunications industries, we have ordered and received reports from utilities and providers documenting additional security measures they have deployed. We have made recommendations to the governor, many of which concern electric and telecommunications infrastructure. For example, we recommended development of security standards for industries that have identified critical infrastructure assets, and a requirement that such industries submit Security Impact Reports to appropriate state agencies. Also, we recommended the establishment of a centralized point of contact for intelligence information involving critical infrastructure… One recommendation that the governor has already implemented is the establishment of a 1-800 call center and e-mail address to allow the public to report to a centralized intelligence-gathering contact-point suspicious activity or behavior related to possible terrorist activity at Texas infrastructure.

In a post-Enron world, what issues are you dealing with regarding corporate responsibility?

We are increasing staffing levels and resources in our Enforcement, Market Oversight and Customer Protection Divisions to ensure fair play. The Texas PUC expects the telecommunications and electric industries to follow the rules of the road… We are also in the midst of developing a rule that outlines a code of conduct applicable to generating companies, transmission service providers, and retail electric providers doing business in Texas.

What is the issue of most concern to Texas?

Right now we are concentrating on a smooth transition to retail electric competition… Last year we had a pilot retail program before this year's full launch of competition. In future years, the law contains certain competitive milestones that must be reached before launching additional measures to open the Texas market… The important thing to remember is that competition is here to stay for the long term. I never expected to see sky-high statistics after only nine months of a restructured market, nor should that be a goal. Nevertheless, I do expect the statistical trends to remain positive and continuous over the course of time.

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