Fortnightly Magazine - October 2006

Don't Mess With Texas

America’s energy competition laboratory prepares to build.

The ERCOT region remains a living example of how to make a successful transition to restructured wholesale and retail markets for electricity. At the same time, the market continues to witness some significant developments. Sights are turning from recovery to the next stage of the power business cycle: The Buildup.

The Most Effective Way

Market prices send investors clear signals to invest in the most efficient means for producing electricity.

Higher electricity prices have drawn sharp attention to the design of organized wholesale electricity markets—particularly to areas where residential customers’ rates will increase because multi-year rate freezes are ending. Some suggest changing the way that markets set wholesale electricity prices, or doing away with competitive markets entirely and returning to government regulation of prices. They say that the design of the markets exaggerates the effects of natural-gas price increases and unfairly rewards generators that use lower-cost fuels.

Industry Evolution: Financial Pressures Ahead

Can utilities simultaneously manage rising costs and pressing capital investment needs?

Does the utility industry have the financial strength sufficient to meet the combined challenges of: (1) sharply increasing and highly volatile fuel and purchased-power costs; (2) significant capital investment requirements; and (3) rising interest rates?

Bad Day at Black Oak

Beware even the best of attempts at apportioning grid rights and costs.

Several recent complaints involving PJM and now at FERC pose fundamental questions on how regulators and grid operators should attempt to price and allocate grid rights and costs. Is the transmission network a public asset, with costs that must be apportioned on principles of equity? Or, rather, is transmission an instrument of commerce, to be priced so as to maximize trade?

The Trouble with Risk Measures

Companies should adopt a far more robust metric.

Market risk remains one of the most significant issues for gas and power merchants. The SEC requires disclosure of market risks in a company’s annual filings. However, the allowable metrics fail to communicate the type of information an investor actually can use to gain an understanding of the market risk embedded in a company’s business.

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