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Tuesday, November 18, 2003

The Energy Bill
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The electricity title of the energy bill passed by the House today is a mixed bag, but on balance I think it's a net plus. Transmission investment has been lagging in recent years and the bill contains several provisions that address this problem, at least to some extent. For example, the bill gives the FERC new siting authority, which the agency can use if the states fail to approve transmission projects of "national interest". It promotes the idea that those who need a transmission upgrade should "pay an appropriate share of the associated costs." In the arcane world of electricity regulation, this notion, which seems like common sense, has become controversial. The bill also promotes incentive-based rates for transmission and repeals the Public Utility Holding Company Act (PUHCA). All of these measures should have a positive effect on transmission investment.

A real solution to the investment problem requires much more, however. Investors have to see the prospect of an adequate return and a substantial reduction in regulatory uncertainty. This gets us to what, in my view, is the most important provision in the electricity title - the one that sends FERC's Standard Market Design (SMD) proposal back to the agency for reconsideration and prohibits finalization of the rule before the end of 2006. Adoption of SMD would likely lead to regulatory uncertainty for years to come. At least now there is the hope - although clearly no guarantee - that the FERC will adopt a more modest approach that will lead to some regulatory stability sooner.

In the same spirit as the SMD remand, the bill contains a sense of the Congress provision indicating that utilities should "voluntarily" become members of Regional Transmission Organizations (RTOs). This is in contrast to the SMD proposal, which would make RTO membership mandatory.

Some have expressed the concern that the loopholes in the bill are big enough for the Commission to accomplish its SMD objectives despite the language to the contrary. Even if this is the case, I would hope that FERC would take to heart the Congress's views on SMD as well as the idea that RTOs should be voluntary.

Here's a novel idea. Why not treat investor-owned utilities the same as Federal utilities, such as TVA and Bonneville, are treated in the bill? The bill makes clear that participation by these entities in an RTO is entirely voluntary - a matter of contract between the Federal utility and the RTO - and that the Federal utility has the right, subject to contract provisions, to withdraw from the RTO and terminate the contract. It seems somewhat ironic that only publicly owned companies would be able to do business this way - which, of course, is the way business is done throughout the economy.

Assuming the bill passes, there should be an opportunity to inject some much-needed new thinking into the electricity "market design" debate. Hopefully, the FERC will be receptive.

posted by Tom Lenard @ 6:24 PM | General

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