EXPENSIVE, FRUSTRATING AND PERILOUS LESSONS LEARNED FROM CHARTING NEW WATERS IN LIBERALIZED MARKETS

EXPENSIVE, FRUSTRATING AND PERILOUS: LESSONS LEARNED FROM CHARTING NEW WATERS LIBERALIZED MARKETS IN Matthew T Hastings Director, International Membership Edison Electric Institute August 1st, 2006 Market liberalization, or deregulation, of the electricity sector has been an ongoing process in the United States for almost two decades In that time there have been extraordinary achievements and significant disappointing failures The utility sector in the United States has changed dramatically and irrevocably Every single element of utility management, operations and finance has been forced to deal with new, unknown and challenging situations Challenges and barriers abound; new ones appear constantly The struggle to build a “level playing field” where all participants have an equal opportunity to compete is ongoing, painful and difficult Political, social, economic and technical factors absorb the landscape The International utility sector will require billions of euros in investment in the next two decades To attract investment International utility companies operating in liberalized markets will increasingly be required to report, perform and operate in ways that are very different from the current The US experience has resulted in a range of “lessons learned” that will be of interest to International electricity market players as they develop and implement strategies to build and maintain competitive position Building and maintaining investor confidence in the utility sector will be an ongoing challenge for every individual player The US experience has demonstrated that open markets are much less tolerant of management missteps and failures to reach stated goals and objectives This paper discusses elements of the US experience, and the pursuant opportunities for International players to benefit from, the expensive and often times painful “lessons learned” I WHY RESTRUCTURE? The US electricity sector has a great many players A discussion of the US utility deregulation experience must begin with a rudimentary understanding of the political, social and economic dynamics of the US electricity sector A great deal of detailed research and analysis describes the US electricity markets A recent report written by the US General Accountability Office (Note: The U.S Government Accountability Office ((GAO)) is an independent, nonpartisan agency that works for Congress GAO is often called the "congressional watchdog" because it investigates how the federal government spends taxpayer dollars) summarizes the situation in a clear and concise manner Sections of that report are summarized below It is an understatement to note that electricity is central to the lives and livelihoods of all Americans Annual expenditures on electricity exceeded $224 billion Electricity is the most critical important input to production in most industries Any changes to it, be they physical, political or technological, will have a significant impact on the overall economic stability and growth This is specifically true in retention and creation of jobs, attracting investment and determining the competitive position of US products and services Historically, the electric industry in the US developed at first as a loosely connected structure of individual monopoly utility companies, each building power plants and transmission and distribution lines to serve the exclusive needs of all the consumers in their local areas Such monopoly utility companies were typically owned by shareholders and were referred to as investor-owned utilities In addition to these investor-owned utilities, several types of publicly owned utilities, including rural cooperatives, municipal authorities, state authorities, public power districts, and irrigation districts also began to sell electricity About one-third of these publicly owned utilities are owned collectively by their customers and generally operate as not-for-profit entities Furthermore, nine federally owned entities, including the Tennessee Valley Authority and the Bonneville Power Administration, also generate and sell electricity—primarily to cooperatives, municipalities, and other companies that resell it to retail consumers This is a complicated situation The chart below illustrates the complexity of ownership of the US regulated electricity industry Hidden inside these figures are extremely complicated situations For example, the “public power” sector, comprising almost 25% of the market share, consists of almost 3,000 separately managed, independent organizations that range from under 100 customers to several million customers Some of them are integrated utilities selling into the telcom and natural gas markets Others are “paper” organizations that buy and resell electricity TYPE OF REGULATED ELECTRIC UTILITY Number of Electric Utiliti es Electric Utilities Revenues from Sales to Ultimate Consumers ($000) Revenues from Sales to INVESTOROWNED PUBLICLY OWNED COOPERATIVE FEDERAL TOTAL 240 2,009 894 3,152 7.6% 63.7% 28.4% 0.3% 100.0% $169,444,4 70 $33,054,95 $20,506,1 01 $1,242,03 $224,247,5 58 75.6% 14.7% 9.1% 0.6% 100.0% Ultimate Consumers Electricity Sales to Ultimate Consumers (mWh 000) Sales of Electricity to Ultimate Consumers Average Revenue per kWh for Ultimate Consumers Revenues from Sales for Resale ($000) Revenues from Sales for Resale Electricity Sales Available for Resale (mWh 000) Sales of Electricity Available for Resale Average Revenue per kWh for Sales for Resale 2,437,982 516,681 305,856 49,094 3,309,613 73.7% 15.6% 9.2% 1.5% 100.0% 6.9¢ 6.4¢ 6.7¢ 2.5¢ 6.8¢ $35,359,34 $13,430,25 $12,027,7 71 $8,900,09 $69,717,46 50.7% 19.3% 17.3% 12.8% 100.0% 854,228 301,412 311,935 248,664 1,716,239 49.8% 17.6% 18.2% 14.5% 100.0% 4.1¢ 4.5¢ 3.9¢ 3.6¢ 4.1¢ Source: Energy Information Administration, 2000 The transmission sector in the US is equally complicated Over time the transmission and distribution systems owned by private, public, and federal utilities became interconnected with one another in order to improve reliability and to facilitate trade across companies These interconnected systems ultimately evolved into three major networks: the Western Interconnect, the Eastern Interconnect, and the Texas Interconnect, illustrated below: Because the utilities operated as monopolies, wholesale and retail electricity pricing was regulated by the federal government as well as the states The Public Utility Holding Company Act of 1935 (PUHCA) and the Federal Power Act of 1935 established the basic framework for electric utility regulation PUHCA, which required federal regulation of these companies, was enacted to eliminate unfair practices by large holding companies that owned electricity and natural gas companies in several states The Federal Power Act created the Federal Power Commission—a predecessor to the Federal Energy Regulatory Commission (FERC)—and charged it with overseeing the rates, terms, and conditions of wholesale sales and transmission of electric energy in interstate commerce FERC, established in 1977, approved interstate wholesale rates based on the utilities’ costs of production plus a fair rate of return on the utilities’ investment States retained regulatory authority over retail sales of electricity, electricity generation, construction of transmission lines within their state’s boundaries, and intrastate transmission and distribution Generally, states set retail rates based on the utility’s cost of production plus a rate of return In addition to federal and state regulation, some industry participants have also self-regulated in part by their voluntary participation in the North American Electric Reliability Council (NERC), an organization of electricity industry entities that develops and maintains standards for operating the electricity systems in the United States The need for such an organization to help coordinate operations of individual utilities became apparent as the transmission and distribution systems of the individual utilities became connected Since small changes in supply and demand in one network can affect neighboring networks, it is necessary that all parties coordinate their operations When coordination fails, the reliability of the system is in jeopardy, as was the case when blackouts occurred in the Northeast in 1965 NERC was formed in response to these blackouts and continues to play a role in facilitating coordination between different utilities’ systems NERC’s regions and subregions are presented in the map below Each is, in many ways, a separate country, dependent on the other but protective of its resources and economic base and growth potential Throughout the 1970s and 1980s, a number of events occurred in the electricity industry that began to encourage a shift towards more competitive electricity markets These events included, discussed in the chart below, included:    rising electricity prices charged by utilities, changes in the technology of electricity generation, a shift in regulatory thinking in the United States and other countries around the world that had begun to move toward the use of markets rather than governments to make decisions about investments to meet many public needs CHANGES IN TECHNOLOGY PRICES ELECTRICITY 1970S-1980’S EVENTS Average residential and industrial electricity prices increased by 37% and 124% respectively, after adjusting for inflation This sharp increase reversed a downward trend in prices over the previous decade Significant technological changes in both generation and transmission were occurring, which improved the efficiency of natural gas-fired power plants These technological improvements made it possible to build smaller, more efficient plants, capable of producing electricity at lower cost than the prices charged by many of the existing utilities In addition, advances in transmission capabilities also allowed electricity to be moved over longer distances, making it more readily available to a wider range of customers RESULT These price increases were in part the result of investment decisions made by utilities and approved by state regulators to build numerous large-scale, costly electric power plants These plants were built on the assumption that demand for electricity would increase steadily in the future However, demand did not rise as quickly as anticipated, in part because of slower-thanexpected economic growth Regulators allowed companies to recover the high costs of building these new power plants through higher electricity rates Electricity customers, particularly large industrial users, saw their electricity prices rising, while advances in technology promised lower-priced power, and they began to exert pressure on legislators and regulators to allow them to gain access to electricity at lower prices Restructuring the industry to introduce competition was seen as a way to gain access to electricity at lower prices There was a shift in the evolution of regulatory thinking in the United States and other countries around the world toward the use of markets rather than governments to make decisions about investments to meet many public needs Economists and public policy analysts, believing in the advantages of competition over regulation, promoted the idea that markets could drive down costs and prices by reducing inefficiencies and providing better incentives for companies to develop new innovations Legislators and regulators passed laws and implemented rules that promoted competition across the U.S economy For example, during the 1970s and 1980s Congress passed laws deregulating the airline, railroad freight shipping, trucking, and barge shipping industries Over the same period, several other countries—including New Zealand, Norway, Sweden, and the United Kingdom—restructured their electricity industries to introduce competition Citing successes from other deregulation or restructuring efforts, many experts, industry participants, and other interested parties began to call for restructuring of the U.S electricity industry Increasing competition was expected to lead to benefits for consumers of electricity In particular, experts believe that competition in wholesale markets would provide a way to reduce prices by improving the efficiency of producing and delivering electricity Proponents of restructuring have stated that regulated companies and regulators made poor investment decisions that raised the average cost of electricity for consumers These investments led to excess investment in electricity generation capacity, in part because utilities and regulators overestimated demand growth NERC REGIONS ASCC: Alaska Systems Coordinating Council (Affiliate) ECAR - East Central Area Reliability Coordination Agreement ERCOT - Electric Reliability Council of Texas FRCC - Florida Reliability Coordinating Council MAAC - Mid-Atlantic Area Council MAIN - Mid-America Interconnected Network MAPP - Mid-Continent Area Power Pool MAPP U.S MAPP Canada AND SUB REGIONS NPCC - Northeast Power Coordinating Council Quebec Ontario Maritime ISO New England New York SERC - Southeastern Electric Reliability Council TVA Southern VACAR Entergy SPP - Southwest Power Pool SPP Northern SPP Southern WSCC - Western Systems Coordinating Council CA NWPP RMPA AZNMSNV Source: North American Electric Reliability Council Once this excess capacity was built, electricity prices had to rise to cover the costs to the utilities, even when generating units sat idle In addition, economists and other industry experts argued that monopoly utilities had poor, if any, incentives to keep overall costs down because they were able to pass on all approved costs to consumers in their regulated rates The experts also argued that regulation slowed the pace of technological innovation, because even if new cheaper generating units could be built, the regulators were still bound to allow the utilities to recover their investment costs for older more expensive generating units Therefore, by introducing competition among wholesale suppliers of electricity, experts expect new, lower-cost generating plants to be built by non-utility companies, leading to greater efficiency in producing electricity and ultimately causing prices to fall As an additional benefit, many newer generating plants are much less polluting than the older existing plants Consequently, investment in new generating plants was seen as an opportunity to facilitate improvements in air quality, if electricity produced by these cleanerburning generators displaces electricity from older dirtier plants Taken together, wholesale and retail competition was also seen as a way to provide a mechanism by which the financial risks associated with building new electricity generating plants can be transferred from consumers to companies and their shareholders In the old regulatory environment, utilities built the bulk of new generating plants after first identifying an expected need for the new plants and after gaining approval from state regulators Once approved and built, the cost of building and operating the new generators was 23 DIFFERENT RULES In its effort to promote competitive wholesale markets, FERC has historically Different rules in electricity systems limit the ability to achieve benefits from competition LIMITED JURISDICTION FERC’s limited jurisdiction in wholesale markets limits the ability to achieve results from competition approved a wide range of specific rules that govern the operation of individual transmission system operators and centralized wholesale markets under its jurisdiction FERC has acknowledged the lack of a single set of rules for transmission access or wholesale market operations Furthermore, FERC has stated that the absence of consistent rules has permitted (1) rules that can be used to discriminate and lead to increased transmission costs and system reliability problems and (2) various design flaws in wholesale markets and transmission services that have created operational problems within and between wholesale markets Overall, the presence of different rules and operations limits the extent of possible competition between these markets Limiting the extent of competition between wholesale markets will, in turn, limit the expected benefits from restructuring FERC’s proposed standard market design rulemaking was developed largely to address the variations in rules and operating procedures for the wholesale markets and transmission services Through its proposal, FERC plans to bring a level of standardization to market rules and procedures that will remedy these problems and provide a level playing field for all entities that seek to participate in wholesale electricity markets FERC does not have regulatory authority over all entities in wholesale electricity markets Specifically, there is no jurisdiction over power sales by federally owned entities (e.g., the Bonneville Power Administration, the Tennessee Valley Authority, and the Western Area Power Administration), publicly owned utilities, or most cooperatively owned utilities For example, the entire state of Nebraska is not explicitly subject to FERC oversight As a result, a patchwork of rules has developed governing both restructured and non-restructured jurisdictions, with large areas of the country operating primarily outside the scope of FERC’s authority While many of these non-jurisdictional entities are smaller than many investor-owned utilities, taken together they serve large areas of the country and provide service to about 25% of the 31 nation’s demand for electricity The areas served by entities not under FERC jurisdiction cover a wide area, especially in the Southeast, Midwest, and West FERC’s limited jurisdiction in wholesale markets limits the ability to achieve benefits from competition SEPARATE MARKETS Separate development of wholesale and retail electricity markets limits the ability to achieve benefits from competition INFRASTRUCTURE SITING Federal, state and local decisions on siting new power plants and transmission lines limit the ability to Federal and state governments each have regulatory authority for overseeing the electricity industry—federal over wholesale and state over retail markets As a result, the actions taken to restructure wholesale and retail markets have, for the most part, been undertaken separately For example, to promote competition in wholesale markets, FERC has taken actions to allow prices to be established by direct interaction between buyers and sellers However, most state actions at the retail level have in fact served to freeze retail prices, thereby limiting the degree to which buyers can respond to changes in underlying wholesale prices Specifically, states have imposed frozen retail prices in restructured markets or continued to regulate prices in areas not undertaking retail restructuring, both of which limit the ability of consumers to respond to changes in wholesale prices The absence of a significant demand response is believed to have a negative impact on the functioning of wholesale electricity markets, causing prices to be higher and more volatile and facilitating the exercise of market power by electricity sellers As a result, these state actions place limits on the extent to which competitive markets can develop and, thus, reduce the potential benefits expected from restructuring Federal, state and local entities all have authority over key decisions that affect new investment in generation and transmission facilities Decisions made by private investors on how and when to site new generation facilities will influence the availability of new electricity supplies Further, although transmission increasingly serves regional needs, state and local governments make many of the decisions on whether and where to site new lines Therefore, the investments necessary to maintain adequate supplies of electricity and a reliable electricity system are critically dependent on how federal, state, and local regulatory bodies exercise their authority over these new investments For example, adding a transmission line that crosses several state boundaries and passes through federal lands requires multiple permits and approval processes involving numerous regulatory entities charged with, among other things, environmental protection and land use planning issues Similarly, investments in new generating facilities, while typically involving a 32 achieve benefits from competition single state, generally require approval from multiple regulatory entities to address state and local environmental, zoning, and energy policy issues While recognizing the importance of the regulatory approval process, many market participants have stated that the lack of a unified and consistent regulatory environment across states creates a potential barrier to investment that leads to uneven and, in some cases, insufficient investment in new generating or transmission facilities For example, states’ power plant siting decisions affect companies’ perceived risk of entering a given market, which may, in turn, result in more or less investment.1 As restructuring creates markets that are more regional in scope, less than needed investment in new plants in one state may have implications for neighboring states—resulting in the need for additional plants to be built in adjacent states or contributing to higher market prices As a result, state actions that serve to delay or prevent additions of new power plants or power lines could limit FERC’s ability to achieve a national market for competitive electricity and, thus, limit the expected benefits of restructuring 33 MARKET MONITORING Better monitoring of market performance is needed to determine how well-structured markets are performing and the extent to which expected benefits of competition have occurred FERC, the states, and other market monitors are not fully monitoring the overall performance of all wholesale and retail markets nor collecting sufficient data to so As a result, cross-regional comparison of the performance of markets is generally not possible FERC proposed changes to the design of electricity markets, which include plans to improve monitoring efforts Until recently, FERC has not actively monitored market performance FERC’s previous efforts to directly oversee the market have been incomplete or ineffective In the past FERC saw their monitoring efforts largely undertaken on a case-by-case basis in response to specific problems FERC has limited authority to compel market participants to provide proprietary data needed for more comprehensive monitoring State efforts to monitor the electricity industry have declined since the mid-1990s The ability of state public utility commissions to monitor restructured electricity markets is limited because oversight has shifted from the states to FERC State regulatory commission access to data from market participants is more limited under restructuring than under the previous regulated environment in which they had authority over setting electricity rates for the utilities in their states and, therefore, access to most of the relevant industry data FERC requires all ISOs or RTOs currently operating wholesale electricity markets to have market-monitoring units that evaluate the conduct of their participants and some measures of market performance However, the primary focus of the monitors has been to identify and mitigate the exercise of market power by electricity sellers, rather than measuring how well their overall design is working or whether these markets are delivering benefits to consumers Efforts to evaluate market power have generally focused on comparing estimates of the costs of producing electricity to the prices received from the market In most specific cases of day-to-day monitoring, monitors share their results in nonpublic reports with the management of the ISO and sometimes with FERC In addition, the market monitors develop periodic reports, which evaluate the performance of their markets and are often made public However, the authority and scope of each of these market monitors to collect data from market participants is 34 limited by the boundaries of their individual markets As a result, investigations undertaken by these entities are inherently limited because some key information may not be reviewed if it involves transactions with entities located outside the monitors’ jurisdiction or involves transactions about which the monitor has no detailed information In addition, because several of the market monitors rely on different methods to evaluate market power, there is a lack of uniformity in what data are collected, how they are analyzed, and what is reported, making cross-market comparisons difficult 35 III CONCLUSIONS Regulatory authority over US electricity markets is divided between state and federal authorities and is likely to remain so for the foreseeable future The United States Congress, through the Energy Policy Act of 1992, endorsed the development of competitive wholesale markets and the Federal Energy Regulatory Commission (FERC), through Order Nos 888, 889, 2000, 2003 and 2004, created a roadmap for how to provide consumers with just and reasonable rates under wholesale competition At the federal level, FERC is promoting policies for the development of competitive wholesale electric markets capable of serving large regions States are responsible for the regulatory structure for providing retail electric service, but have different views on what is the best model, which largely reflect regional considerations Currently, about one-third of the states provide for retail competition and two-thirds not States and FERC want to assure just and reasonable rates to their customers and to assure there are adequate electric generation resources States want to continue to take the lead on policies concerning electric resource adequacy and procurement relating to fuel supply choices and environmental aspects of electric generation For many the jury is out on whether or not electricity deregulation has been a success in America Some would say that it is still in a developmental stage, others have argued that it has played its run, has failed, and should be closed down, and others would point to progress and the need to learn from the ongoing experiences, not abandon ship, and proceed on an aggressive, thoughtful way to achieve the promised economic savings The reality, of course, is that electric utilities are operating in many parts of the United States in deregulated markets Deregulation in other 36 countries has worked and seems to be an almost complete win-win for all parties involved While political stress is ongoing between federal and state regulatory authorities and the financial markets are still nervous about the end-result, deregulation is not likely to be abandoned any time soon Nor should it be, claim many The decision to restructure the US electricity industry, at both national and state levels, is part of a two-decade process That process involves a broad movement away from government regulation to competition for several industries, including banking, telecommunications, airlines, trucking and natural gas Theoretically competition should lower costs, better align prices and costs, improve producer efficiency, and encourage the introduction of new consumer services and pricing plans The reality of the US experience in electricity sector deregulation is far from completely positive There have been pockets of success, but the overall perception and experience has failed to meet the expected projections It is debatable whether or not the restructuring process would have taken a different route; with more positive results were the prolonged California experience, the Enron scandals and the collapse of merchant generation not factors What seems to be known is that from the purely financial side prices have not decreased, investment has become more expensive, electric utilities (and hence their shareholders) have suffered greatly, and there is no clear signal of success or achievement Based heavily on the experiences of the California electricity crisis the Edison Electric Institute (EEI) developed key ingredients of a competitive electricity industry The benefits of robust wholesale competition can be achieved only if a strong, effective state-federal working relationship is established on all regulatory matters that provide the stability and certainty 37 needed to attract investment Within this context, any framework for wholesale competition should include the following elements:     Effective Wholesale Competition Needs a Robust, Reliable Transmission Infrastructure There Must be Fair and Open Access to Transmission Efficient Wholesale Markets Require Fair Rules for Competitive Transactions Under any Market Structure, there are Policies are Critical to Achieving LowCost Service to Electric Customers Each is described in detail below: Effective Wholesale Competition Needs a Robust, Reliable Transmissio n Infrastructu re There Must be Fair and Open All market participants should be subject to mandatory, enforceable reliability standards that are developed or approved by the North American Electric Reliability Council (NERC), with oversight and enforcement by the Federal Energy Regulatory Commission To attract the capital necessary to build sufficient transmission capacity: (1) FERC’s transmission rate polices should be reformed to provide proper incentives and cost allocations; (2) the Public Utility Holding Company Act (PUHCA) should be repealed, with appropriate federal and state access to books and records; and (3) the tax code should provide the appropriate incentives, including accelerated depreciation, to attract capital investment To facilitate the siting of transmission infrastructure: (1) FERC should have backstop siting authority if states cannot or will not act on applications to build transmission to relieve critical transmission bottlenecks and (2) the Department of Energy (DOE) should act as lead agency to coordinate all authorizations and environmental reviews required under federal law to site transmission facilities and to set deadlines for federal reviews To facilitate regional initiatives, like those involving new multi-state transmission, resource adequacy or Regional Transmission Organization (RTO) formation, there should be effective regional coordination Regional State Committees can play an important role, but should not create another layer of regulation 1All transmission-owning utilities should be subject to the same level of FERC regulation to assure fair, open access for all market participants to the transmission grid The transmission system should be operated in a fair and nondiscriminatory manner 38 Access to Transmissi on Many of the Nation’s transmission systems are under the control of an RTO or an Independent System Operator (ISO) States and FERC play a significant role in decisions relating to the formation and expansion of RTOs Where RTOs are not formed, fair and nondiscriminatory transmission access should be achieved by state and FERC endorsed mechanisms, which might include independent transmission administrators, transcos or similar organizations Market monitors should also provide for oversight over matters such as the behavior of market participants and assurance of independence, transparency and fair open access Regardless of whether transmission is controlled by an RTO, ISO, independent system administrator, or other similar organization, rules and practices should be transparent and the transmission system should be operated efficiently Transmission pricing should (1) allow for cost recovery of fixed and variable costs and a reasonable return on transmission investment; (2) eliminate the pancaking of rates within an RTO region; (3) ensure that cost responsibility follows cost causation; (4) minimize the potential for cost shifting and (5) permit the recovery of all prudently incurred transition costs, and (6) promote efficient siting of new transmission and generation facilities 39 Efficient Wholesale Markets Require Fair Rules for Competitiv e Transactio ns Under any Market Structure, the Following Effective market monitoring, enforcement, and consumer protections should be in place for competitive wholesale markets Market monitors should be independent of market participants and transmission operations management and should have the authority to report directly to FERC and state regulators Competitive market rules should not favor one corporate structure, business mode, or retail regulatory model over another Many different structures and business models can coexist in a competitive wholesale marketplace provided there are fair rules in place for all market participants Under the Federal Power Act, it is FERC’s responsibility to prevent the exercise of market power in competitive wholesale markets and to develop the rules for such markets Any analysis of market power wholesale markets should take into account existing commitments and obligations under state law and state policies relating to service obligations, resource procurement, resource adequacy, fuel supply choices and environmental aspects of electric generation Affiliates should be allowed to compete in competitive procurements conducted by regulated utilities to serve their own retail customers Transactions with affiliates should be conducted in a fair and transparent manner to protect against bias and favor to the affiliate of such a regulated utility A reasonable competitive procurement process should be in place which explicitly recognizes both FERC’s jurisdiction over wholesale transactions and state jurisdiction over retail service, planning, resource adequacy, fuel supply choices, environmental aspects of electric generation and retail cost-recovery issues Regional market structures should provide adequate price signals to promote efficient investment and ensure longterm resource adequacy Provisions should be made for long-term resource adequacy that reflect the regulatory and market structures adopted by the states within a region In competitive markets, this may require market mechanisms to ensure long-term resource adequacy Market rules should allow for reasonable credit and risk management policies In traditional regulated retail markets, innovative policies to encourage efficient, low cost operations Regulators should provide sufficient certainty in their rules and decisions to stimulate long-term investments by avoiding after-the-fact revisions, decisions that implement a “lower of cost or market” approach or decisions that transfer uncompensated risks to utilities States should fairly address provider of last resort, reliability backup and related cost recovery issues 40 Policies are Critical to Achieving Low-Cost Service to Electric Customer s Federal regulators should recognize the retail service obligations of utilities and promote policies consistent with those state imposed obligations State and federal efforts to promote cost-effective conservation and efficiency investments to benefit consumers should be strongly supported Well designed low income energy assistance programs should be strongly supported Federal and state energy and tax policies should promote fuel diversity and further development of renewable energy, energy efficiency improvements, nuclear energy, and clean coal technologies PURPA’s mandatory purchase obligation should be reformed because it distorts markets and increases electricity prices to consumers In 2001 EEI developed key ingredients of a competitive industry Reviewing the literature and analyses that have been undertaken since then it is clear that these fundamental drivers are still the dominant factors of a “lessons learned” They are: IV Maintain a favorable investment and regulatory climate for new generation to ensure that enough generation capacity is on line and planned to meet growing load Ensure that enough infrastructure (transmission capacity and natural gas pipeline capacity) is in place and planned to meet growing loads, maintain reliability, connect new generators to the grid, support large regional markets, and provide fuel to power plants Encourage retail customers to participate in dynamic-pricing and voluntary-load-reduction programs (i.e., couple retail and wholesale markets) Create honest retail competition: avoid standard-offer rates with artificial discounts, create conditions that encourage companies to offer retail services without favoring individual competitors Encourage electricity suppliers to manage and diversify their supply and price risks Create efficient and integrated wholesale markets for energy, ancillary services, and transmission congestion Monitor and minimize horizontal market power (generation) and vertical market power (combined ownership and operation of generation and transmission) REFERENCES Apt, Jay, Competition Has Not Lowered U.S Industrial Electricity Prices, THE ELECTRICITY JOURNAL, pp 52-61, March 2005, and Carnegie Mellon Electricity Industry Working Paper CE1C-05-01 Borenstein, Severin and James Bushnell, Electricity Restructuring: Deregulation or Reregulation,PWP-074, UNIVERSITY OF CALIFORNIA ENERGY INSTITUTE, Berkeley, California, February 2000 Blauvelt, Euan C., Deregulation: Magic or Mayhem?, THE ELECTRICITY JOURNAL, pp 39-47, August/September 2004 42 Edison Electric Institute, Framework for the Continuing Development of a Competitive Wholesale Market for the Benefit of Consumers, EDISON ELECTRIC INSTITUTE, Washington, DC, January 2005 Hirst, Eric, The California Electricity Crisis: Lessons for Other States, EDISON ELECTRIC INSTITUTE, Washington, DC, July 2001 Hunt, Sally, Making Competition Work in Electricity, JOHN WILEY & SONS, INC., New York, 2002 Kiesling, Lynne, Getting Electricity Deregulation Right: How Other States Have Avoided California’s Mistakes, REASON PUBLIC POLICY INSTITUTE, Los Angeles, California, April 3, 2001 Lave Lester B., Jap Apt and Seth Blumstack, Rethinking Electricity Deregulation, THE ELECTRICITY JOURNAL, pp 11-26, October 2004 Michaels, Robert J., Vertical Integration and the Restructuring of the U.S Electricity Industry, CATO INSTITUTE POLICY ANALYSIS No 572, July 13, 2006 Rosenzweig, Michael B., Sarah P Voll, and Carlos Pabon-Agudelo, Power Sector Reform: Experiences from the Road, THE ELECTRICITY JOURNAL, pp 16-28, November 2004 Sioshansi, Fereidoon and Lawrence D Hamlin, Competitive, Regulated, or Somewhere in Between? Where Do We Go from Here? THE ELECTRICITY JOURNAL, pp 87-94, June 2004 U.S General Accountability Office, Lessons Learned from Electricity Restructuring, U.S GENERAL ACCOUNTABILITY OFFICE, GAO-03-271, Washington, DC, December 2002 Van Doren, Peter, The Deregulation of the Electricity Industry: A Primer, CATO INSTITUTE POLICY ANALYSIS No 320, October 6, 1998 Van Doren, Peter and Jerry Taylor, Rethinking Electricity Restructuring, CATO INSTITUTE POLICY ANALYSIS No 530, November 30, 2004 ... during the 1970s and 1980s Congress passed laws deregulating the airline, railroad freight shipping, trucking, and barge shipping industries Over the same period, several other countries—including... last in a series of deregulation initiatives Natural gas was the first industry to undergo deregulation in 1978 It was followed by airlines in 1978, railroads in 1980, and the trucking industry in. .. permits and approval processes involving numerous regulatory entities charged with, among other things, environmental protection and land use planning issues Similarly, investments in new generating