Major Plan To Reform Electricity Markets Due Soon
07/23/2002
Dow Jones News Services
(Copyright © 2002 Dow Jones & Company, Inc.)
(This story was first published Monday.)
By Arden Dale
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--One crisis after another has zapped the electricity business. Now, it is about to get another jolt -- the most ambitious federal plan to rework its power markets in nearly a decade.
Energy companies, Wall Street firms and others are watching closely for the blueprint, even though it may not be adopted as policy for months or even years. Expected to be sweeping and controversial, it may face legal challenges and political obstacles.
The Federal Energy Regulatory Commission has said it will issue the plan on July 31. The aim is to fix broken markets by standardizing several of their key aspects, including the way the country's approximately $11 billion of power lines are operated and how electricity is priced. A broad array of companies will be affected, from traditional utilities such as American Electric Power Co. (AEP) and Entergy Corp. (ENT), to newer energy merchants including Mirant Corp. (MIR), Reliant Inc. (REI), and Dynegy Inc. (DYN).
"The goal is to finish the job of opening up the power markets, to balance competitive forces," FERC chairman Pat Wood III said in an interview. "We saw how well it worked with natural gas. One of the things we've learned over the past several years is that there are a lot of different approaches to opening markets; for the benefit of consumers and investors we want to get one nailed down, to set forth a game plan that's sufficiently flexible for an evolving marketplace."
Charles Gray, executive director of the National Association of Regulatory Utility Commissioners, said the plan will be "the most significant decision since 888," the FERC order that initially opened wholesale markets in 1996.
"It's at the top of the list for sure; it's going to govern how the industry is organized for the next decade," said Bruce Edelston, director of policy and planning at Southern Co. (SO), a large utility in Atlanta.
Under Pressure
FERC, which created the approximately $600 billion wholesale market and is its chief cop, has been under intense pressure to reform it. Since California's energy crisis in 2000 and 2001, the agency has faced a series of electricity market crises, including the collapse of Enron Corp. (ENRNQ).
Most recently, energy companies have been hard hit this year by allegations of fraudulent trading, and some are being investigated on those grounds by the Securities and Exchange Commission, FERC and the Commodities Futures Trading Commission.
The power industry has already produced reams of comment based on what they think will be included in the new FERC plan. FERC published a paper on March 15 that lays out a number of issues expected to be included. Still, no one knows exactly what to expect from the document, which is known widely in the industry as the SMD, or Standard Market Design. After giving market participants a chance to comment on its plan, FERC will presumably adopt it, or a reworked version, as policy.
Some of the biggest battles will likely be over which entities should control power lines. Others may be fought over who should pay for congesting power lines, and what models should be used for pricing power.
"A lot of decisions that have to be made have nothing to do with science and economics," said John Hughes, technical director of Electricity Consumers Resource Council, which represents large electricity consumers including Ford Motor Co. (F), General Motors Corp. (GM), Intel Corp. (INTC), and International Paper Co. (IP). "They're political because the commission realizes it could encounter a legal or political backlash, and it's trying to avoid that."
The very concept on which the plan is likely to be built is a divisive one that has already spurred protracted battles. It is the notion of creating regional power grid operators, or so-called RTOs, to run power lines and administer markets. FERC in 1999 issued a major order urging energy companies and other market participants to form RTOs. Some regions, including New York and the Mid-Atlantic states, have already done so. Others, including the Southeast, have been slower to make the move.
Observers say FERC's new plan will probably continue to urge the formation of RTOs, and may even take stronger action by ordering them. The agency has indicated it likes several aspects of RTOs in the eastern states, including a method for pricing, known as locational marginal pricing.
Investors May Take Heart
Energy companies said they hope investors will be heartened by the plan, and see in it a potential end to uncertain times that have stymied investment in the sector.
"There's a feeling on Wall Street that the camel's back may be broken, that regulators won't be committed to completing the transition," said Mark Stultz, a spokesman for the Electric Power Supply Association, which represents merchant energy companies. If FERC proves by adopting policy that it's committed to making markets work, "that could begin to start the dominoes falling in the other direction with regard to investor confidence," he added.
The plan will be "extremely important" for the industry over the long-term, according to Steven I. Fleishman, managing director of power and gas research at Merrill Lynch & Co. (MER), an investment bank that maintains financial relationships with a number of energy companies.
"We do need to have more functional standardized markets; you can't keep changing the rules," Fleishman said. "I'm happy that we've had some time to get through California and can start dealing with really fixing things up."
- By Arden Dale; of Dow Jones Newswires (201)938-2052; arden.dale@dowjones.com
(END) DOW JONES NEWS 07-23-02
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