Promoting competition in the US electric industry

An open and competitive market is one in which information flows as freely as do electrons. OASIS, or Open Access Same-Time Information System, is therefore designed to provide transmission customers with timely electronic information about available trans-mission capacity, prices and other data necessary to obtain services. The FERC sets the technical standards and protocols to accomplish this.

In another response to the competitive market, the FERC has established rules to approve market-based rate authority for entities which show that neither they nor their affiliates has market power in generation or transmission (or that they have mitigated such market power) and that they do not control barriers to entry. The development of regional transmission groups (RTGs) has also been encouraged. RTGs are voluntary organisations which include transmission owners and users, as well as state regulators in some instances. As they evolve, RTGs are expected to help plan the use and expansion of the transmission system according to the economic needs of each major region of the United States and to resolve disputes over transmission pricing.

In Order No 888 the Commission has focused on the concept of an independent system operator (ISO) as a means of addressing undue discrimination concerns. Under the ISO scheme, utilities within a control area would transfer control and operation of their transmission facilities to an independent entity - the ISO. The ISO would have no affiliation with the transmission owners, or would be governed by a broad representation of interested parties or interested wholesale power entities or stakeholders. There would therefore be no incentive to discriminate against any user of the system and the ISO could operate it to maximise efficiencies. The ISO concept seems particularly apt for existing power pools.

Power pools have been established, primarily in the north-eastern US, by utilities to maximise reserve sharing and obtain operating efficiencies. In a new competitive environment, however, these pools will have to make their services available to all wholesale users on non-discriminatory terms. These `tight' pools operate as one control area with all of the members' combined generating resources centrally dispatched. Several pools have voluntarily developed plans to implement ISOs. Pool operation would be turned over to the ISO, and transmission service over the combined system would be available to all wholesale users under a pool wide open access tariff.

The industry is undergoing consolidation and reconfiguration - some say as a result of the uncertainties resulting from competition or perceived to result from competition. In December 1996, after much deliberation, the Commission revised its policy for evaluating mergers involving public utilities or other dispositions of utility assets. The new policy applies the analysis used by the US Department of Justice in its merger cases. This meant employing more sophisticated means of determining exactly what constitutes the relevant `electricity market'. The policy mainly applies to mergers with horizontal market power implications, but new combinations have developed, such as mergers between gas and electric companies, which have vertical market power implications. The Commission has recently issued orders involving gas/electric mergers which indicate how it will analyse and dispose of them. It has dealt with tens of billions of dollars worth of utility mergers in the past year alone.

Restructuring activities by state regulators

The transition to competition in the electric industry will be influenced more by the actions of state regulators than by the FERC. Electric utilities are heavily state-regulated; perhaps as much as 85% of assets and revenues are committed to retail service in the US. States administer the `regulatory compact' under which utilities are obligated to provide reliable service to all retail customers in their service territory. The state is responsible for deciding whether that `regulatory compact' should be altered to permit retail customers to shop for power from alternative suppliers, but the US Congress is also giving thought to addressing the issue. Retail access is being actively considered by many states during this transition to competition, as are issues about stranded cost recovery, environmental impacts and social programmes (for example universal service and demand-side management programmes) funded through retail rates.

Recently the California Public Utilities Commission (CPUC) ordered a major restructuring of electricity within their state. The order requires retail direct access by January 1 1998. It also creates an ISO which is FERC jurisdictional. The ISO terms and conditions have been filed with FERC and are being reviewed. The three major IOUs in California will transfer operational control of their transmission facilities to the ISO, which will schedule deliveries of power and ensure non-discriminatory access to the transmission system. The CPUC also ordered the creation of a power exchange, which will allow power producers to compete on the basis of a transparent bidding process. The power exchange will match bids between sellers and purchasers. While participation in the exchange will be voluntary for most, the three California IOUs will be required to participate for a period of five years.

While the decisions of legislatures and regulators are important to the timing and fairness issues, competition has arrived. It is driven in large part by market forces and the demands of customers. Regulators do not create competition. Regulators can, however, create the fundamental preconditions for it. Conclusion Two things are clear about the US electric utility restructuring. The nature and pace of change in the industry, even though heavily influenced by regulatory policy, will be driven largely by developments in the electricity markets. Because of our federal system of regulation and the influence of the market, the ultimate outcomes (e.g. the effect on rates and the continuation of integrated resource planning and the evolving structure of retail markets) will to some extent vary from jurisdiction to jurisdiction. A basic restructuring of traditional vertically integrated electric utilities and the promotion of com-petition in the production of electricity are necessary and appropriate at this stage of development of the American power industry. Universal service is well established in principle and practice. The transmission, distribution and generation systems operate with a high degree of reliability throughout the country, despite considerable diversity in ownership, generation mix and public policy objectives. But increasing competition in the generation sector has powerfully influenced the economics of the industry and the thinking of both utility management and regulators. We no longer assume that large vertically integrated utility operations will create the greatest potential economic efficiency. To realise that potential, industry operations must be meaningfully changed. The FERC has taken action to give market forces a greater role in determining what shape the industry will take as the new millennium dawns.

(The first part of this article appeared in Smart Energy International issue 2 1997)