The Goldilocks Dilemma – What’s the
Retail Regulatory Framework That’s
“Just Right”?
A presentation by:
Dr. John A. Anderson
President & CEO
Electricity Consumers Resource Council
Washington, D.C.
At The:
The Santa Fe Conference
Center for Public Utilities, NMSU
Santa Fe, NM – March 20, 2007
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What Is ELCON?
The national association for large
industrial users of electricity in the
U.S.
Founded in 1976
Members from a wide range of
industries from traditional
manufacturing to high-tech
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What I Plan To Do Today:
Assert that a truly competitive electricity market would be the
best way to satisfy the Goldilocks Dilemma
Consumers would vote with their dollars for the amounts of new
generation, transmission, energy efficiency, environmental
investments, etc. that they desire
Clearly, a truly competitive electricity market would assure a
consumer focus
Certainly, there were problems with traditional regulation
Tradition regulation would not meet the Goldilocks Dilemma
Due to the many problems, many states tried to change
But there are also critical problems with today’s FERC-
jurisdictional “organized markets”
They are far from being competitive
They do not bring net benefits to consumers, much less result in
satisfying the Goldilocks Dilemma
States face a dilemma of their own on how to proceed
Unfortunately, I think we will be in a very unsettled state for some
time
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The Question Before Us Today
Is Difficult – But Important
What is the recipe that will result in:
New baseload generation
New transmission investment
New demand response and energy efficiency
objectives
New environmental and national security
objectives and
A rational deployment of limited capital
And all in a consumer oriented environment
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A Little (But Only A Little)
History:
In the beginning there were vertically-
integrated utilities that:
Provided generation, transmission and
distribution of electricity
Had exclusive service territories granted by
governments
Regulators were their “customers”
Consumers had few options other than to
purchase from the local utility
There certainly was no end-use consumer focus
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Traditional Regulation Meant:
Most utilities had:
Little incentive to either offer lower prices or
better service
Little incentive to even ask consumers what they
really wanted
Every incentive to protect their own investments
in generation (which was often inefficient) and
transmission
Every incentive to “gold plate” their
expenditures to increase their returns
And returns all but guaranteed by state PUCs
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The Traditional Regulatory
Model:
Seemed to work for some time
End-use consumer rates:
Steadily fell for many years as economies of
scale were realized
Then were relatively stable
Most consumers had no idea whether they were
or were not fair
Service seemed relatively good
What do you compare it to?
Consumers didn’t complain a lot
What options did they have?
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But Then…..
Costs rose dramatically for some, but
certainly not all, utilities:
Nuclear costs skyrocketed
Interest rates spiked
Inflation grew
Environmental costs rose dramatically
Rate increases and very significant
price differentials caused a re-
evaluation of the industry
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It Is Important To Note That
Regulation Was Inconsistent:
For consumers, traditional regulation worked much better in
some areas than in others
Some states seemed to try to turn electric utilities into
social service agencies or environmental advocacy entities
This made their territories much more expensive
But others stuck to traditional COS principles
This created price disparity between geographical areas
The relatively expensive areas tried “restructuring,” while the
relatively low cost areas stuck to their business models
The results were even greater price discrepancies between
geographical areas
Which fueled the opposition to restructuring
And it has the potential to do so with other “creative”
regulatory actions
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Many Folks Thought That A
Healthy Dose Of Competition:
In the high-cost areas would produce favorable
results:
ELCON was one of the first – and one of the strongest
– advocates for competitive electricity markets
We believed then – and still believes now – that
“true” competition would discipline artificially high
prices that came from some forms of regulation
But it also should bring technological innovation, new
products and services, a customer focus and allow
customers to be in control of their risk
Unfortunately, we have not seen these expected
results
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The Problem Is We Did Not Get
“Real” Or “True” Competition:
What we got lacked several critical preconditions of
competition:
There is no direct interaction between supply and demand – Price
responsive load is ignored – At best, we have “competitive
bidding” of generation, which existed under traditional regulation
Prices are not set by market forces – Rather, we have “capacity
markets” that are not markets, but are another form of regulation
Price caps and artificial bid mitigation measures commonly
implemented
Too many inefficient suppliers that were propped up with overuse
of RMR contracts and other such devices
A transmission infrastructure not adequate to allow the necessary
movements of energy and power and a failure to mitigate market
power caused by congestion – In fact, we got DISincentives for
the mitigation of some congestion
Consumers unable to hedge future prices with bilateral contracts
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ELCON Still Believes That
“Real” or “True” Competition:
Would best satisfy the “Goldilocks Dilemma”:
Real or true competition would allow consumers to
“vote with their dollars” for:
The amounts and types of new generation and
transmission that consumers want
The energy efficiency and environmental
investments that they are willing to pay for
Real or true competition certainly would result in a
consumer oriented environment
Suppliers would have to be sensitive to what
consumers want – or they would not be able to sell
their products and services
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Will We Get “Real” Or “True”
Competition Anytime Soon?
There is VERY significant opposition to changes in the
“organized markets” that would bring real competition
Some entities are making obscene returns – especially on
depreciated coal and nuclear generating units
Obviously, they do not want to see changes that would
reduce these returns
They are willing and able to spend very large amounts of
both human resources and money protecting these
earnings
However, FERC has now said that it understands that
opposition to the organized markets is substantial – and
growing
Thus, there seems to be a light at the end of the tunnel
The real question: Is it daylight – or the headlight of the
oncoming locomotive?
And further, will FERC actually make the hard decisions
necessary to protect consumers?
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So Overall Where Are We?
Without strong FERC leadership, we believe
that retail regulation, at least for the
foreseeable future, will be whipsawed by a
set of increasingly contradictory public
policies:
A patch quilt of quasi-competitive and quasi-
regulatory “markets”
Growing NIMBYism
A rush to do something about climate change
A failure of the stakeholder process so the
problems are not self-correcting
I discuss each in turn
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Hybrid Markets:
Industry restructuring has been an economic disaster due in
large part to the lack of a federal and state cooperation in,
or agreement on, a common model for the industry
Consumers are increasingly at a disadvantage in “hybrid”
markets because of enormous transactions costs – both in
time and money
Failure of the Day 2 market design (do we dare call it
SMD???) results in a frequent need for regulatory
intervention and “patches”
Investors do not like regulatory uncertainty or regulatory
confusion, and have respond accordingly with a very high
cost of capital – if they agree to finance at all
Solutions are very difficult to get implemented:
The stakeholder process is stacked against consumers
The whole issue is very complex – Have you ever tried to
explane to your local Congressional representative that you
don’t have enough FTRs!
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NIMBYism:
There is a serious lack of political leadership
necessary to overcome opposition to new energy
infrastructure
The public has to understand that their economic well-
being depends on the siting of new transmission
corridors and baseload generation
FERC’s effort to cajole infrastructure investments with
punitive locational prices has grossly backfired. The
LMP prices simply tell the monopolists (that own high-
cost generation protected by transmission constraints
that they also own) where NOT to build
The “free lunch” crowd were guilty of asserting that
supposedly “win-win” solutions (e.g., DSM, energy
efficiency, etc.) would be both adequate and
inexpensive. They are not – and such assertions just
put off the inevitable
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Climate Change:
If climate change was not a real issue before this year, it
certainly is here today
All indications are that the US Congress will do something on
climate change – In this Congress
But we still are not having the right debates. A few examples:
What do individual states or regions expect to accomplish if
they curtail certain GHG emissions in their states or
regions?
What are the costs associated with such measures?
How do we compare the real or total costs and the end-use
consumer benefits?
How will individual state actions fit with future US
Congressional actions?
Unless questions like these are answered, doing anything will
probably be a token exercise without any cost accountability
Perhaps more important to us here, are such actions legal
under state public service laws and regulations?
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Finally, The Stakeholder
Processes:
The use of the stakeholder processes has gained traction in
restructured areas
Examples include: ISOs and RTOs; NERC; NAESB; FERC
settlement proceedings
They involve such critical issues as resource adequacy
They seem to be growing as “regional planning” is
implemented
But unfortunately, the stakeholder process is broken
Thus, the problems are not self-correcting
End-use consumers have only a small proportion of the
votes – but they have to pay all of the bills
Consumers are unable to stop the implementation of
proposals that they do not believe are in their best
interests
The growing consumer rebellion signals (at least to us) the
impending “train wreck”
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So What Should State
Regulators Do?
Go back to basics:
Implement sound economic policies
Use real accounting
Doubt those proposals that seem too good to be true
Recognize that today the default fuel for future
generation is natural gas
And find ways to promote fuel diversity to prevent
runaway “scarcity pricing” in natural gas markets
Get retail price signals correct – and be sure that
they are fair and nondiscriminatory to ALL consumers
– BEFORE experimenting with risky measures
directed at issues such as climate change
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So What Should State
Regulators Do? (Cont.)
Recognize that trying to make a single entity
both sell and “unsell” energy simply won’t work
And “decoupling” makes things worse, not
better
Join the debate on whether end-use consumers
are receiving net benefits from the “organized
markets”
We must recognize the value of truly
independent operation of the transmission
grid and of regional planning that conforms
to real power flows
But we must carefully balance the total
costs of ISOs and RTOs against the end-use
consumer benefits
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Conclusions
ELCON believes that “real” or “true” competition would
be the best solution to the Goldilocks Dilemma
However, today’s “markets” are far from competitive
And such markets are failing to achieve the stated goals
We believe that today’s “market” structure is not
competitive and not sustainable
If stakeholders collectively do not choose to fix the
problems with the markets
There will be a serious attempt to move back in the
direction of regulation
This will be very difficult
And may do no better in achieving the stated Goldilocks
goals
However, under no circumstances should we follow the
Maryland, Virginia and other state experiences to date
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Conclusions (Cont.)
The real problem, to us, is that neither
traditional regulation nor today’s organized
markets have a consumer focus
Thus, neither meet the Goldilocks Dilemma’s
stated goals
The real challenge will be to find a way to
truly respond to the needs of consumers
This is difficult
And I am not optimistic
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Questions?
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To Contact ELCON
Phone: 202-682-1390
E-mail: elcon@elcon.org
Web site: www.elcon.org
Address: 1333 H Street N.W.,
8th Floor, West Tower
Washington, DC 20005
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