Originally published at RTO Insider
The return of major load growth has brought back basic debates about how to economically regulate the power industry, with utilities in restructured states seeking to own generation directly and independent power producers looking to serve large loads in vertically integrated states. (See Demand Growth Leads to a New Round of an Old Debate in States: Restructuring.)
In a federal system like the U.S., restructuring usually leads to power shifting from the state to the federal government as FERC oversees the markets and transmission planning processes at ISO/RTOs, said former FERC Chair Mark Christie, who is now at William & Mary Law School.
“PJM operates the capacity market, and that capacity market historically … really has far more effect on what generation gets built in PJM states than the state [integrated resource plan] would in a state like Georgia or Arizona, which are not deregulated,” Christie said.
With a more disconnected federal government, the restructured states offer less democratic accountability, he argued.
“There is a connection at the state level between those who have to set retail rates, which is what I did for 17 years, and the people who have to pay those bills, because you are at the state level; people know you. It’s much more accountable to the very people that we’re supposed to be serving here, and believe me, they do complain,” Christie said. “That’s the way democracy is supposed to work.”
That accountability is important as the Virginia State Corporation Commission (where Christie served before FERC) works to mitigate the effects of a large and growing data center market on other customers’ power bills, he added.
Historically, the utility industry has been highly regulated to make up for the fact that it was designed around regional monopolies that earn more money by investing in their system, Lighthouse Energy Institute President Devin Hartman said. “You need to have the counteract of the force of intervenors in an evidentiary process on the record to try to address that and determine what’s prudent behavior in this space.”
By the 1980s, the industry was seeing very high levels of cost accumulation and stranded costs, and economists started arguing it should open up to more competition, especially on the generation side, he recalled.
“We did this in part with the deregulation of telecommunications, natural gas, railroads, you name it,” Hartman said. “But it’s important to note that electricity is a bit different. There are more complex sets of market failures. So, this is why, for example, we need to have an independent system operator for electricity grids to help facilitate competition at the bulk system.”
States have taken different roads on restructuring, with some opening retail markets, and others keeping their utilities regulated but joining organized wholesale markets in a hybrid system, Hartman said.
“We’ve clearly seen benefits on the supply curve,” he added. “We’ve seen more demand participation. We’ve seen innovation. We’ve seen environmental benefits. We’ve seen transparency.”
Large business customers clearly have benefited from restructuring, but the picture is murkier and varies state by state for residential and small business consumers, Hartman said.
He noted that demand was expected to spike in the late 1990s and early 2000s as restructured markets were first launched, but that did not pan out.
“The consequences of that risk socialization were felt under the cost-of-service model,” Hartman said. “Whereas under the competitive model, you actually saw some bankruptcies, right? The shareholders ate it. You saw a fundamentally different approach to risk management.”
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