Perspective
We Can Work It Out
January 1, 2003
By Pat Wood III and William M. Nugent
Solving the industry's problems will require cooperation between the federal government and states.
If we are to successfully forge a new, efficient and customer-focused structure for the electric industry, state and federal regulators must work together to ensure reliable supplies of electricity at the lowest cost possible in markets that are truly competitive and free of market manipulation.
Consistent transmission rules for all power providers are a necessary starting point for creating a stable national framework in support of regional markets.
The effort to form an integrated wholesale power market in the Midwest, Southwest and Mid-Atlantic regions-projected to save customers in 26 states $7 billion during the next decade-is a leading example of this new approach.
Regional electricity markets differ in geography, economics and resources. Standardizing the design of these markets requires a balance between interstate commerce in wholesale electricity and the states' interests and regional self-determination.
State and federal regulators must work together so customers can reap the benefits of a national wholesale electricity market. Market harmonization can ensure adequate and reliable supplies of electric energy at just and reasonable prices, while respecting the unique characteristics of regional power markets.
In the wake of the collapse of Enron Corp. and California's disastrous experience with electricity restructuring, the nation is understandably once-bitten, twice-shy. But standardized market rules, coupled with vigorous and coordinated state and federal oversight, can help ensure such dysfunction never happens again.
It is incumbent on regulators to cooperate in forging the rules of the road for today's still-evolving competitive power industry. The California crisis revealed flaws in both the wholesale and retail market designs in place at the time, and the need for close and careful scrutiny of market behavior. With lessons learned from California, and from more successful market restructurings elsewhere in the United States and internationally, we can eliminate barriers to competition, harmonize markets and successfully harness competition for the public's benefit.
The expansion of markets holds the promise of significantly lower overall costs not just in Illinois and the Midwest, but across the country. Yet some are concerned those benefits will be unevenly distributed. State and federal officials should work together to realize these greater overall benefits without forcing higher costs on any region. This will require an unprecedented level of cooperation between state and federal regulators.
We must recognize that electricity markets are inherently regional and interconnected, and that the decisions of one state affect customers in neighboring states. By cooperatively framing a standard market design, state and federal regulators can improve power grid reliability and inject efficiencies into the marketplace that are passed on to customers in the form of lower prices.
A set blueprint for effective competition in the nation's electricity markets also will help eliminate regulatory uncertainty that has depressed badly needed investment in transmission and generation required to meet increasing demand for electricity.
Eliminating barriers to trade in electricity and creating vibrant multi-state power markets must include regional approaches that allow customers to reduce demand in response to price signals, providing protection from extreme price volatility.
Federal regulators should not and cannot micromanage how regional electricity markets evolve. For example, the South can retain its vertically integrated utilities, and the extensive hydropower system in the West can continue to operate without operational changes.
Optimal markets rely on state leadership within each region to ensure adequate power supplies and build new power lines while appropriately allocating the costs of expanding the grid.
Making markets work can mean more than just lower costs for customers. Eliminating barriers to competition will pave the way for new power technologies that are cleaner and better for the environment, providing unquantifiable public health benefits.
But state and federal regulators cannot and should not address the development of competition in the electric industry separately. We can and we must work together to resolve these issues. Our nation's economic future depends on it.
Pat Wood III is chairman of the U.S. Federal Energy Regulatory Commission and the former chairman of the Texas Public Utility Commission.
William M. Nugent is a commissioner with the Maine Public Utilities Commission
and immediate past president of the National Association of Regulatory Utility Commissioners.
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