Power and Energy Updates
FERC Softens its Line on Standardization of Electricity Markets
May 19, 2003
On July 31 2002 the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking to require public utilities to offer standardized electric transmission services and implement a standard market design for wholesale electricity markets. The notice was designed to further FERC's goal of promoting competition in wholesale electricity markets through greater transparency and uniformity of market rules.
The proposal caused considerable controversy among policymakers and utilities from various parts of the United States, especially those in the Southeast and Pacific Northwest, which either already enjoy lower-cost electricity rates or have unique local concerns. Complaints included that the proposal's 'one size fits all' approach was out of step with the regional nature of electricity markets, and that some aspects of the proposal infringed upon areas that were traditionally within the states' jurisdictional purview. In response to these concerns and political pressure exerted by certain members of the US Congress, FERC recently issued a white paper on its standard market design initiative, outlining planned changes to the proposal to address these issues. FERC's Standard Market Design White Paper discusses the basic policies that FERC intends to implement when it issues its final rule on standard market design, which is expected later this year. FERC has invited comments and stated that it will not issue a final rule until it considers comments and energy legislation being considered by the US Congress. FERC also plans to convene regional conferences to discuss wholesale market design issues with state regulatory authorities and market participants.
In the Standard Market Design White Paper, FERC has struck a deferential tone regarding state and regional concerns. FERC has stated that it will allow for phased-in implementation of standard market design that is tailored to each region of the country, and that it will not require implementation of any feature of standard market design in a particular region if the costs can be demonstrated to outweigh the benefits. FERC has also stated that certain activities it had proposed to regulate in the notice of proposed rulemaking will be subject to state or regional oversight. For example, FERC has backed down from its original plan to assert jurisdiction over all aspects of transmission services provided to retail electricity customers. Instead, FERC will regulate only the terms and conditions, and not the rates, for transmission service that is embedded in the local utility's bundled retail sales services. (It will continue to regulate the rates, terms and conditions of all unbundled transmission service that is provided separate from the local utility's retail service.) Likewise, FERC will defer to the states with respect to determining whether utilities have sufficient electric generation resources, and a regional committee of state representatives will determine the appropriate approach for allocating the costs of new electric transmission facilities and transmission system upgrades. State and regional committees will also be afforded deference in the design and development of transmission service rates. Although FERC has softened many aspects of the notice of proposed rulemaking, it continues to stand firm with its resolve to promote competition through regional wholesale electricity markets. The white paper indicates that FERC plans to accomplish its goal by implementing standard market design through regional transmission organizations and independent system operators that will independently operate utility transmission systems on a regional basis. FERC has even proposed to require all utilities to join a regional transmission organization or independent system operator, in a departure from its previous stance that regional transmission organization/independent system operator participation would be voluntary.
FERC has gone to great lengths to assuage the concerns of the states that are worried about FERC's jurisdictional reach over the transmission grid and electricity markets. In an effort to salvage what it can from its aggressive standard market design proposal, FERC is indicating that the market design of regional transmission organizations and independent system operators will not be standardized throughout the country. It appears that FERC will be focused on getting regional transmission organizations and independent system operators up and running, and encouraging the development of so-called 'seams' agreements to promote competition between regions. It is not clear, however, if the white paper will help to address the concerns of some in the US Congress regarding the standard market design initiative. Requiring regional transmission organization/independent system operator participation may be of particular concern to states that are opposed to FERC extending its jurisdictional reach, as may be FERC's continued assertion of jurisdiction over the non-rate terms and conditions applicable to the transmission component of bundled retail electric service. FERC's progress in implementing the standard market design initiative will be an area to track closely as the movement toward competitive electricity markets in the United States continues to unfold.