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Public Workshop: Market Power
and Consumer
Session
II, Panel B (Assessment of State
Comments
of
Roy Thilly
Washington, D.C.
September 13, 1999
My name is Roy Thilly.
I am the CEO of Wisconsin Public Power Inc., a
municipally-owned wholesale electric utility, and also the current
president of public power's national trade association, the American
Public Power Association.
I speak today on behalf of WPPI from the perspective of a
transmission-dependent utility that must rely on the transmission
systems of others to serve our load reliably and economically. WPPI is
a municipal electric company owned by 30 Wisconsin municipalities that
operate electric distribution systems.
We are a political subdivision of the state of Wisconsin and
supply all of the power requirements of our member/owners.
All of our members were previously captive customers of the
investor-owned utilities on whose transmission systems they are
located. WPPI has spent
over 15 years breaking open the transmission grid to create
competition for our load and to be able to access attractive
generation resources on behalf of our members and their customers. We
own generation that covers about 50% of our needs and purchase power
for the remainder from a variety of utilities and marketers. We
operate in three control areas.
Thank you for this opportunity to be with you to address market
power and consumer protection issues in restructuring the electricity
industry. Also, most importantly, thank you for the FTC's strong
interest in these issues and for the Agency's involvement in market
power debates at FERC and elsewhere over the past several years.
I will begin with a brief survey of how public power is faring
relative to select provisions of the laws that have been passed around
the country at the state level. Then
I will concentrate on our experience in Wisconsin in dealing with
market power in preparation for retail competition.
In summary, my Wisconsin and midwestern regional experiences
provide several clear directions:
¨
It is important to begin by
identifying the goals in legislative restructuring before
concentrating on competition as the means (i.e.,
lower electricity prices for all consumers, the maintenance of system
reliability, efficiency and effective choices). This process should
make it clear that strong federal RTO requirements and market power
protections, including prohibitions on information hoarding, are
essential.
¨
It is important to identify
the steps, and their proper sequence, to get from here to there.
Defined prerequisites must be accomplished for retail competition to
work.
¨
Retail competition and any
attendant benefits are doomed to fail if effective wholesale
electricity competition is not secured first. We are not there yet.
¨
Within wholesale competition,
transmission access and concentration of control of generation
capacity, as well as control area procedures, remain significant
sources of market power and impediments to competition.
¨
Structural solutions
(ensuring number of competitors, ease of entry, independence of
corporate functions and regional institutions), as opposed to attempts
at behavioral regulation, are necessary to prevent creation of a
deregulated monopoly electricity industry that will harm consumers. Legislation and Public Power
Around the Country
Although electric restructuring legislation has been enacted in
one form or another in 21 states, it is too early to evaluate fully
the direct impacts or draw more than tentative conclusions.
Regarding public power and competition and market power issues,
the most significant state legislative provisions (other than ISO
requirements and attempts at market share limits) deal with
opt-out/opt-in provisions, competition restrictions and municipal
aggregation authorizations.
The 21 states that have enacted restructuring legislation with
only rare exceptions provide public power systems the option of
participating or not. Typically
a public power system can decide whether or not it wishes to open its
service territory to retail choice, but must allow choice in its
territory if it wishes to sell to retail customers outside of its
territory. This is consistent with local choice.
Maine is an exception to this opt-in/opt-out policy.
Its 1997 law prohibits a consumer-owned utility from selling
retail generation output outside of its own territory, but allows
competitive providers to sell to public power customers. A 1998
amendment to the law does allow consumer-owned utilities to conduct
competitive bids for standard-offer service for customers in their
territory.
A second exception is Illinois. A 1997 law allows public power
systems the option of providing retail choice subject to financial
conditions. A system cannot elect to provide choice if doing so will
put the utility's tax-exempt status or tax-exempt debt at risk.
Public power is concerned about legislative provisions that
restrict it from being one of the competitors in the New World. In
addition to the Maine example above, two states, Arkansas and
Oklahoma, have included other service territory restrictions in their
restructuring laws.
A 1999 Arkansas law enacts a moratorium on municipal
condemnation proceedings until two years after retail choice begins
and prohibits municipal utilities from serving customers in a newly
annexed area if the municipal utility has not opened its own territory
to retail competition. A 1998 Oklahoma bill enacts a moratorium on
condemnation proceedings until July 1, 2002, the prospective date of
retail choice. If retail choice is implemented by July 1, 2002, the
provisions of Oklahoma law allowing a municipal utility to condemn an
electric cooperative's property are repealed. Thus, under these new
laws, a municipal utility in Arkansas that opts out of providing
retail choice, and all Oklahoma municipal utilities, will be precluded
from providing distribution service to consumers in newly annexed
areas.
An important procompetitive restructuring provision that
municipalities seek in state restructurings is the ability to
aggregate. Approximately eight of the 21 states that have passed
retail choice legislation specifically give municipalities the right
to act as aggregators for the city, its residents and businesses.
One state, Maryland, expressly forbids municipalities from
acting as aggregators. We believe any easily exercised right for
municipalities to aggregate is an important way to help secure
benefits for small customers. Wisconsin Market Power
Experience
Wisconsin began examining deregulation in 1994.
Initially, it appeared that the state would move rapidly to
deregulate retail sales. However,
after a comprehensive stakeholder process before the Public Service
Commission, the deregulation impetus slowed significantly.
The PSC adopted a 32-Step Plan in 1996 that set out a number of
key prerequisites that the Commission felt needed to be accomplished
in order for retail competition to work for the benefit of consumers.
The overriding objectives were, and are, to restructure the industry
in a way that has a high probability of benefiting all classes of
customers with no degradation of reliability of service.
Since this Plan was adopted and subsequently condensed into
seven steps, Wisconsin and the upper midwest have experienced very
significant summer reliability problems for three years.
Dramatic wholesale price spikes have occurred during the last
two summers. Because of these problems, the PSC and the Legislature
have been focusing primarily on reliability, rather than deregulation.
Nevertheless, progress is being made in accomplishing the
essential prerequisites to deregulation. From
the point of view of this conference, there are two key prerequisites
in the Wisconsin Plan. The first is to regionalize, and make
competitively neutral, the transmission system that the state is
dependent upon. The second is to prevent the accumulation and exercise
of generation market power. We are making good progress on the first,
but not the second. Currently,
Wisconsin's transmission system is owned by five different
investor-owned utilities, each with its own tariff. This creates a
number of operational, pancaking and other problems. In several
complaint proceedings, FERC has found that Wisconsin transmission
owners have improperly favored themselves and denied service to
competitors in administering their Order No. 888 tariffs. In its
32-Step Plan, the PSC recognized that for competition to work there
should be a single transmission system that is simple, independent of
market participants and allows all customers equal access to
competitive supplies. In
1998, the state legislature adopted Act 204, which is primarily a
reliability measure. However,
this Act also included a requirement that all utilities C
private municipal and cooperative C
that own transmission, must become members of a FERC-approved
independent system operator, or independent transmission company, by
June 30, 2000.
Most importantly, the Act requires full unbundling of the
transmission function at retail. In other words, each of the state's
utilities must take all transmission service from the ISO that they
join for all of their requirements, including service to native retail
load. This is a major
step forward in comparison to FERC's Order No. 888 regime, which
allows transmission required for bundled retail service to be taken
outside of the standard tariff, thereby undermining the concept of
full comparability. Wisconsin has answered FERC's challenge that the
politically sensitive issue of full retail unbundling be answered at
the state level and required it in Act 204. This means that in the
future Wisconsin utilities like Wisconsin Electric will be in the
exact same position as small utilities like WPPI. We will each get all
of our transmission from an ISO for all purposes and there will be no
distinction between the native load of transmission owners and the
transmission requirements of others.
Unfortunately, however, there has been no agreement to date on
consolidating the control area and balancing functions and eliminating
the substantial competitive advantages that will arise in retail
competition from maintenance of the status quo. One can expect the
incumbent utilities to try to impose onerous metering and balancing
requirements on competitors unless this issue is addressed. At the
same time, they will seek to shift as much cost to the regulated
distribution function as possible to ensure recovery and significantly
limit the percentage of the bill at risk in competition.
A related, new problem that has developed recently and
threatens to undermine our effort to establish a competitively neutral
regional grid is owner efforts to refunctionalize major portions of
their transmission systems to distribution. The clear objective is
clearly to avoid giving up control and to create an anticompetitive
buffer between customers and the market. One Wisconsin utility has
asked our PSC to find that there is virtually no transmission in our
state. This utility would refunctionalize more than 80% of its
transmission system to distribution, gutting its obligation to
transfer control to an ISO. I believe this same tactic is being
pursued quietly by a number of owners before state commissions. It is
a terrible development.
A third major problem is the existence of a rollover right
under FERC's Order No. 888 tariff. This right allows current owners to
lock up available transmission capacity for the long-term even though
they have transactions to use this capacity in place for only a year
or two. This is a major impediment to new entrants.
As a result of continuing reliability problems, a new
legislative proposal is now being sponsored by Wisconsin's Governor
and pending in the Legislature. This
bill goes a step further by requiring that all of the highly
integrated, eastern Wisconsin transmission system be in the Midwest
ISO, to avoid the possibility of the system being split between two or
more ISOs. It also creates a very significant incentive for
Wisconsin's major transmission owners to divest their transmission to
a new Wisconsin transmission company. This company will not be
"independent" in the FERC sense since the previous
transmission owners will have partial ownership of the company and
representation on the Board of Directors.
However, the company will consolidate the ownership, operation
and maintenance functions of four vertically integrated companies into
a single transmission-only company and eliminate the competition for
capital that new transmission faces in a vertically integrated
company. This should make
operations, rational planning and future construction easier. Because
this transmission company will not be "independent," it must
be a member of the Midwest Independent System Operator.
These steps are major efforts to resolve the problem of
vertical, or transmission, market power in advance of deregulation.
However, they do little to resolve horizontal, or generation market
power, which presents a huge problem for Wisconsin in getting to
retail competition.
Our transmission system is severely constrained. There is
approximately 10,000 MW of load on the eastern Wisconsin system. We
have only about 400 MW of firm import capability into this area from
the south through the Commonwealth Edison system and about 1,000 MW of
import capability from the west. Almost all of this firm import
capacity has been reserved by the incumbent utilities and requests are
pending from them to reserve substantially more than the expected
future capability of the system. Given the rollover rights in FERC
Order No. 888 tariff, this means that all transmission capacity into
the state on a firm basis has been reserved for the indefinite future
by existing utilities, including WPPI. The large incumbents also
control virtually all of the generation within the constrained eastern
Wisconsin market, with one player controlling approximately 54% of
that generation. In addition, several of the largest plants in the state are
jointly owned by the other two large utilities. This is not a recipe
for a competitive market.
In Act 204, there was an attempt to address this issue by
encouraging the construction of new merchant plants by independent
power producers not affiliated with current generation owners. There
is a requirement in the Act that the PSC pass a rule adopting a market
power test to govern the extent to which Wisconsin utility affiliates
can participate in new merchant plants. These rules are very
controversial. Because of our reliability problems, the large
utilities want badly to construct new generation, but are only willing
to do so on a non-regulated, merchant plant basis. They have refused
to construct new rate-based generation, even with the possibility of
advance, stranded cost protection. Given the need for new capacity,
there is a significant risk that exceptions may be made to the market
power restrictions intended by the Act in order to get new generation
built. This will result in increased generation concentration, making
it even harder to get to retail competition.
I believe that the biggest problem Wisconsin faces in creating
a competitive market is how to deal with its generation concentration
problem. It is unlikely that our transmission constraints will be
resolved by new construction in the near or intermediate term. There
is a proposed new transmission line to the west that could result in
increasing transmission capacity into the state by another 750 MW. The
line will face stiff environmental and landowner opposition. If
constructed eventually, the market will still remain constrained given
offsetting load growth, particularly if the present incumbent
generation owners capture the new transmission capacity. While there
are a few independent power producer projects proposed within the
state, it is unclear whether they will be built and if they are built,
it is possible that the capacity of those units will be controlled by
the existing generation owners through contracts, again increasing
concentration.
If Wisconsin wants to achieve retail competition, it is going
to have to require divestiture of both transmission capacity rights
and generation by the incumbent large utilities and take steps to
prevent a quick return of concentration in other hands. These
prerequisites are likely to prove very difficult to achieve.
WPPI's view is that while states must wrestle with market power
issues in their debates about retail competition, it is essential that
federal legislation grant FERC, or another federal agency, the ability
to require strong RTOs and remedy generation market power problems
forcefully and in their incipiency, rather than rely on existing
antitrust laws. Antitrust laws will prove a poor vehicle for
transforming a highly monopolistic industry into a competitive one, as
opposed to policing an already competitive industry.
Thank you again, and I look forward to participating in the
Question and Answer portion of this panel. |
