Big Dogs Are Barking

Issue 2 and Volume 112.

By Steve Blankinship, Associate Editor

About 10 years ago as wholesale electricity markets were opening up and retail markets were starting to deregulate, there was a saying among electric utilities that opposed disturbing the status quo: “Big Dogs Eat First.” It meant that deregulation would favor the biggest customers first and most. The push for retail deregulation was led by the same powerful coalition of large industrial customers and the burgeoning independent power producer (IPP) segment that pushed for wholesale deregulation. The highest-profile cheerleader for all of this was a company called Enron.

At the time, those proposing wholesale and retail deregulation enlisted and received vigorous support from consumer groups, environmentalists and the renewable energy sector, all of whom touted deregulation as a means to create competition that would bring lower electric prices, encourage development of more renewable energy and increase the amount of renewable energy on the grid. Now, a decade later, all is not well among the various groups that carried each other’s water during the heady days of deregulation.

In December, a coalition of some of the biggest industrial power consumers in the United States filed a petition with FERC to expand its investigation of wholesale power markets. The coalition, which includes the Electricity Consumers Resource Council (ELCON) that represents large industrial power customers from every manufacturing sector, said regional transmission organizations (RTOs) were producing “unjust and unreasonable wholesale power prices.” RTOs and independent system operators (ISOs) coordinate wholesale electric power markets in various parts of the U.S. FERC examined competition within wholesale power markets and is considering new rules, but the large industrials say the examination didn’t go deep enough and “something is seriously amiss” in the RTO system.

These big dogs are the very ones that barked to get the current system. They were already getting the best deals and would receive even better deals under a top-to-bottom power industry restructuring. Little dogs—commercial and residential customers—stood to benefit to lesser degrees and commensurate to their ability to play in the new markets. And since many of the big dogs were power producers themselves, the prospect of being able to sell their self-generated power to the grid whenever they could make money doing so made a re-vamped system all the more appetizing.

Big industrials are still unhappy. But this time, their discontent is not shared with some former allies who supported deregulation last time around. The American Wind Energy Association (AWEA) even termed the industrials’ demands “an attack” and said the principal and unintended victim could be renewable energy because RTO markets can integrate far more energy from variable power sources. AWEA added that the single market clearing price design is the most transparent and efficient option for short-term operation of these markets. John Shelk, president of the Electric Power Supply Association (EPSA), a trade group for IPPs, said the complaint could “increase the uncertainty that hinders timely investment” by muddying market rules.

Former FERC commissioner William Massey, who represents a lobbying group that includes Exelon and Constellation—both of which operate in RTOs—said the large industrials are targeting well-established federal policy formulated for well functioning, consumer-focused markets. He said prices in these markets are carefully monitored, are just, reasonable and benefit consumers. FERC commissioner Jon Wellinghoff defends FERC market reforms, calling them an important step in advancing and modernizing the core of electric grid regulation by putting demand resources on an equal footing with other resources and praising new rules that recognize the intermittent nature of renewable resources.

In March 2007, FERC rejected a previous complaint that covered issues similar to the coalition’s latest request for a market investigation, stating that current RTO markets provide incentives for existing generators to reduce marginal costs, improve overall efficiency and encourage new, low-cost generation to locate in transmission-congested areas.

John Anderson acknowledged that his organization, ELCON, was among the earliest and strongest advocates of competitive electricity markets. “We still believe that truly competitive markets can provide lower prices and better service for consumers and still believe that the ISO or RTO concept is necessary to provide the nondiscriminatory transmission access that is essential to providing consumer benefits,” he said. “But all the RTOs have produced is a form of re-regulation with locational marginal pricing and capacity markets producing higher prices, poorer service and record profits for some utility holding companies.”

ELCON had hoped that competition in wholesale and retail markets would produce lower prices as well as new products and services. But these results were not realized, said Anderson. Prices are higher than industrials thought they would be and few if any new technologies, products or services emerged. “Restructuring of wholesale and retail markets has brought few benefits to large or small consumers,” he said. He said governance of organized markets is tilted heavily toward suppliers.

While some industrials sell a lot of power to the grid, he said others find it more difficult, sometimes because of utility opposition. He said repealing the Public Utilities Regulatory Policies Act that had encouraged the sale of co-generated power “will not be helpful to those facilities that can sell low-cost, efficiently generated power.” EPSA’s opposition to further market changes is understandable, he said, given that some of its member companies are “recording super-high earnings.”

This complex issue pits one group of big dogs against another. Adding to the complexity is the imperative to further integrate renewables into the energy equation. It’s a dog fight that illustrates the energy dilemma this nation faces.