WASHINGTON, D.C. - Citing the work of Nobel Prize winner Vernon Smith, a participant in The Progress & Freedom Foundation’s electricity project, Thomas M. Lenard has filed comments with the Federal Energy Regulatory Commission saying the agency’s Standard Market Design plan would harm the transition to competition in electricity.

“The SMD proposal is at odds with the purported goals of ‘restructuring’, which are competition, efficient pricing and investment incentives that will produce the needed transmission and generation capacity,” Lenard wrote in comments filed with FERC. He maintains the main goal of restructuring “should be to establish conditions that will yield an efficient and cost-effective capital stock – both generation and transmission – by introducing competition, efficient pricing and market incentives for investment.” Unfortunately, he concludes, “The Commission’s SMD proposal does not achieve these objectives.”

With transmission providers forced to play a passive role under the SMD proposal, Lenard argues FERC’s proposed use of locational marginal pricing (LMP) will not work as advertised. Citing work by Nobel laureate Smith, Lenard writes that when a transmission line is capacity-constrained, “a significant portion of the rents can be captured by generators”, not by the line, as FERC assumes. Therefore, he concludes, “LMPs will not provide accurate price signals for investment.” In addition, Congestion Revenue Rights, another proposed SMD tool, “will be a very imperfect hedge against the costs of congestion.”

Lenard writes that the SMD proposal “does not improve the incentives for transmission investment,” relying primarily on “cumbersome planning processes which, by themselves, are likely to be a disincentive to investment.” Concerning generation, “The Commission also proposes to rely on regulatory planning, rather than the market…” But, he writes, if regulatory entities substitute their judgments for that of the market, they will need to assure rates are sufficient to cover costs. According to Lenard, “This is likely to get us back into a regulatory regime that looks a lot like the one we’re trying to replace and will set back the goal of a competitive market.”

Lenard filed earlier comments on SMD in November. The Progress & Freedom Foundation is a market-oriented think tank that studies the impact of the digital revolution and its implications for public policy. The Foundation is a 501(c)(3) nonprofit organization founded in 1993.