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News Release
September 3, 2003
CONTACT: David Fish
(202) 289-8928

FERC Electricity Plan
Would Harm Transmission

Economist, Former Utility Executive, Challenge SMD,
Offer Alternative Vision

WASHINGTON, D.C. - The Federal Energy Regulatory Commission’s goal of enhancing wholesale electric power competition is a good one. But the agency’s chosen means – described in the recent “White Paper” on Standard Market Design – could lead to electric power fiascos even larger than the recent regional blackout and last year’s California mess. The FERC plan’s main problem, according to an economist and former utility executive who filed official comments recently with the agency, is its reliance on an extremely detailed and prescriptive government plan, rather than real market mechanisms.

Applauding FERC’s previous efforts “to promote market-based sales of electricity and to substitute competition for cost-of-service regulation,” Thomas M. Lenard and Anthony G. Schuster warn, “This progress is placed at risk with the overly prescriptive approach FERC is now taking.” Instead, the duo would “reduce the amount of government-imposed ‘market design’ and increase the ability of market institutions to evolve over time in response to economic forces.” They wonder aloud why FERC, which approved the California plan, should be trusted with the even bigger and riskier Standard Market Design plan. “Because government-designed market institutions are not self-correcting, FERC should understand they pose major risks,” they write. “Real markets, in contrast, self-correct…”

The Progress & Freedom Foundation economist and former executive agree the transmission sector has monopoly characteristics and must be regulated – but they resist FERC’s effort to treat transmission as a mere ‘platform’, divorced from ownership. Such treatment would reduce already lagging levels of investment, they warn. “Making transmission independent of generation is an appropriate response to the discrimination problem,” they write. “Making transmission independent of transmission owners is not a good response…because it creates very serious incentive problems. Non-owners can never have the same incentive to operate assets efficiently as do owners who bear the financial consequences of their decisions.” Unlike FERC, Lenard and Schuster see Regional Transmission Operators as non-governmental and voluntary “profit-making entities.” They believe RTOs “should not be viewed as a mechanism of divestiture” and that there should not be a geographical configuration requirement. They advocate that instead of ex post calculation of locational marginal prices, prices should be determined in a real market for transmission services.

“Since transmission will remain regulated for the foreseeable future, one of FERC’s major priorities should be the establishment of a new performance-based regulatory mechanism to provide the appropriate incentives for transmission owners both to operate and expand their networks efficiently,” they write. “When congestion costs at the margin are greater than the marginal costs of adding capacity, the transmission company should have the incentive to add capacity.”

PFF is a market-oriented think tank that studies the impact of the digital revolution and its implications for public policy. It is a 501(c)(3) nonprofit organization founded in 1993.



The Progress & Freedom Foundation