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CONTACT: Patrick Ross
December 16, 2004
(202) 289-8928

FERC Stymies Electricity Competition
Lenard Says Wood Has Taken 'Wrong Turn' After Key Order

WASHINGTON D.C. - Widespread hopes for competition in the electricity transmission market haven't been realized due in part to policy failures by federal regulators, according to Progress & Freedom Foundation Senior Fellow Thomas M. Lenard. Speaking at a conference at Carnegie Mellon University, Lenard, PFF Vice President of Research, said the Federal Energy Regulatory Commission had been on a solid path toward competition but since has taken missteps.

"After a decade of trying, we have failed in two policy areas that are key to obtaining the benefits of competition: developing a coherent pro-competitive framework for transmission and developing the demand side of the market," Lenard said. "Both of these are, in turn, key to the two major concerns associated with competition: increasing reliability and reducing opportunities to exercise market power."

Lenard said "it could have been done better had we not taken a wrong turn after Order 2000." He said Order 2000 permitted significant flexibility in the design of Regional Transmission Organizations (RTOs) in contrast to the more prescriptive approach adopted subsequently by the FERC, which is not consistent with competitive markets. FERC's role has had a disproportionate impact in recent years, because Congress repeatedly has failed to pass comprehensive energy legislation.

"Had it been allowed to play itself out," Lenard said, "Order 2000 could have represented a major positive step." But when Pat Wood replaced Curt Hebert as FERC chairman in 2001, the agency shifted to a much less flexible, more prescriptive approach. A new model was put forward that mandated transfer of all transmission assets under FERC jurisdiction to non-owner, non-profit entities, but for-profit RTO's weren't permitted.

"On the positive side," Lenard said, "FERC has been sufficiently constrained so that it is not able to force the new model everywhere. And, if there is another change of personnel at the FERC, it may be possible to shift policy to try to get back to the trajectory envisioned with Order 2000.

Lenard spoke at a conference titled "Electricity Transmission in Deregulated Markets: Challenges, Opportunities, and Necessary R&D Agenda." It was co-sponsored by Carnegie Mellon University, the Electric Power Research Institute and the U.S. National Science Foundation.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.



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