US FTC launches investigation of retail electric competition

By the OGJ Online Staff

HOUSTON, Mar. 1�Raising questions of market power, the US Federal Trade Commission (FTC) Wednesday said it will examine possible jurisdictional limitations on states' authority to design successful retail electric competition plans and whether there is a need for federal intervention.

While competition ordinarily leads to lower prices, the FTC said effective competition may not develop instantaneously after decades of pervasive regulation and local franchised monopolies.

Moreover, the effectiveness of competition may be affected greatly by the rules that govern the operation of the market and that provide incentives to guide market participants' behavior, it said.

The investigation was requested by US Reps. Billy Tauzin (R-La.), chairman of the Energy and Commerce Committee, and Joe Barton (R-Tex.), chairman of the Subcommittee on Energy and Air Quality.

The FTC said it will produce a report that discusses the advantages and disadvantages associated with different approaches to particular issues and that identifies, if warranted, areas in which additional federal legislative or regulatory action may be desirable.

The FTC said it will be seeking information on consumer protection issues, retail supply, retail pricing, market structure, and other issues.

To date, 24 states and the District of Columbia have set dates when customers will be allowed to choose an electric power supplier. Recently, however, the FTC noted, substantial price increases and reliability problems in some areas undergoing the transition to a competitive market have raised questions about the best way this restructuring can be designed to benefit retail customers.

Some states have responded to rising prices and reliability problems in California and the West by delaying or are considering delaying, implementation of retail competition plans. For example, the FTC noted, Nevada, Montana, West Virginia, and Arkansas have decided to delay, or have considered delaying, the transition to competition that they had previously established, while others, including Louisiana, Colorado, Alabama, and Mississippi, have determined that restructuring is not in the public interest at this time.

For the update to its 2000 report, the FTC said it will examine state plans that allow customers to choose a generation supplier, and state plans with unique approaches to retail electricity competition. Written comments in response to questions in a Federal Register notice are due April 3.

Some of the states the FTC expects to hear from are Arizona, California, Illinois, Maine, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, and Texas. The commission said it will work with the states to understand plan features, such as standardized labeling rules, supplier licensing requirements, provider of last resort obligations, and pricing of default service.

It will also will gather facts about market reaction to a particular state's plan, including the number of customers eligible for retail competition, rate of customer switching to new suppliers, and number of new suppliers offering service.

In terms of market structure, the FTC asked for a response to the following:

� How has the development of Regional Transmission Organizations (RTOs) affected retail competition in the state?

� Did the state require the divestiture of generation assets�or impose other regulatory conditions on the use of these assets when retail competition was introduced? To what extent was divestiture of generation assets a component of the state's handling of a utility's stranded costs? Was divestiture used to remedy a high concentration of generation assets serving the state? Has the state examined whether there has been appreciable consolidation of ownership of generation serving the state since the start of retail competition?

� If a utility no longer owns generation assets to meet its obligations as the supplier of last resort or default service provider, what market mechanism such as spot market purchases, buy back, or output contracts, does it use to obtain generation services to fulfill these obligations? Is the market mechanism transparent? Is it necessary to monitor these market mechanisms?

� What is the state's role in overseeing operation of the transmission grid and the extent to which public power or municipal power transmission systems are integrated into this effort? What is the relationship between the state's role and the Federal Energy Regulatory Commission's role in transmission system operation in the state?

� Do firms that have provider of last resort or default service receive preferential transmission treatment? If so, how does this affect wholesale electric power competition? What should the state's role be in overseeing wholesale transmission reliability?

� To what extent did the state identify transmission constraints affecting access to out-of-state or in-state generation prior to the start of retail competition? Is the state capable of remedying these transmission constraints, or is federal jurisdiction necessary?

� How have state siting regulations for new generation and transmission facilities been affected by the onset of retail competition? Is federal jurisdiction necessary for siting of electric power generation facilities? What incentives do suppliers have to maintain adequate reserve capacity? What are the ways to value capacity in competitive markets?

� Since the start of retail competition, what has been the rate of generation plant outages�scheduled and unscheduled? To what extent has the state monitored these outages and examined their causes?

Under other issues, the FTC asked for information about the following:

� What measures has the state taken to make customer demand responsive to changes in available supply? Has the state provided utilities incentives to make customers more price responsive? Has the state moved away from average cost pricing? What effect have these measures had on demand and on demand elasticity?

� Has the state provided incentives for owners of cogeneration capacity to offer power during peak demand periods? Has the state identified, reported, and facilitated development of pumped storage facilities or other approaches to arbitraging between peak and off-peak wholesale electricity prices?

� What issues have arisen under retail competition that have required cooperation or coordination with other states? What approach was taken to securing this cooperation or coordination? Are there other issues requiring cooperation that have not yet been addressed?

� How prevalent is the use of distributed generation within the state? What barriers do customers face to implementing distributed resources?

� Which specific jurisdictional issues prevent state retail competition programs from being as successful as they might be?

� Which specific technological developments are likely to substantially affect retail or wholesale competition in the electric power industry that may alter the manner in which states structure retail competition plans?

� What are the lessons to be learned from the retail electricity competition efforts of other countries? Are there other formerly-regulated industries in the US, such as natural gas, that allow customer choice and provide useful comparisons to retail electricity competition?