Role of the Regulator in a Competitive Electricity Market

Charles D. Gray

Executive Director

www.naruc.org

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What is NARUC?

The National Association of Regulatory Utility Commissioners (NARUC) is a non-governmental non-profit organization founded in 1889.

Our Members include the state Commissions (government agencies) engaged in the regulation of American utilities and carriers in the 50+ states & territories. The Federal Energy Regulatory Commission and the Federal Communications Commission are also members. NARUC has Associate Members in over 20 other countries.

NARUC member agencies regulate electricity, natural gas, telecommunications, and water utilities

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What does NARUC do?

We provide forums and activities for the exchange of experience/policy, legal support, advocacy, and other forms of regulatory support. (NARUC is not a regulatory agency itself.)

• Education (Conferences, Trainings, Technical Workshops)• Advisory Services & Outreach to Congress, Federal Agencies,

Other Stakeholder Groups (testimony, resolutions/policy positions, briefings, etc)

• Research & Information Exchange (Publications, Grant Projects)

• International Programs: regulatory partnerships, capacity building, technical assistance, study tours, job shadow placements www.naruc.org/international. (Funded by USAID, DOE, EPA, USTDA.)

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Financing

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NARUC’s Structure

• Board of Directors (Officers, past presidents, appointed members & committee chairs = 34 members)

• Executive Committee• President, First Vice President, Second Vice President (commissioners

elected by their peers, serve 1-year terms then elected to next position); Treasurer (commissioner elected by peers, serves 3-year term); Past President; Executive Director

• NARUC Staff & Departments • Executive Director (& assistant)• Policy (6 staff)• Public Affairs (1 staff)• Finance & Administration (5 staff)• Meetings (3 staff)• Domestic Grants & Research (3 staff)• International Programs (6 staff)

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NARUC’s Committees (1)

• Consumer Affairs• Critical Infrastructure• Electricity

• Subcommittee on Nuclear Issues – Waste Disposal • Subcommittee on Clean Coal and Carbon Sequestration• Staff subcommittee on Electric Reliability

• Energy Resources and the Environment• Executive Committee

• Subcommittee on Education and Research• Investment Committee• Audit Committee• Staff Subcommittee on Administrative Law Judges• Staff Subcommittee on Executive Management• Staff Subcommittee on Information Services• Staff Subcommittee on Law

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NARUC’s Committees (2)

Committees and Subcommittees:• Gas

• Staff Subcommittee on Pipeline Safety• International Relations• Telecommunications

• Staff Subcommittee on Universal Service Fund• Water• Washington Action Program

• Task force on Climate Policy• Joint NARUC/FERC Collaboratives

• Demand Response• Smart Grid

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What Do the State Regulatory Commissions Do?

Traditional Role -- Regulate the Rates, Terms and Conditions of Service of “Fixed Utilities” – Telecommunications, Electricity, Natural Gas, and Water

New Role -- Manage the Development of Competitive Markets for Telecommunications and Energy Services; Monitor Market Performance

Even Newer Role -- Help Ensure Safety, Reliability and Security of Utility-based Critical Infrastructure Facilities; Factor Environmental Factors into Utility Planning and Operation

Coordinate State Policies and Procedures with Federal Counterparts – FERC and the FCC

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Key Characteristics of Regulatory Commissions (1)

AutonomyI. Appointment of Commissioners

• Staggered terms• Quality criteria• Who makes appointments

II. Exemption from civil service/government salary rulesIII. Financing Commission

• License fees• Budget approval

IV. Removal from office – for cause only

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Key Characteristics of Regulatory Commissions (2)

AuthorityI. Full Tariff AuthorityII. License IssuanceIII. Market (design)IV. Information Collection, Monitoring,

Enforcement

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Key Characteristics of Regulatory Commissions (3)

AccountabilityI. Public Participation & TransparencyII. Annual Report & AuditIII. Appeal of Decisions to Courts Only or

International ArbitrationIV. Budget ReviewV. Code of EthicsVI. Removal from Office – for cause only

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Key Characteristics of Regulatory Commissions (4)

Ability/CapacityI. Capable Trained StaffII. Procedures & ManagementIII. Sound Tariff Methodologies & PricesIV. Licensing PracticesV. Monitoring & Enforcement

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Changes Brought by Industry Restructuring

Source: ISO-NE

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State and Federal Jurisdiction

NARUC New Commissioners Training – Electricity IssuesMarch 11, 2008

Authority Generation Transmission Distribution Retail Customer Interface

Federal Wholesale salesAncillary servicesMerger authorityNo authority over facilities

Rates, terms, conditions for wholesale and unbundled retail interstate transmissionTransmission reliability rulesSiting in national interest corridors (1 year after filing)

N/A N/A

State -traditionally regulated

Rate-based facilitiesAdequacy of generationReserve marginsSiting

Rates, terms, conditions of bundled retail transmission or purely intrastate transmission Siting

Retail ratesTermsConditionsService qualityOutage mgmt.Outage indicesPortfolio standards

BillingCollectionDisconnection policyMeteringDemand-side mgmt.

21Source: NRRI, Electric Tutorial, 2006.

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State and Federal Jurisdiction cont.

NARUC New Commissioners Training – Electricity IssuesMarch 11, 2008 22

Authority Generation Transmission Distribution Retail Customer Interface

State -restructured

Siting SitingUnless purely intrastate, all transmission is unbundled, and so is under FERC authority

Same authority as traditionally regulated states, plus:Standard offer service (a.k.a. provider of last resort)

Same authority as traditionally regulated states

RTO (Authority only over transmission– delegated from FERC)

N/A Operational authority over transmission in a regionMaintenance of short term reliabilityAdministration of own tariff and pricing systemManagement of congestionPlan and coordinate transmission upgrades and additionsMarket monitoringOperate computerized site for sharing available capacityContract for a supplier of last resort for ancillary services Address parallel path flow issues

Source: NRRI, Electric Tutorial, 2006.

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Energy Regulation: State Responsibilities (1)

• Regulation of retail electricity and natural gas sales to consumers

• Approval for the physical construction of electric generation, transmission, or distribution facilities

• Facility siting of electric generation and transmission • Regulation of activities of the municipal power

systems, federal power marketing agencies, and most rural electric cooperatives

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Energy Regulation: State Responsibilities (2)

• Regulation of local distribution pipelines of natural gas

• Resource planning, including regional activities• Power supply acquisition• Infrastructure investment, including security

measures• Environmental impacts of utility operations• Market monitoring

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Energy Regulation: Federal Responsibilities

Federal Energy Regulatory Commission (FERC):

• regulates the interstate transmission of electricity, natural gas, and oil

• reviews proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines

• licenses hydropower projects

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Regulatory Structure – Two things to Remember

1. Electric Utilities are Regulated at both State and Federal Levels: FERC regulates wholesale sales and interstate transmission services; States regulate everything else

2. Two regulatory models exist: “Organized Markets” and “Vertical Integration”

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Electric Utility Regulation Remains a Hybrid System at the Retail Level

In the U.S., there was considerable interest in competition during the late 1990s. A combination of events such as the “meltdown” in California and the perception by consumers that the benefits of retail choice are small seemed to have limited the interest in retail competition among those states that haven’t already enacted retail competition.

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U.S. Transmission Grid

U.S. Interconnections

Source: EIA, http://www.eia.doe.gov/cneaf/electricity/chg_str/booklet/images/fig4.jpg

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State Regulatory Authority

State public service commissionsRetail rates

In traditional states: revenue requirement, cost allocation, and rate design for each customer class

In restructured states: provider of last resort or standard offer service rates for non-choice customers

Source: NRRI, Development & Evolution of Electric Deregulation, March 2008

Traditionally Structured States Operating in Vertically Integrated Markets

• State Regulators Use Cost-based, Average Price Methodologies – Southeast, Southwest, Northwest

• Integrated Resource Planning of All Aspects of Utility Operations – Generation, Transmission, Distribution, Load Management/Demand Response

• Some Regional Coordination – WECC; Southern States Energy Board

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RTOs in the United States

Restructured States Operating in Organized Markets

• Retail Customer Choice Available, but Little Used

• State Regulators Manage Local Utility Access to Wholesale Markets for the Benefit of Retail “Standard Offer” Class • Northeast, MidAtlantic, MidWest• NJ Auction

• Regional Coordination • OPSI, OMS

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2008 U.S. Electric Power Industry Net Generation

Source: Energy Information Administration, http://www.eia.doe.gov/cneaf/electricity/epa/figes1.html

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Fuel Costs for Electricity Generation, 1997- 2008

Source: Energy Information Administration, http://www.eia.doe.gov/cneaf/electricity/epa/figes4.html

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Avg. Retail Price of Electricity – 2008

Source: EIA, http://www.eia.doe.gov/cneaf/electricity/epa/fig7p4.html

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Changes in Retail Price of Electricity 2007 - 2010

Source: EIA, Electric Power Monthly, February 2009, http://www.eia.doe.gov/cneaf/electricity/epm/epm_sum.html

Recent Developments

• Continued Upward Pressure on Electricity Prices

• Economic Downturn -- State Commissions Prepare for Increased Stress on Consumers

• Increased Funding for Low Income Home Energy Assistance Program (LIHEAP)

• Growing Recognition of Increased Supply and Infrastructure Needs

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Recent Developments (Continued)

• Extension of Renewable Production Tax Credits and Implementation of RPS

• Rebirth of Nuclear Industry – Loan Guarantees?

• Closing of Yucca Mountain Waste Repository

• Stimulus Funding – Smart Grid, Transmission Planning, Broadband Deployment, “Green Jobs”

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Highlights of American Recovery and Investment Act (“Stimulus”)

Energy-related Funding• Smart Grid Deployment• Broadband Deployment• Transmission Planning• Energy Efficiency – “Green Jobs”• Regulatory Support – Training,

Capacity Building

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Pending Congressional Legislation

• Cap and Trade Climate Legislation – Passed House of Representatives, Pending in Senate; enactment unlikely in 2010

• Other Energy Legislation1. Transmission Planning, Siting and Cost Allocation2. National Renewable Portfolio Standards, with Energy

Efficiency Component3. Cyber Security/Grid Protection4. Off-Shore Oil and Gas Drilling5. Nuclear Power Incentives – Accelerated Licensing;

Expanded Loan Guarantees6. Energy Efficiency Programs – national Building Codes;

Weatherization Retrofit; Appliance Efficiency 34

FERC / NARUC Collaboratives

• NARUC and FERC Participate in two “Collaborative Dialogues” on Issues of Common Concern

• Demand Response – Focus on Coordinating Implementation of DR between Wholesale (FERC-regulated) and Retail (State-regulated) Markets

http://www.ferc.gov/industries/electric/indus-act/smart-grid/FERC-NARUC-collaborative.pdf

• Smart Grid – Focus on Coordination of State and FERC Policies to Promote/Regulate Investment in Smart Grid Technologies

http://www.ferc.gov/industries/electric/indus-act/smart-grid/FERC-NARUC-collaborative.pdf

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State Responses to Climate Change

Implementation of Regional Cap-and-Trade Programs

Source: Pew Center on Global Climate Change 36

Efficiency Approaches

•Enhanced Commitment to Energy Efficiency – NJ, CA, NC; •Commitment to Pursue National Action Plan for Energy Efficiency (NAPEE); •Rate Reform-Decoupling

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8th EU-US Energy Regulators Roundtable April 23-24,

2010, Berlin, Germany 38

Conclusions

• To this point, states have led the way in many aspects of energy policy, and will continue to be key players in the future

• Obama administration has a number of initiatives on the table which would have a major impact on national energy policy

• The outcome of federal energy policy changes is still very uncertain

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Basis and Goals of Competition* (*Adapted from Pierce Atwood law firm presentation)

System where market forces make economic decisions, instead of regulators or central planners

• Attract Private Investment

• Increase Economic Efficiency

• Improve Service & Reliability

• Lower Prices

• Promote Customer Choice

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Expectations of Strategic Investors*

(*Adapted from Pierce Atwood law firm presentation)

• Commercial Infrastructure (economic, regulatory, financial, legal)

• Predictable Rules• Open & Transparent Decision-Making by Regulator

(independence, public participation, objective, written decisions, appeal process)

• Non-Discrimination (Liability, Taxes, Profit Repatriation)• Absence of Corruption or other Market Distortions• Free Capital Flows• Rules of Law/Justice System• Adequate and Predictable Risk Management

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Regulatory Competencies* (*Adapted from Pierce Atwood law firm presentation)

Competition changes nature of regulation, but does not eliminate need for regulation• Traditional structure (monopoly) emphasizes price

setting, rate design, engineering, resource planning• Competition focuses on market oversight, level

playing field, market power, information• Coordination among national regulators and/or

anti-monopoly offices critical to avoid anti-competitive behavior

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Benefits of Cross-border & International Trade*

(*Adapted from Pierce Atwood law firm presentation)

• Improved efficiencies

• Fuel diversity

• Non-coincident peaks

• Greater system stability

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Electricity – Implementation of EPAct and EISA

Four big sets of issuesReliabilityInfrastructure/Smart GridTransmission Access/Wholesale

Competition Energy Efficiency

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Infrastructure

Transmission Siting EPAct – Backstop Siting Authority DOE Congestion Study and National Interest Corridor

Designation FERC Backstop Authority Pending Legislation

Transmission Investment Incentives EPAct – Transmission Investment Incentives FERC Rulemaking on Pricing Incentives

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PURPA

EPAct and EISA EPAct -- State implementation of 5 new

standards:1. Net metering2. Fuel Diversity3. Generation Efficiency4. Smart Metering5. Interconnection

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PURPA (cont)

EISA – State Implementation of 3 new standards, plus 1

1. Integrated Resource Planning

2. Rate Design – “Decoupling”

3. Smart Grid

PLUS

1. Combined Heat and Power Incentives

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FERC Orders 888 and 890

Implementation of open access transmission policy to support development of competitive wholesale power markets

Non-discriminatory access principle is critical

NARUC supported Order

Order 890 issued in 2007 to update Order 888

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Unbundling

Policy implemented by State legislatures and commissions to disaggregate generation from delivery

Two Models – “Functional” unbundling (G and T are separate but under common ownership); and “Structural” unbundling (G and T placed in separate corporations)

Creation of affiliate interest issues – precursor of more systematic market monitoring

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Third Party Access

Implementation of principle of non-discrimination

PURPA initiative followed by EPAct 1992

State role on interconnection; netmetering

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Market Monitoring

FERC leadership under the EPAct in restructured markets

RTO issue – Internal or external State role – work with the market monitor (MMU) State concern – access to data; communication with

MMU Intl Project – Southeast Europe Market Monitoring

(www.naruc.org/see_monitoring)

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Privatization

I. Process – determines objectives of privatizationII. Procedures – IPO, Tender, Combination of shareholders

and financial investorsIII. Goals

Economic ProfitMaximize income to state from disposal of companies, typically IPO or price tender, regulatory policies met

Social Benefits & IssuesImprovement in security and quality of supply, enhancement of competition, may often lead to price increases for households in developing countries

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NARUC’s International Experience – Issues for Consideration

Power Sector Reform – Stages1. New Regulatory Framework2. Independent Regulatory Agency3. Privatization

Reasons for Reform• Government or Donor requirements• Development of new energy policy priorities

Consequences of Reform• Goal to enhance competition• Allows for consumer protection• Creates independent regulator

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Contact Information

Charles GrayExecutive Directorcgray@naruc.org

Telephone: 202-898-2208Fax: 202-898-2213