American energy regulators set for electricity power grab

The most important item on the electricity policy agenda is a little-known proposal by the U.S. Federal Energy Regulatory Commission (FERC) to impose a nationwide Standard Market Design (SMD) on the electric power industry. If adopted, warns economist Thomas M. Lenard, SMD will make the American electricity system more vulnerable to failure, because it is based on the flawed premise that the government is better equipped than the private sector to fix broken markets.

California, for instance, adopted a plan approved by FERC beforehand. Despite its obvious flaws, the California market design was allowed to persist until it virtually bankrupted all the state's utilities. Then it was "fixed" by shifting enormous costs to taxpayers.

Among other reasons to be concerned about FERC's proposal, according to Lenard:

FERC's new plan would place billions of dollars of transmission assets under the control of non-profit, quasi-regulatory Regional Transmission Organisations – separating ownership from control and creating the likelihood that decisions will be guided by political rather than economic-efficiency considerations.

The proposal does not improve incentives for transmission investment, when an estimated $50 to $100 billion is needed; yet the lack of investment is partly due to the highly uncertain environment created by regulators.

The Energy Department's cost-benefit analysis found only about a billion dollars of net benefits – well within the margin of error, meaning that the costs could easily outweigh the benefits.

If FERC implements SMD, it will take years before the inevitable mistakes are corrected (if they ever are) and a stable set of rules emerges. The resulting confusion will yield a less reliable electricity supply.

The energy bill under construction in Congress should at least delay implementation of SMD. "Congress," Says Lenard, "needs to tell FERC to go back to the more-modest, less-prescriptive course it was on before."

Source: Thomas M. Lenard (Progress & Freedom Foundation), Power Repair Misfits, Washington Times, October 3, 2003; see also Thomas M. Lenard and Anthony G. Schuster, Comments on the FERC's Wholesale Market Platform, White Paper, August 14, 2003, Progress & Freedom Foundation.

For text http://www.washingtontimes.com/commentary/20031002-084027-2296r.htm

For transcript of PFF Congressional Seminar http://www.pff.org/publications/pop10.16energypostblackout.pdf

For PFF White Paper http://www.pff.org/publications/lenardschuster081303.pdf

FMF Policy Bulletin\7 October 2003