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TASK FORCE REPORT ON COMPETITIVE MARKETS HIGHLIGHTS NEW GENERATION, BENEFITS OF UNIFORM PRICE AUCTION, AND ADDRESSES MARKET TRANSITION (EPSA PowerFact)

"Regulation also does not provide the same market discipline that effective competition provides. Under regulation, ratepayers may bear the risk of mistakes resulting from where and how investments are made. In competitive markets, the penalties for such mistakes fall on management and shareholders. Future accountability for investment decisions can lead to better decision-making at the outset." (The Electric Energy Market Competition Task Force, "Report To Congress On Competition In Wholesale And Retail Markets For Electric Energy," April 2007, p. 73)

<center>Lessons from Traditional Regulation</center>


  • "Historically, regulators had encouraged local utilities to build or contract for sufficient generation to serve customers within their territories. Regulators blocked entry by independent generators or allowed the utilities to do so. This resulted in utilities owning nearly all generation assets within their service territories and discouraged competition among generators. While the intent of these policies was partly to keep price down, the unintended effect was to dampen incentives for cost reduction, investment in new capacity and innovation." (p. 45, emphasis added)

  • "Ultimately, ratepayers were left to bear much of the investment risk, as they had to pay for regulator-approved projects resulting in overinvestment as well as any subsequent higher costs from underinvestment (for example, costs of running higher cost generation more often than is economically efficient)." (p. 46, emphasis added)

  • "The effects of this regulated price disconnect are heightened by one of the shortcomings of cost-based rate regulation: its difficulty in providing incentives for investors to make economically-efficient decisions concerning when, where and how to build new generation." (p. 53, emphasis added)


<center>Non-utilities a Growing Presence; Competition Resulting in More Capacity, Greater Fuel Diversity</center>

  • "Nonutilities are a growing presence in the industry. In 2004, nonutilities owned or controlled approximately 408,699 megawatts (MWs) or 39.6 percent of all electric generation capacity, compared to about 8 percent in 1993... Nonutilities accounted for about 33 percent of generation in 2004." (p. 14)

  • "Between 1996 and 2004, roughly 74 percent of electricity capacity additions were made by nonutility power producers." (p. 35)

  • "...from January 2002 through June 2003, the Midwest added 14,471 MW in capacity." (p. 61)

  • "More than 23,000 MW of capacity were added in the Southern control area between 2000 and 2005,162 and several generation units owned by merchants or load-serving entities have been built in the Carolinas in the past few years. A significant portion of the region's new generation was nonutility merchant generation..." (p. 61)

  • "Over 6,000 MW of new generation capacity entered California in 2002-2003..." (p. 62)

  • "From January 2002 through June 2003, ISO-NE added 4,159 MW in capacity." (p. 62)

  • "From January 2002 through June 2003, NYISO added 316 MW in capacity. Three generating plants with a total summer capacity of 1,258 MW came on line in 2004... Approximately 1,000 MW of new capacity entered commercial operation in the New York City area in 2006." (p. 63-64)

  • "From January 2002 through June 2003, PJM added 7,458 MW in capacity... In 2004, 4,202 MW of new generation was completed in PJM." (p. 65)

  • "In the late 1990s, developers added more than 16,000 MW of new capacity to the Texas market... More than 13,000 MWs of new capacity is scheduled to be online in 2009-2011." (p. 67)

  • "Commenters suggest that competitive suppliers are beginning to focus on developing facilities fueled by other sources. They cite 2006 announcements by NRG Energy, Inc. (investing $16 billion to develop 10,500 MW of nuclear, wind, and coal facilities), TXU (investing in multiple coal-fired plants), Constellation Energy and Exelon Corp. (developing a nuclear plant), BP and Edison Mission Group (investing $1 billion in a hydrogen-fueled plant), and AES (investing $1 billion in renewable technologies)." (p. 79)


<center>Uniform Price Auctions Result in "Economically Efficient Prices"</center>

  • "From a practical perspective, academics and market designers generally agree that uniform price auctions in competitively structured markets produce economically efficient prices." (p. 69)

  • "The uniform price auction creates strong incentives for entry by low-cost generators that will be able to displace high-cost generators in the merit dispatch order." (p. 70)


<center>Emerging From the Transitional Period: Rate Caps, Switching</center>

  • "Net revenue analyses for centralized markets with price mitigation suggest that price levels are inadequate for new generation projects to recover their full costs. For example, in the last several years, net revenues in the PJM markets have been, for the most part, too low to cover the full costs of new generation in the region. Based on 2004 data, net revenues in New England, PJM and California would have allowed a new combined-cycle plant to recover no more than 70 percent of its fixed costs." (p. 81, emphasis added)

  • "More than any other policy, this requirement that distribution utilities offer service at low prices [artificial rate caps] unwittingly impeded entry by alternative suppliers to serve retail customers. New entrants cannot compete against a below-market regulated price." (p. 84, emphasis added)

  • "...larger geographic markets for wholesale electricity enable retail suppliers and marketers to buy generation supplies from a wider range of local and distant sources (e.g., neighboring utilities with excess generation, independent power producers, cogenerators, etc.). Even if no new generation facilities are built, independent operation and management of the transmission grid increases retail customers' choices and makes it more difficult for local generators to exercise market power." (p. 92, emphasis added)

  • "States should strive to avoid rules that make switching more expensive or slower than is necessary to avoid unauthorized switching (slamming)." (p. 104)

  • "Entry is a key concept in retail electricity competition. States should attempt to avoid rules that make entry more expensive or slower than is required to avoid fraudulent marketing activities. Areas to consider include registration fees and delays, costs and delays in interacting with the distribution utility (metering, billing, treatment of receivables), security deposits for suppliers, rules regarding disconnecting retail customers for non-payment, and exit penalties." (p. 104)

  • "Competitive market prices align consumers' willingness to pay for a service with the marginal cost of providing it (where, in the long run, the marginal cost includes a competitive rate of return on investments). This alignment leads to the most economically efficient allocation of resources." (p. 105)

  • "Experience with restructuring in other industries indicates that consumer switching from a traditional supplier to a new one can be a slow process. It took 15 years before AT&T lost half of its long-distance service customers to alternative suppliers." (p. 108, emphasis added)

  • "Experience indicates that once residential customers switch to alternative suppliers, they seldom return to POLR [provider of last resort] service even after the temporary discounts expire." (p. 108)

Task Force Report on Competitive Markets Highlights New Generation, Benefits of Uniform Price Auction, and Addresses Market Transition (PowerFact).PDF
Report To Congress On Competition In Wholesale And Retail Markets For Electric Energy.PDF

CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660

EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.