PowerFacts

EPSA RESPONDS TO CATO OP-ED ON COMPETITION

"We welcome a constructive debate on ideas put forward by the Cato Institute in a recent guest editorial. While we agree with a number of points made, there appears to be a serious misunderstanding of some of the basic benefits of regional transmission organizations and current competitive power markets. We look forward to continuing the dialogue with the Cato authors and others to enhance the benefits of competition to best serve consumers nationwide."
John E. Shelk, President and CEO, Electric Power Supply Association

<center>HOW WE GOT HERE</center>

On Aug. 30, 2007, the Wall Street Journal ran an editorial by Jerry Taylor and Peter Van Doren of the Cato Institute ("Short-Circuited"). The authors make some good points as to where the nation stands today with competition in electricity and how restructuring evolved. There is much we agree on (e.g. the benefits of market forces), although, as outlined below, there are others where we disagree. The op-ed correctly notes that vertically-integrated states are not immune to the rate increases that have been so widely publicized in restructured states. We would go even further and argue that the pre-existing gap in rates between states that restructured and those that did not has actually narrowed over the last ten years. The authors also give a good explanation of why uniform-clearing price auctions are used in organized markets. The authors also make the point that "allowing markets to dictate electricity prices is a good thing for consumers" with different prices sending signals to the market for the need of either more or less development.

<center>INDEPENDENT OVERSIGHT OF TRANSMISSION BENEFITS CONSUMERS</center>

However, in advocating for the benefits of an apparently unregulated, vertically-integrated utility structure the authors seem to misunderstand the benefits of independent system operators (ISOs) and regional transmission organizations (RTOs). The authors posit a number of mistaken reasons why a vertically-integrated utility is preferable to a more competitive structure:

1. Transmission line owners fear being "held up" by generators. It is absurd that transmission owners should fear being held captive by generators as the facts on the ground in vertically-integrated areas of the country such as the Southeast and Northwest tell a different story. Vertically-integrated utilities in these regions plan for and dispatch their own power plants, often despite the availability of newer, more efficient and environmentally responsible generation owned by competitive suppliers. It is these generators that are "held up" by difficulty in accessing transmission or reaching customers. This situation creates distressed assets sold for pennies on the dollar to the very utilities that had previously declined to include the competitive units in planning and dispatch protocols.


2. Efficient investment in both transmission and generation may not be possible in a functionally separated arrangement. RTOs have proven that through their regional scope and responsibility, they are encouraging necessary transmission development. In its most recent regional transmission expansion plan PJM has projected $4.2 billion in infrastructure development. The Midwest ISO approved a long-term transmission infrastructure plan calling for $3.6 billion in investment. ISO New England has benefited from over $1.2 billion in transmission investment over the last five years, with $2.6 billion to $4.3 billion in transmission projects currently being planned.


3. Vertically-integrated utilities operate the generation and transmission system with greater reliability. The authors say that, "Coordination [of the generation and transmission system] is far easier when there is one actor rather than hundreds." We agree, which is why it is confusing that they would advocate for a piecemeal approach calling for each vertically-integrated utility to run its own small part of the system. A better, more reliable approach - and one chosen by 2/3rds of the economy - is to have independent oversight and dispatch over multi-utility, and often multi-state areas. ISOs and RTOs have demonstrated strong reliability records, taking advantage of the economies of scale they enjoy and proving the authors' point that coordination is in fact easier when there is one actor over a broad region.

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.