October 26, 2006

Electric Energy Market Competition Task Force Draft Report to Congress

Key materials
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Highlights

The Regulation

  • Section 1815 of the Energy Policy Act of 2005 established an interagency task force to conduct a study and analysis of competition within the wholesale markets and retail markets for electric energy in the United States. This Draft Report presents the results of this analysis for public comment.

Our Findings

  • The Report describes well both the current status of competition, the extent of federal and state regulatory restructuring in the electric power industry, and the continuing uncertainty about the regulatory rules that will govern the industry in the future.
  • The most significant shortcoming of the Report is a failure to recognize that advances in electronics and communication systems are dramatically reshaping the potential for end-use customers to provide demand response and manage their own consumption actively in response to price changes that reflect the varying costs of producing power over the course of a day.
  • The Report overlooks the problematic justifications and troubled history of capacity payments in the electric power markets operated by Regional Transmission Organizations and Independent System Operators (RTOs/ISOs). Some RTOs/ISOs have implemented capacity payments to induce generators to build new generation capacity, to compensate for the negative investment incentives that accompany price caps in wholesale electric power markets. The underlying market problems that produce the justification for capacity markets result directly from the lack of active consumer participation in markets, which would make both price caps and capacity investment incentives unnecessary.

By the Numbers

  • Implementing interoperable advanced metering, building automation, and grid-friendly appliances on the grid could save customers $81 billion over 20 years, over and above implementation costs, according to the Pacific Northwest National Laboratory. These technologies would enable end-use customers to supply active demand response to the electric power system, and would thus contribute to better reliability, lower price volatility, and better investment incentives.

Recommendations

  • The Report should emphasize that the technology is increasingly available to support active consumer participation in electricity markets, and such participation would promote retail and wholesale competition.
  • The Report should highlight the potential of advances in technology to activate demand and complete the missing link between wholesale and retail markets as an alternative to continued exploration of capacity payment mechanisms.