Role of the Regulator in a Competitive Electricity

Role of the Regulator in a Competitive Electricity Market Charles D. Gray Executive Director www. naruc. org

What is NARUC? Ø The National Association of Regulatory Utility Commissioners (NARUC) is a non-governmental non-profit organization founded in 1889. Ø 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. Ø NARUC member agencies regulate electricity, natural gas, telecommunications, and water utilities 2

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. ) 3

Financing 4

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) 5 • International Programs (6 staff)

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 6

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 7

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 8

Key Characteristics of Regulatory Commissions (1) Autonomy I. Appointment of Commissioners • Staggered terms • Quality criteria • Who makes appointments II. Exemption from civil service/government salary rules III. Financing Commission • License fees • Budget approval IV. Removal from office – for cause only 9

Key Characteristics of Regulatory Commissions (2) Authority I. Full Tariff Authority II. License Issuance III. Market (design) IV. Information Collection, Monitoring, Enforcement 10

Key Characteristics of Regulatory Commissions (3) Accountability I. Public Participation & Transparency II. Annual Report & Audit III. Appeal of Decisions to Courts Only or International Arbitration IV. Budget Review V. Code of Ethics VI. Removal from Office – for cause only 11

Key Characteristics of Regulatory Commissions (4) Ability/Capacity I. Capable Trained Staff II. Procedures & Management III. Sound Tariff Methodologies & Prices IV. Licensing Practices V. Monitoring & Enforcement 12

Changes Brought by Industry Restructuring Source: ISO-NE 13

State and Federal Jurisdiction Authority Generation Transmission Federal ØWholesales ØAncillary services ØMerger authority ØNo authority over facilities ØRates, terms, conditions for wholesale and unbundled retail interstate transmission ØTransmission reliability rules ØSiting in national interest corridors (1 year after filing) State traditionally regulated ØRate-based Ø Rates, terms, ØRetail rates ØBilling facilities conditions of ØTerms ØCollection bundled retail ØAdequacy of ØConditions ØDisconnection transmission or generation ØService quality policy purely intrastate ØReserve ØOutage mgmt. ØMetering transmission margins ØOutage indices ØDemand-side ØSiting NARUC New Commissioners Training – Electricity Issuesmgmt. ØPortfolio 14 March 11, 2008 standards Source: NRRI, Electric Tutorial, 2006. Distribution N/A Retail Customer Interface N/A 21

State and Federal Jurisdiction cont. Authority Generation State restructured ØSiting RTO (Authority only over transmission – delegated from FERC) Transmission ØSiting ØUnless purely intrastate, all transmission is unbundled, and so is under FERC authority Distribution Retail Customer Interface ØSame authority as traditionally regulated states, plus: ØStandard offer service (a. k. a. provider of last resort) ØN/A ØOperational authority over transmission in a region ØMaintenance of short term reliability ØAdministration of own tariff and pricing system ØManagement of congestion ØPlan and coordinate transmission upgrades and additions ØMarket monitoring ØOperate computerized site for sharing available capacity NARUC New Commissioners Training – Electricity Issues ØContract for a supplier of last resort for ancillary services 15 Source: NRRI, Electric Tutorial, 2006. March 11, 2008 ØAddress parallel path flow issues 22

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 16

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 17

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 18

Regulatory Structure – Two things to Remember 1. Electric Utilities are Regulated at both State and Federal Levels: FERC regulates wholesales and interstate transmission services; States regulate everything else 2. Two regulatory models exist: “Organized Markets” and “Vertical Integration” 19

Electric Utility Regulation Remains a Hybrid System at the Retail Level In the U. S. , there was considerable interest in competition during the late 1990 s. 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. 20

U. S. Transmission Grid 21

U. S. Interconnections Source: EIA, http: //www. eia. doe. gov/cneaf/electricity/chg_str/bookl et/images/fig 4. jpg

State Regulatory Authority Ø State public service commissions Ø Retail rates Ø In traditional states: revenue requirement, cost allocation, and rate design for each customer class Ø 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 23

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 24

RTOs in the United States 25

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, Mid. Atlantic, Mid. West • NJ Auction • Regional Coordination • OPSI, OMS 26

2008 U. S. Electric Power Industry Net Generation Source: Energy Information Administration, http: //www. eia. doe. gov/cneaf/electricity/epa/figes 1. html 27

Fuel Costs for Electricity Generation, 1997 - 2008 Source: Energy Information Administration, http: //www. eia. doe. gov/cneaf/electricity/epa/figes 4. html 28

Avg. Retail Price of Electricity – 2008 Source: EIA, http: //www. eia. doe. gov/cneaf/electricity/epa/fig 7 p 4. html 29

Changes in Retail Price of Electricity 2007 - 2010 Source: EIA, Electric Power Monthly, February 2009, http: //www. eia. doe. gov/cneaf/electricity/epm_sum. html 30

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 31

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” 32

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 33

Pending Congressional Legislation • Cap and Trade Climate Legislation – Passed House of Representatives, Pending in Senate; enactment unlikely in 2010 • Other Energy Legislation 1. 2. 3. 4. 5. 6. Transmission Planning, Siting and Cost Allocation National Renewable Portfolio Standards, with Energy Efficiency Component Cyber Security/Grid Protection Off-Shore Oil and Gas Drilling Nuclear Power Incentives – Accelerated Licensing; Expanded Loan Guarantees 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 (Stateregulated) 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 Promote/Regulate Investment in Smart Grid Technologies to http: //www. ferc. gov/industries/electric/indus-act/smart-grid/FERC-NARUC-collaborative. pdf 35

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 37

8 th 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 39

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 40

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 41

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 anticompetitive behavior 42

Benefits of Cross-border & International Trade* (*Adapted from Pierce Atwood law firm presentation) • Improved efficiencies • Fuel diversity • Non-coincident peaks • Greater system stability 43

Electricity – Implementation of EPAct and EISA Four big sets of issues ØReliability ØInfrastructure/Smart Grid ØTransmission Access/Wholesale Competition ØEnergy Efficiency 44

Infrastructure Ø Ø Transmission Siting EPAct – Backstop Siting Authority DOE Congestion Study and National Interest Corridor Designation FERC Backstop Authority Pending Legislation Ø Ø Transmission Investment Incentives EPAct – Transmission Investment Incentives FERC Rulemaking on Pricing Incentives Ø Ø 45

PURPA Ø EPAct and EISA Ø EPAct -- State implementation of 5 new standards: 1. 2. 3. 4. 5. Net metering Fuel Diversity Generation Efficiency Smart Metering Interconnection 46

PURPA (cont) Ø 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 47

FERC Orders 888 and 890 Ø Implementation of open access transmission policy to support development of competitive wholesale power markets Ø Non-discriminatory access principle is critical Ø NARUC supported Order Ø Order 890 issued in 2007 to update Order 888 48

Unbundling Ø Policy implemented by State legislatures and commissions to disaggregate generation from delivery Ø Two Models – “Functional” unbundling (G and T are separate but under common ownership); and “Structural” unbundling (G and T placed in separate corporations) Ø Creation of affiliate interest issues – precursor of more systematic market monitoring 49

Third Party Access Ø Implementation of principle of non-discrimination Ø PURPA initiative followed by EPAct 1992 Ø State role on interconnection; netmetering 50

Market Monitoring Ø FERC leadership under the EPAct in restructured markets Ø RTO issue – Internal or external Ø State role – work with the market monitor (MMU) Ø State concern – access to data; communication with MMU Ø Intl Project – Southeast Europe Market Monitoring (www. naruc. org/see_monitoring) 51

Privatization I. II. Process – determines objectives of privatization Procedures – IPO, Tender, Combination of shareholders and financial investors III. Goals Ø Economic Profit Maximize income to state from disposal of companies, typically IPO or price tender, regulatory policies met Ø Social Benefits & Issues Improvement in security and quality of supply, enhancement of competition, may often lead to price increases for households in developing countries 52

NARUC’s International Experience – Issues for Consideration Power Sector Reform – Stages 1. New Regulatory Framework 2. Independent Regulatory Agency 3. 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 53

Contact Information Charles Gray Executive Director cgray@naruc. org Telephone: 202 -898 -2208 Fax: 202 -898 -2213 54