FERC’s capacity

If any lawmakers thought the switch from a regulated electricity market to what passes for a deregulated one was going to be easy, they kept the idea to themselves. But even the most dedicated realist must have been surprised by a recent federal ruling that intentionally brings electric users – that is, everyone – simultaneously the worst of both the old regulated and the new deregulated world of power generation.

The Federal Energy Regulatory Commission (FERC) recently decided to use a penalty devised under regulation to spur the creation of new energy sources for New England. The penalty comes from transmission companies that have failed to contract sufficiently for current and prospective peaking energy demands. The penalty money would go to generators of energy, which would then, theoretically, be encouraged to apply the money for new energy production.

Or they could blow it on an end-of-the-millennium party for stockholders. And that’s just one problem with government officials trying to control an industry they have partly deregulated – they can issue half-decrees – the fines – but they can’t ensure the fines are put to good use. In this case, however, it is worse than just a problem of inadequate authority.

Transmission and distribution companies in New England do not meet the FERC requirements for installed capacity contracts but that may not be because the region needs incentives for more generators. The Department of Justice is looking into the possibility that generators have colluded in holding back on power sources to raise the price. At the least, FERC should have waited until that investigation was completed. But even if it did decide the fines were necessary, it should have thought twice before increasing the rate in New England from 17 cents a kilowatt to $8.75 a kilowatt, the level at which, FERC says, generators have the incentive to build new capacity. In a region that pays some of the highest prices in the country, consumers might like to share with FERC some thoughts on their capacity for outrageous power costs. It’s not that high.

But it is still worse than this. New England, unlike FERC problem-state California, has a large amount of new power generation coming on line in the next few years, has kept its electric infrastructure up to date, does not rely on neighbors to provide power and has not seen the sharp increase of demand that has occurred on the West Coast. Spurred in part by the natural gas line running from Canada, generation companies may not even build all the plants that have been proposed because they fear the region will suffer from overcapacity.

Generation companies have not needed incentives through penalties to do this; the market is generous enough. The same sort of illogical incentives are found in day-ahead bids for power from T&D companies, which often must pay for all power the highest price offered on any added increment of power.

It is simplistic to say that deregulation does not work, but clearly there are parts to this half-market, half-utility business that do not work in anything like the consumers’ best interest yet leaves consumers restricted over what they can do about it. FERC should review its ruling on the capacity contracts, observing that the market will soon produce more power here than it needs, even at peak power, and that the fines will bring no added benefits to the people paying the light bill.