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FERC Chairman on Energy Competition and Regulation

On June 26th Chairman Joseph Kelliher, of the US Federal Energy Regulatory Commission (FERC), gave a keynote speech on “Energy Competition and Regulation” at the APP Energy Regulatory and Market Development Forum in Sydney, Australia. According to Kelliher’s presentation 49% of United States’ electricity supplies relies on coal, 22% relies on natural gas and 19% relies on nuclear power. The other 10% come from oil, water and renewable with water being 6%. The United States has the largest power grid in the world with 10 companies owning 27% of the grid and 525 other entities owning the remaining 73%.

Kelliher stated that competition is at heart of U.S. energy policy relating to wholesale power and gas markets, that the competition policy was established 30 years ago, and it is not “deregulation”. FERC has never stopped regulating wholesale power and gas markets although the nature of regulation has changed. FERC’s role is different and in some respects larger. This competition has been successful in both the power and gas markets assuring security of US electricity and natural gas supply at reasonable costs for 25 years.

According to Kelliher in FERC’s Regulatory Role FERC has five principal missions:– Economic regulation – Infrastructure development – Safety (hydro, LNG) – Grid reliability – Enforcement

• FERC regulatory authorities
– Wholesale power and natural gas sales
– Electric transmission and gas transportation
– Electricity mergers and corporate transactions
– Regional power market rules
– Natural gas pipeline, storage, and LNG siting
– Limited authority to site electric transmission
– Police market manipulation
– Grid reliability standards

In regards to the US regional power markets Kelliher’s presentation showed:
• U.S. does not have a national electricity market
• Regional power markets – some of which are also international
• Hybrid markets: 3 different wholesale market regimes – RTOs/ISOs: centralized day ahead markets, bilateral markets, financial trading, large trading volumes, good transparency
– West: bilateral spot markets, large trading volumes, good transparency
– Southeast: bilateral spot market for residual power, low trading volumes, poor transparency

The presentation outlined the structure of the Electric Industry:
• Competition
– Generators – utilities and independents
• High level of vertical integration
• Diversity
– Investor owned utilities
– Federal utilities
– State and municipal utilities
– Rural electric cooperatives
– Independent power producers
– Transcos
– Traders and marketers

Kelliher went on to talk about Competitive Markets, noting a crisis in California and the West.
• U.S. wholesale power markets working well
• Competition policy a success
• Competition has assured security of U.S. electricity supply for 25 years
• Some failures: California and Western crisis
• Difficult to define “success” – what is proper benchmark? – Price is not best measure – driven by fuel and capital costs

• Characteristics of competitive markets
– Generation entry – Generation fuel diversity
– Market access – Robust power grid
– Grid investment – Grid access
– Market transparency – Demand response
– Efficiency/operating – New technologies performance
– New products/services
• U.S. wholesale markets have most of these characteristics
• Wholesale power markets under stress from higher costs
– Capital costs
– Fuel costs

Kelliher acknowledged the challenges facing the US electricity sector:
• Two great challenges facing U.S. electricity
sector
– Security of electricity supply
– Climate change
• Competition policy best suited to assure security of electricity supply at reasonable cost – not low cost
• U.S. poised on edge of large generation build, perhaps larger than generation build between 1996 and 2004

Kelliher presented FERC’s understanding of resolve needed to secure electricity for the nation
• Tremendous investment needs (between 2010 and 2030) – Generation – $560 billion (no carbon policy change); $751 billion (advanced coal technologies and sequestration); $531 to $457 billion (energy efficiency improvements)
– Distribution – $ 673 billion
– Transmission – $ 233 billion
• Investment must occur in high cost environment • What is best means to assure security of supply? – Traditional rate regulation – Competition
• U.S. adopted competition policy in reaction to failure of traditional regulation to contain costs in 1970s-1980s
• Competition better suited to support necessary investment and contain costs

The presentation acknowledged climate change’s impact on energy concerns
• Question: not whether U.S. will change course – how and when
• Tension between assuring security of electricity supply and climate change
• Uncertainty about climate change policy comes at cost – and may continue
• Very difficult to address both challenges at the same time – not impossible
• What must U.S. do well to meet climate change challenge?
– Energy efficiency and demand response improvements
– Technology development and deployment
– New generation entry
– Generation fuel diversity
– High investment level
– Improvements in operating performance
– Infrastructure expansion – wind, cost
• All areas where competition delivers superior results

• Climate change action will come at a significant cost
• Whether costs are reasonable or unreasonable depends on balance between energy and environmental policy
– Usually no balance
– Necessary here – climate change is energy policy, not just environmental policy
– Options – sound energy policy, some acceptable, others reckless
– If we address climate change in manner that is unsound energy policy result will be high energy prices, unreliable energy supplies
• Risk of undermining public confidence in climate change action

US is the largest gas consumer and second largest gas supplier and is, at this time, relatively self-sufficient producing 83% of the supply. Canadian import is rapidly declining with LNG being the fastest growing source of gas supply. The east coast having three LNG import terminals, the southern gulf having three import terminals and the west coast having no terminals in the United States and one terminal, located in Mexico. The US Natural Gas pipeline has the largest and most transparent network in the world, covering 300,000 miles, interconnecting with Canada and Mexico.

Kelliher stated that US gas production from 1983 to 2007 showed the success of competition policy:
• Price controls led to steady decline in gas production
• Decline not caused by declining reserves but by regulatory policy
• Price decontrol led to rebound of U.S. gas production

FERC’s stance on allowing competition to “regulate” the LNG market in order to secure it was demonstrated:
• U.S. maintaining current levels of production – 10% rise • High prices result in very active exploration and production
• U.S. demand growing more quickly
• One strength of U.S. gas market – robust infrastructure
• Development of robust pipeline network
– Efficient administration by FERC
– Good rates of return
– Functional unbundling – pipeline competition– ownership separation
• Canadian imports no longer sufficient to make up shortfall
• U.S. relying increasingly on LNG to meet domestic demand – LNG fastest growing source of US gas supply

• U.S. wholesale gas market working very well
• Fundamental change – transition from North American market
• North America in competition with Europe and Asia/Pacific for LNG – many differences among LNG import markets
• U.S. has certain advantages in competition for LNG
– U.S. gas market: world’s largest, most liquid, most transparent
– Properly values seasonality of gas
– Significant domestic gas production
– Large gas storage capacity
– Largest pipeline network in world
– Ready access to both Atlantic and Pacific LNG markets
– Contract certainty
• LNG pricing: LNG is a commodity, unlike most commodities priced regionally
– Probably unsustainable – international pricing
• Convergence between gas and power markets
• Convergence between gas physical and financial markets

Kelliher concluded that policy choices were governed by industry structure and the regulatory regime. Competition policy has followed different courses in power and gas markets, given differences in these
markets. In the U.S. experience the competition policy has been a success being that it has assured security of electricity and gas supply at reasonable cost for 25 years. U.S. remains committed to competition policy. The focus at FERC will be on strengthening competitive wholesale power and gas markets through steady reform.

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