Federal Energy Regulatory Commissioner Urges Nationwide Wholesale of Electricity

To prevent a repeat of the sort of price shocks that characterized the recent electricity crisis in California, the U.S. should adopt a single nationwide design for wholesale electricity markets, the commissioner of the Federal Energy Regulatory Commission (FERC) told an audience of about 100 people at the ARCO Forum last night.

According to William Massey, who has served as FERC commissioner since 1992, putting all energy transmission grids under the jurisdiction of FERC will allow for greater competition among energy firms and decrease the likelihood that firms will be able to manipulate the market and drive up prices.

Massey, the keynote speaker at last night’s forum on electricity policy, acknowledged that moving from the current “hodgepodge” of systems of regional and local regulation to one central system will be difficult, but he said he pledges to push ahead with the idea anyway.

“It’s bold. It’s controversial. It’s the right thing to do,” Massey said.

The panel discussion, attended by representatives of energy companies as well as consumer advocacy groups, also featured Theresa Flaim, who is senior vice president of the Tennessee Valley Authority, and William W. Hogan, who is Littauer professor of public policy and administration at the Kennedy School of Government (KSG) and director of the Harvard Electricity Policy Group (HEPG).

The three speakers discussed the often chaotic process of moving toward a “market-based system” for electricity production and transmission since Congress passed the Energy Policy Act in 1992, which aimed to end the monopoly of local electricity utilities and bring more competition to the electrical industry.

The FERC was responsible for implementing the act, and in 1996, issued an order mandating the utilities to allow all generators access to the transmission grids.

These days, Massey said, when people think of electricity deregulation, they tend to think of the recent crisis in California. But he argued that the problem stemmed from a poorly designed market—not from deregulation itself.

Panel moderator John Ruggie, who is Kirkpatrick professor of international affairs at KSG and director of the Center for Business and Government, agreed.

“[The California market] looked like it had been designed by Franz Kafka and created by Rube Goldberg,” Ruggie quipped.

Massey acknowledged that the FERC shared responsibility for creating the California crisis.

“We approved the California design,” he said. “We should not have.”

Massey chastised what he said was the lack of “political courage” among his colleagues at the FERC to intervene in the market during the crisis and “stop the carnage.”

Massey said that due to the natural monopoly inherent in transmission grids, there needs to be a “regulatory cop on the beat” to avoid the type of price-fixing that he said seemed to have occurred in the California crisis.

The FERC proposal would create one national design for the wholesale electricity market, with the FERC having jurisdiction over the nation’s electrical transmission grids.

Massey joked that one of the tough sells of the proposal was its dry name, the Standardized Market Design (SMD)—though he said he would personally prefer to call it the “Adequate Resource Customer Protection Rule.”

During the question-and-answer session, an energy executive joked that SMD ought to stand for “Sexy Market Design” because of “all the heat it has generated.”

“Some might like to call it the ‘Sadistic Market Design,’” Massey shot back.

In her remarks, Flaim credited HEPG with providing a “safe haven” for sound discussion of energy issues during the last decade of energy market restructuring, a point echoed by many other speakers.

Ruggie related Hogan’s observation that in a Google search of the phrase “electricity policy,” HEPG is the first thing that comes up.