Open Dialogue Will Aid RTO Formation

Reprinted from The Energy Daily
Bill Hall
Senior Vice President, Energy Policy and Strategy
Duke Energy

I applaud the Federal Energy Regulatory Commission for holding “RTO Week” in mid-October to discuss issues related to implementing regional transmission organizations (RTO) to facilitate larger and more efficient competitive power markets. It was an inclusive event where all stakeholders—private and public generators, transmission owners, state and federal regulators, marketers and academics—freely spoke their minds. Most importantly, all stakeholders, particularly the FERC commissioners and staff, often got involved in the give-and-take discussion.

I have spent the last four years in California responsible for Duke Energy North America’s four power plants and I have seen what can happen when electricity supplies are tight, risks inherent in volatile commodity markets are not managed and the market rules are constantly changing. We need to learn from these experiences as well as focus on what has been done right in other regions of the country where competitive power markets have worked and consumers have benefited.

Competitive markets by their nature are very efficient. In well-structured power markets, when more supply is needed, price signals have provided the incentives for private investment to build power plants and other infrastructure. By establishing RTOs governed by non-politicized boards and rapidly responding market-monitoring functions, policymakers will ensure that megawatts freely move to where they are needed most—regions served by high-priced electricity. The result is more supply and moderate and lower prices.

To encourage investment in generation and transmission, FERC should continue to obtain input from state regulators and other stakeholders, and establish consistent standards for RTOs. Large power plants cost hundreds of millions of dollars and have long payback periods. The capital markets will be more willing to invest in the necessary infrastructure if they are comfortable that their investments are solid, with the potential to generate an adequate return.

Commodity markets are inherently volatile, so it is important that RTO market rules be designed with tools to hedge against risky price swings. Many participants in wholesale power markets have created their own tools to manage the risks associated with price volatility, but as the highly publicized California electricity crisis showed us, these tools were not used or fully available to the regulated utilities in the state. The outcomes in California would have been different if the original market rules had encouraged better risk management.

Any RTO market design must enable short- and long-term fuel, power and transmission contracting to take place so market participants can manage the huge risks inherent in any commodity business.

We must put the California experience to work for us by acknowledging what happened when the right things were done to correct it. Consumers responded to price signals and conserved, which resulted in lower demand. Power contracts reduced the amount of power bought on the volatile spot market, and planned supply came on line. Predictably, these actions have moderated prices.

What was striking in the RTO Week discussions was the overall consensus that we must work together to move RTOs forward from concept to reality. It is clear that larger, more interconnected transmission grids governed by non-politicized boards will better facilitate competition and deliver lower prices than the smaller transmission organizations and the command-and-control approaches used in the past. The key to achieving this goal is to continue the productive, inclusive and forward-thinking discussions FERC sponsored at RTO Week.

— Bill Hall is the senior vice president of Duke Energy’s national energy strategy and policy activities. From 1998 until October 2001 he was responsible for Duke Energy North America’s western assets and was actively involved in issues related to California’s electricity crisis.