Please mark your calendars for April 24-25, 2007, for NEM's Tenth Annual Global Energy Forum and Membership Meeting. The meeting will be held in Washington, DC at the Marriott Metro Center. The White House, Presidential candidates, senior congressional leaders and CEOs of other deregulated industries have tentatively confirmed attendance. An agenda will be forthcoming. Day one all the headliners appear and the VIP reception will take place. On day two, PUC Chairs and Commissioners and NEM members will have a roundtable on all the issues affecting NEM members. FERC and PUC Chairs have confirmed.

FERC convened the first of a series of conferences on competition in wholesale electric markets on February 27, 2007. The conference consisted of three panel discussions. Participants included economists, consumers (large and small), utilities, cooperatives, ISONE, generators, a wind energy producer, and state Commissioners.

Chairman Kelliher began the conference by noting that wholesale electric market competition is national policy, as recently affirmed by the federal Energy Policy Act of 2005, and that his perspective is informed by this underlying fact. Commissioner Spitzer noted in his initial remarks that he is not wedded to the status quo. Spitzer recommended that federal policy should accommodate environmental concerns. He also noted disapprovingly the practice of some stakeholders to support competition, except in their own service territories. Commissioner Wellinghoff’s initial remarks stated his focus on efficiency in delivery of electric services and ensuring that consumers get the best benefit from the electric system.

Consumers played a critical role in the conference, with some supporting current market constructs and others questioning whether the market is providing them benefits. Wal-Mart convincingly argued in support of competitive wholesale and retail markets as the most effective way for them to manage their energy costs. Wal-Mart recounted mitigation of $10 million in electric costs and $10 million in gas costs last year (not including Texas and New York) through competition. In contrast, ELCON, an early competitive market advocate, recommended that the Commission acknowledge that the Day 2 RTO construct is not working for end use customers, that FERC examine if the problem can be fixed, and if not, examine an appropriate level of regulation. Commission Moeller queried, if we currently had $3 gas, whether ELCON would be raising the issue. Another consumer group, Public Citizen, disputed the benefits of competitive markets on a more fundamental level, questioning whether market based rates have produced a just and reasonable result.

Two of many themes developed in the conference are the need to facilitate the participation of demand response and renewables in the market. Many participants called for the removal of barriers to participation of demand response in the market. One panelist noted that currently, demand response is called on to mitigate emergencies and is not engaged fully to effect price. With respect to renewables, it was argued that opportunities for these resources are greater in organized markets. Since the resource base for renewables is principally located in rural America, adequacy of transmission to these resources was also deemed critical.

Panel 1 - Review of the Origins of Restructuring and Assessment of Market Performance

During this panel, Professor Joskow of MIT discussed the historical precedent for restructuring including utilities high operation costs, inefficient utilization of generation and transmission capacity, poor coordination and slow adoption of new technology. Joskow noted that the pressure to adopt deregulation stemmed from consumers. Another panelist noted that the wholesale electric markets have provided the vast majority of new generation and have done so at their own risk, not at the risk of captive utility ratepayers. Existing generation has attained greater productivity and efficiency. However, certain factors underpinning restructuring were not anticipated. For instance, the fallacy of the assumption that there was a virtually inexhaustible supply of natural gas at $3 or less. There has also been an unanticipated underinvestment in transmission.

The Commission raised interesting questions in the context of this panel. Chairman Kelliher asked what is the proper measure of success of wholesale markets. He suggested this could include: 1) who bears the risk (ratepayers vs. competitive entities); 2) deployment of new technologies; 3) efficiency; 4) open access to the transmission system and to markets; 5) adequacy of supplies; and 6) reliability of service. Kelliher argued that mere movement of prices was not an adequate measure. (ELCON suggested that consumer satisfaction should also be a measure.)

Commissioner Kelly was interested in how competition can foster the development of technology and renewables to an even greater extent. Commissioner Wellinghoff questioned the lack of supply and demand resource symmetry in New England, and more broadly, wanted to explore the benefits of bringing increased demand response in the market. Commissioner Spitzer noted that restructuring arose in the high-cost states and asked what benefits are in it for the low-cost states to persuade them to support restructuring. He was also interested in what can be done in RTO and non-RTO regions to facilitate long-term contracting.

Panel II - Review of Organized Markets

Exelon and other panelists argued compellingly as to the successful operation of organized markets such as PJM. Exelon also noted that organized markets are essential to retail choice programs. Exelon testimony included a “Competition: Myths and Facts” sheet refuting misconceptions and erroneous accusations about the competitive wholesale market. Professor Hogan of Harvard outlined areas for future FERC action including: 1) remedying the scarcity pricing problem; 2) setting a boundary between when markets and FERC act on transmission investments; 3) resolving the uncertainty created by the Ninth Circuit’s decision on the enforceability of contracts; and 4) resolving the freeloader problem created by those on the edge of organized markets that benefit from its reliability without actually joining.

The panel prompted a series of questions from the FERC Commissioners. Chairman Kelliher asked which of the Day 1 RTO, Day 2 RTO or bilateral markets was best. He also was interested in the lack of generation building in New England despite the increased demand and low reserve margins. Commissioner Kelly asked about the challenges businesses face in implementing demand response and whether it is possible to implement demand response in states without retail choice. Commissioner Spitzer inquired if there would be a material difference in result in Illinois if it had been under the cost of service model versus the auction model it chose to employ.

Panel III - Review of Bilateral Markets

NARUC President Kerr stated that NARUC as an organization is supportive of open access wholesale market structures. Kerr highlighted three issues of import to NARUC: 1) the importance of regional planning and coordination, 2) the role of renewable resources, and 3) effective market monitoring and enforcement. Many panelists argued that the bilateral markets are working well. For instance, Southern Company said the “traditional model” delivers significant benefits such as stable pricing, adequate supplies, the opportunity for integrated system planning and resulting economies of scope, a shorter term wholesale market to provide optimization opportunities, and clear avenues of accountability.

The Commissioners also had many questions for these panelists. Commissioner Moeller stated that the advantage of organized markets is the ability to see congestion costs and therefore address their root causes. Moeller asked how it would be possible to achieve that in bilateral markets. Moeller also asked if organized markets facilitated participation of renewable resources. Commissioner Kelly asked why the APPA’s Electric Market Reform Initiative was undertaken and what is the status of transmission activities in the West. Commissioner Wellinghoff asked about the advisability of creating a market for trading RECs. Chairman Kelliher was interested in why the Southeast market structure seemed to excel in promoting transmission investment. Kelliher also asked if it would be useful to identify best practices in competitive procurement.

Chairman Kelliher advised that it had not yet decided the course of follow-up activities.