Among recent changes in the energy world is a federal plan to standardize wholesale power markets. Called the "standard market design" (SMD), the Federal Energy Regulatory Commission (FERC) proposes to eliminate differences among regions that limit access to lower-cost power resources. Will those changes be as invisible as past orders? Or will FERC's sought-after sea change make waves in your electric rates?

What FERC's SMD Will and Won't Do

It will not deregulate/restructure utilities at the retail level; that's still up to the states. It won't fix financial problems of wholesale power suppliers (e.g., Enron, Dynegy). It will not add new generation where presently needed, nor will it guarantee any rate reductions (or increases) for anybody.

FERC has gathered "best practices" from around the United States to be applied universally, so some aspects of its plan won't look new to those in areas where some of these methods are already in place. Here are a few of the "hot buttons" FERC is pushing.

  • All utilities must place their transmission systems under control of centralized regional agencies, called Regional Transmission Organizations (RTOs) which have powers broader than independent system operators (ISOs).
  • RTOs get renamed "independent transmission providers" and must operate wholesale day-ahead and real-time power markets.
  • Load-serving entities (LSE), which are utilities and retail power marketers, must have a 12% to 18% reserve between peak demand and contracted/owned capacity.
  • If more power is used than previously secured, LSEs are charged heavy penalties ($1/kWh or more) which would likely be passed on to retail customers, or built into tariffs.
  • Ability to cut back on power use (i.e., "demand response") when called by an RTO would be equivalent to contracted generating capacity.
  • When transmission systems become fully loaded ("congested"), wholesale pricing gets based on the highest cost generator in a utility's territory. This "locational marginal pricing" reflects the true value of generation and transmission assets.
  • To simplify installation of new generation, common standards for interconnecting new plants would be adopted by all transmission owners (mainly utilities).

When And How Should I Expect To See Impacts?

FERC's implementation schedule starts in mid-2003 and stretches into mid-2004. Lawsuits will likely stretch that out several more months (maybe a year). FERC has backing for its policies from the Bush administration, however, so major changes in some form are probably inevitable.

Here are a few predictions, based on experience in the deregulated Northeast, where some of those policies (in varying forms) have been around for several years.

  • Where utilities lose monopoly advantages, expect new tariff filings seeking increases in transmission and distribution (and maybe energy) rates.
  • In older, transmission-constrained, urban areas, expect higher demand charges and/or higher energy charges during peak demand periods.
  • If retail access is available in your area, commodity energy charges may drop, more sophisticated contract options (i.e., beyond fixed pricing) may appear, but longer-term contracts may be necessary to secure better pricing.
  • Demand response programs that pay for LSE-requested reductions may appear.
  • Average power prices may rise for customers with low load factors and inflexible loads, and drop for those with high load factors and/or flexible demand.
  • If the economy recovers, expect new power technologies to be offered and promoted, such as interval metering and distributed generation.
  • When impacts trickle down to the retail level, expect confusion and conflicting views from utilities, regulators, consultants, and energy columnists.

So What, And What Should I Do If You're Right?

If you're responsible for a facility's energy budget or serve someone who is, ask yourself these questions. Are any major HVAC, lighting, or process load upgrades being planned? If so, choosing the most energy efficient and flexible options may hedge against volatile/rising power pricing.

Are power loads to be bid out during that period? Consider a multiyear contract, with demand response options, financial hedging tools, and a cap/floor pricing regime. At the very least, watch out for short-term actions (like widespread use of window A/C units) that end up as major blunders when power pricing becomes more sensitive to peak demand. ES