SPEAKERS
Hon. Joseph T. Kelliher Chairman Federal Energy Regulatory Commission Executive Interview	Daniel Yergin CERA Chairman, CERA

CERA Chairman Daniel Yergin opened Power Day 2 of CERAWeek 2008 by thanking Alstom, the CERAWeek Global Energy Partner, and Lazard, the CERAWeek Global Financial Partner.

Dr. Yergin welcomed the Opening Address speaker, the Hon. Joseph T. Kelliher, Chairman of the Federal Energy Regulatory Commission (FERC), and acknowledged Chairman Kelliher’s distinguished career in both government and the private sector.

Chairman Kelliher began with a disclaimer that the views he was about to express were personal and did not necessarily represent those of the FERC or its staff, or of the US government. He said that competitive US wholesale power markets are working very well, although pressures driven by higher fuel prices are a significant concern. US policy “is not now and has never been the deregulation of wholesale power markets,” he said, but “relies on a mix of competition and regulation to ensure just and reasonable prices.”

The FERC’s goal is “perfect competition that is so beautiful it would make an economist weep”—or at least “more perfect” competition—in US wholesale power markets. The benchmark for success in these markets is not movements in retail prices, which are driven principally by changing fuel costs, but rather prompts the question, What are the characteristics of perfect competition, and do they exist in US wholesale markets? In most cases they do exist, and where they do not, as in demand response and elasticity, the FERC is committed to making improvements.

The FERC has never stopped regulating wholesale power markets, he asserted, but the character of regulation has changed significantly. Twenty-five years ago the FERC set a rate for every wholesale power seller in the country and regulated power market control through this system. Now, he said, we monitor this by setting general market rules and authorizing market-based rates only to sellers that lack market power. The FERC now has the authority to police market manipulations and to impose penalties for violation of tariffs, violation of markets rules, and market manipulation.

Higher fuel prices and their effect on power prices have led some to question whether a competitive policy is the right course for the United States. But it is “important to resist the siren song of re-regulation,” he cautioned. Even if pure re-regulation could be achieved, it would mean a “terrible outcome” for consumers and make it impossible to meet the challenges of security of supply and climate change.

Chairman Kelliher emphasized that the current US competition policy was a very deliberate choice based on the “comprehensive failure of the old regulatory regime.” The call for re-regulation is essentially a call for lower prices, he said, and represents very little philosophical or ideological perspective.

The FERC continues to encourage generation entry by improving capacity markets in the regional transmission organization areas, to streamline market access and grid access, and to improve transparency of power and gas markets, among other initiatives. In most cases, he said, the FERC itself has initiated the reforms in a proactive rather than reactive approach. The search for the “perfect mix” between regulation and competition will be ongoing, because even if “we reach a moment of clarity,” the underlying market is dynamic and the mix will have to adapt.

The United States is poised on the verge of a large generation build, he said, but significant investment in transmission and distribution is needed. The prospect for change in US climate change policy has created greater uncertainty about the role of coal in power supply. Given the recent cancellation of coal projects and the limits of wind power, the country will rely, perhaps “more than is ideal,” on natural gas over the next ten years, putting upward pressure on power prices; he believes that nuclear must play a larger role.

Chairman Kelliher concluded by asserting that US competition policy will not change, that competitive markets are best suited to meet climate change and security of supply challenges, and that the FERC will continue its policy to strengthen these markets.