ENERGY REGULATORY AND MARKET DEVELOPMENT FORUM November 4, 2010

ENERGY COMPETITION AND REGULATION: THE U.S. EXPERIENCE The Honorable Philip D. Moeller Commissioner Federal Energy Regulatory Commission

Competition Policy
Competition is at heart of U.S. energy policy relating to wholesale power and gas markets Competition policy not new established 30 years ago Competition policy not deregulation FERC never stopped regulating wholesale power and gas markets
Competition policy has been success in both power and gas markets Competition assured security of U.S. electricity and natural gas supply at reasonable cost for 25 years
Nature of regulation changed FERC role different larger in some respects

Competition Policy
Competition policy involves mixture of competition and regulation seek best possible mixture Competition and regulation have different objectives
Costs: profit level regulation vs. cost control Investment: regulatory risk vs. contract certainty and reliance on market rules Risk allocation: end-use consumers vs. market participants

Competition policy not an event it is a process

Competition Policy
How FERC introduced competition into wholesale power and gas markets
Open access to the networks Functional unbundling Deregulation of most wholesale gas sales Market based pricing for wholesale power sales Encourage greater infrastructure investment Encourage new entry by power generators and gas producers Increased transparency RTOs/ISOs

Competition Policy
Power and gas markets highly dynamic static regulatory policy unlikely to succeed FERC pursues steady reform to strengthen competitive markets
Encourage entry Improve market access and grid access Establish good market rules Prevent market power exercise and market manipulation Assure effective enforcement Improve market transparency Provide contract certainty Reinforce the networks Improve demand response

FERC Regulatory Role

U.S. electricity regulation federalist
Federal and state regulation
Economic regulation Infrastructure development Safety (hydro, LNG) Grid reliability Enforcement Wholesale power and natural gas sales Electric transmission and gas transportation Electricity mergers and corporate transactions Regional power market rules Natural gas pipeline, storage, and LNG siting Limited authority to site electric transmission Police market manipulation Grid reliability standards

FERC has five principal missions:

FERC regulatory authorities

Overview of U.S. Electricity Markets

Capacity (MW)

10,000

20,000

30,000

40,000

50,000

60,000

0
Southern Co NextEra Energy Inc American Electric Power Co Inc Tennessee Valley Authority Duke Energy Corp Entergy Corp Calpine Corp Dominion Resources Inc Exelon Corp Progress Energy Inc NRG Energy Inc U S Army Corps of Engineers Energy Future Holdings Corp Ameren Corp Berkshire Hathaway Inc Xcel Energy Inc Public Service Enterprise Group Inc Edison International U S Bureau of Reclamation FirstEnergy Corp

MW

Source: Based on data from Ventyx, Velocity Suite, October 2010

0.0% 0.5% 1.0% 1.5%
Percent of Total U.S.

U.S. Electric Generation Ownership Profile

Percent of Total

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Disaggregation of generation ownership

U.S. is worlds largest electricity generator

U.S. Electricity Supply Mix 2009

RENAWABLES & OTHER 3% WATER 6% NUCLEAR 22% NATURAL GAS 23% OIL 1%

Total = 3.984 Billion MWh

COAL 45%

U.S. electricity supply relies heavily on fossil fuels

Source: Based on data from Ventyx, Velocity Suite, October 2010

U.S. Interstate Power Grid

(235,721 Circuit Miles or 379,356 Km)

U.S. has the largest power grid in the world.

Source: Based on data from Ventyx, Velocity Suite, October 2010

U.S. Electric Transmission Ownership

140,000

120,000

100,000

500 Others
80,000

Ownership of U.S. power grid highly fractured.

$ Millions
60,000 40,000

20,000

The percent of grid owned by top 10 companies is 29.5%.

0 Electric

Source: Based on data from Ventyx, Velocity Suite, October 2010

U.S. Transmission Investment

Sustained period of marginal investment SmartGrid initiatives Policies designed to encourage greater grid investment
Rates of return Regional transmission planning Regional cost allocation Federal siting

Source: Edison Electric Institute (http://www.eei.org/ourissues/ElectricityTransmission/Documents/bar_Transmission_Investment.pdf

U.S. Regional Power Markets

U.S. does not have a national electricity market Regional power markets some of which are also international Three different wholesale market regimes
RTOs/ISOs: centralized day ahead markets, bilateral markets, financial trading, large trading volumes, good transparency West: bilateral spot markets, large trading volumes, good transparency Southeast: bilateral spot market for residual power, low trading volumes, poor transparency

Electric Industry Structure

Competition
Generators utilities and independents

High level of vertical integration Diversity

Investor owned utilities Federal utilities State and municipal utilities Rural electric cooperatives Independent power producers Transcos Traders and marketers

Competitive Markets
U.S. wholesale power markets working well Competition policy a success Some failures: California and Western crisis Difficult to define success what is proper benchmark?
Cost to end-users Infrastructure development Security/reliability of supply

Competitive Markets
Characteristics of competitive markets
Generation entry Market access and grid access Robust power grid, with sufficient investment Market transparency Demand response Efficiency/operating performance New technologies and services

U.S. wholesale markets have most of these characteristics

Security of U.S. Electricity Supply

Two great challenges facing U.S. electricity sector
Climate change Infrastructure investment

Competition policy best suited to assure security of electricity supply at reasonable cost not low cost U.S. generation security benefitting from expansion of natural gas production and major investments in renewables

Projected U.S. Electricity Generation Capacity Additions

300

250

200

GW
150

Renewables/other Nuclear Natural Gas Coal

100

50

0 2009-2015 2016-2020 2021-2025 2026-2030 2031-2035

Source: EIA "Annual Energy Outlook 2010", Figure 62.

Climate Change
U.S. actively engaged in climate change legislative debate Tension between assuring security of electricity supply and climate change Uncertainty about climate change policy comes at cost What must U.S. do well to meet climate change challenge?
Energy efficiency and demand response improvements Technology development and deployment New generation entry Generation fuel diversity Improvements in operating performance Infrastructure expansion wind, solar, transmission

Overview of U.S. Natural Gas Markets

US Sources of Gas Supply

Largest gas consumer and second largest producer Relatively selfsufficient U.S. produces 88% of supply Canadian imports declining New technologies expanding recoverable supplies (primarily shale)

U.S. Natural Gas Pipeline Network

Gas Market: Largest, most liquid, and most transparent Pipeline Network: Largest gas pipeline network (306,000 miles or 492,400 km) Interconnected with Canada and Mexico

Gas Industry Structure

Disaggregation of gas production Much lower level of vertical integration Ownership separation of pipelines from producers and distribution Ownership of gas pipelines more concentrated

U.S. Gas Production from 1980 through 2009

22,000

20,000

18,000

16,000

14,000

U.S. Annual Dry Natural Gas Production (Bcf)

Success of competition policy on U.S. natural gas production Price controls led to steady decline in gas production Decline not caused by declining reserves but by regulatory policy Price decontrol led to continuing rebound of U.S. gas production New technologies have fostered recent increases

12,000

10,000
19 8 19 0 8 19 1 8 19 2 8 19 3 8 19 4 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 09
Source: Energy Information Administration

Security of U.S. Natural Gas Supply

U.S. domestic production growing Very active exploration and development Shale gas supplanting Canadian gas and LNG imports in supply mix U.S. demand growing primarily from power sector One strength of U.S. gas market robust infrastructure Development of robust pipeline network Efficient administration by FERC Good rates of return Functional unbundling pipeline competition ownership separation

Wholesale Gas Markets

U.S. wholesale gas market working very well Shale gas has revolutionized U.S. gas production
Shale gas now accounts for about 23% of total U.S. natural gas production, up from 4% in 2005 Share of production is expected to increase significantly Large resource base and low production costs Environmental concerns, water use, and regulatory regimes still need to be clarified

LNG supply shifting toward peaking applications in areas remote from production fields.
North America in competition with Europe and Asia/Pacific for LNG supply

Convergence between gas and power markets Convergence between gas physical and financial markets Divergence between gas and oil markets

Conclusion
Policy choices governed by industry structure and regulatory regime Competition policy has followed different courses in power and gas markets, given differences in these markets U.S. experience: competition policy has been a success
U.S. remains committed to competition policy Focus at FERC strengthening competitive wholesale power and gas markets, through steady reform
assured security of electricity and gas supply at reasonable cost for 25 years