Restructured Electricity Markets:

Three States' Experiences in Adding Generating Capacity

GAO-02-427: Published: May 24, 2002. Publicly Released: Jun 24, 2002.

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Twenty-four states and the District of Columbia have restructured electricity markets by shifting from service provided through a regulated monopoly to service provided through open competition among the local utilities and their competitors. The restructuring was intended to boost competition and expand consumer choice, increase efficiency, and lower prices. Of the three states GAO studied, Texas had the greatest need for additional electric power, and it added the most new capacity from 1995 through 2001. In contrast, California added 25 percent of the forecasted need for capacity over this period. Although Pennsylvania added less than half of its forecasted need for capacity, the state continues to be a net exporter of electricity to nearby states. The three states have similar processes for approving applications to build and operate new power plants. In all three states, state and local agencies must review the applications to ensure that the developer complies with environmental, land use, and other requirements before issuing the permits necessary to build and operate a power plant. California also has a state energy commission that reviews each power plant application to determine whether the benefits of additional electricity outweigh its likely negative environmental or other effects. Texas' rules for connecting new power plants to the electricity transmission system are less costly for independent developers and are administratively simpler than the approaches used in California and Pennsylvania. In deciding where to build new power plants, independent developers said they weigh a market's risks, including uncertainty about changes in a state's market rules, against expected profits. Higher risks require higher expected profits.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On July 24, 2003, FERC issued its final rule entitled "Standardization of Generator Interconnection Agreements and Procedures." The rule requires that public utilities provide independent power developers with access to their grid by using FERC's standard interconnection agreement.

    Recommendation: To facilitate development of power plants needed in restructured markets and to provide comparable treatment for all developers, the Chairman of the Federal Energy Regulatory Commission, in consultation with transmission system owners, power plant developers, and lenders, should develop and require the use of a standardized interconnection agreement.

    Agency Affected: Federal Energy Regulatory Commission

  2. Status: Closed - Implemented

    Comments: On July 28, 2004, FERC reported that it has taken several steps--in consultation with transmission system owners and other stakeholers--to clarify how transmission upgrade costs are allocated. Most importantly, on July 24, 2003, FERC issued Order No. 2003, in which it established generic rules for the interconnection of generation plants with capacity in excess of 20 MW to the transmission grid.

    Recommendation: To facilitate development of power plants needed in restructured markets and to provide comparable treatment for all developers, the Chairman of the Federal Energy Regulatory Commission, in consultation with transmission system owners, power plant developers, and lenders, should clarify how transmission system upgrade costs are allocated.

    Agency Affected: Federal Energy Regulatory Commission

 

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