01:00 AM EST on Tuesday, March 14, 2006

NEW YORK

NEW ENGLAND regulators, under pressure from political leaders, are making decisions related to electricity markets that will have important impacts on job opportunities, the reliability of the power supply, and electricity prices. It's a bundled deal; sensible regulation may die on the cross of regulatory gifts that make no market sense.

This issue is falsely billed as consumers versus the power industry. The rules that govern the power system are determined by those who generate and sell power. This group, the Independent System Operator of New England, (ISO-NE), is overseen by governmental regulatory agencies.

Two changes are slated for the region. First, the ISO-NE wants to assure that any power plant paid to commit itself to operating in a power emergency can promptly deliver power to the needed location. The current market lets a power plant in Vermont bid to supply Boston when Boston is at risk of a blackout. This creates the possibility that when the city is in an emergency and the power that is contracted is outside the city, it may be inadequate to meet the need. In this event, the city would have a blackout.

Yet this sensible change, labeled "locational capacity," has been poisoned by a second change: Troubled power plants in areas with oversupply will be guaranteed rising prices over the next several years.

Opponents assert that the first change will raise prices throughout New England. They are wrong. It will raise prices in urban areas and it will lower prices in rural areas.

Further, opponents' estimates of increased urban prices are overblown. Power emergency markets, capacity markets, are expected to rise from $3 to $5 per year per kilowatt of capacity (the energy required to power a small home) to $100 per year per kilowatt of capacity, in these urban markets. Capacity prices would decline slightly in non-urban areas.

However, opponents have overlooked that these increases will be in part offset by other components of the electricity bill. Capacity prices represent about .5 percent of the total bill today; they will represent roughly 15 percent of a bill after this change is made.

Most of the other 85 percent is called the "energy portion" of the bill. Energy prices are determined by power plants' bidding into power markets when the system is not in an emergency condition. Currently, power plants raise bids into the energy markets to satisfy investors undercompensated by capacity markets. Since every power plant is undercompensated in capacity markets, parity drives substantial price hikes in energy markets.

When the capacity markets are more expensive, the reverse will be true in energy markets: Plants will be forced to supply cheaper energy to remain competitive.

If the first change is implemented: On net, urban power plants will earn slightly more; rural power plants will earn slightly less; urban energy buyers will pay slightly more; and rural energy buyers will pay slightly less. Savings will probably be more concentrated in poorer areas. Near-term, the first rule change will have no impact on the region's total electricity bill.

Why, then, implement it without regulatory interference?

The system will immediately be more reliable. In response to Katrina, the ISO-NE instituted an emergency-capacity market, just for the winter. This ensured against rolling blackouts this winter.

Longer-term, power plants will probably seek to locate near the load they serve. This is more efficient, and it will allow current plants to be replaced by cleaner-burning facilities.

Industries that need reliability will be more likely to either remain in or move to New England cities. This will create high-level jobs for the region.

Prices in the region will not rise as quickly as they would have without the new power-plant infrastructure.

Why are many regional politicians resisting this no-cost move to ensure that electricity markets work? First, costs will be evident in "capacity" prices, and the benefits in "energy" markets will be hidden by generally rising energy prices. More important, the second change, which props up rural power prices, has inspired areas that would gain from the first change to threaten to pull out of the deal.

The first change is necessary, and it will benefit all but the power plants that provide excess supply. The second change was a gift to these troubled power plants, which, perhaps, should never have been built. Splitting this baby may kill the birth of efficient electricity markets, which serve consumers, economic development and conservation interests.

Effective political leadership will eliminate the gift to industry, and drive the market change toward "locational capacity."

Mike Gordon is the founder and president of ConsumerPowerline, a strategic energy-asset management firm, recently awarded a contract by the Massachusetts Division of Capital Asset Management to manage the electricity consumption for nearly 20 state office buildings and to sell excess capacity back to the Independent System Operator of New England (ISO-NE).