1. Competition or Reliability in Electricity? What the Coming Policy Shift Means for Restructuring Diana L. Moss, Ph.D. Vice President and Senior Research Fellow American Antitrust Institute dmoss@antitrustinstitute.org Press Conference on AAI Report Washington, D.C. December 16, 2003 Copyright © 2003 by the American Antitrust Institute

2. About the American Antitrust Institute The American Antitrust Institute is an independent Washington-based non-profit education, research, and advocacy organization. Our mission is to increase the role of competition, assure that competition is fair, and challenge unduly concentrated power in the American and world economy. We perceive ourselves as centrists dedicated to the vigorous use of antitrust as a vital component of national competition policy. Dr. Moss is Vice President of the AAI, adjunct professor at the Georgetown University Public Policy Institute, and the former coordinator for merger competition analysis at FERC. Please visit us at: www.antitrustinstitute.org

3. What’s In the Report?  Regulatory and Antitrust Restructuring Challenges - the list of usual suspects, plus one new one  The Changing Restructuring Paradigm - from “laissez faire” to “managed” to “reliability based” competition  Anticipating Reliability Problems - NERC’s early warnings  Stories Behind Reliability Problems – the stress of competition or anticompetitive conduct?  What Reliability Means for Restructuring – FERC and the Energy Bill provisions, reliability as efficiencies defense, regulatory v. antitrust standards

4. Regulatory and Antitrust Restructuring Challenges  Ongoing M&A, exit of independents  Exercise of market power  Market manipulation  Corporate governance problems  Fractionalization of federal, state, and regional regulatory oversight  Formation of Regional Transmission Organizations  Flagging investment in transmission infrastructure  Reliability and/or competition?

5. The Changing Restructuring “Paradigm”  “Laissez-faire” Competition – mid to late 1990s  “Managed” Competition – late 1990s to about 2002  “Reliability-Based” Competition – 2002 to the present

6. Anticipating the Effects of Competition on Reliability: NERC’s Early Warnings  “The supply and transmission systems will be increasingly challenged to adapt to the evolving open access market.” (1997 at 4).  “During this transition from “embedded-cost regulation” to “competition”...the electric utility industry needs to maintain a balance of economics and reliability.” (1997 at 21).  “Currently, there is no infrastructure in place...to adequately manage the transition from the traditional obligation-to-serve scenario to a completely market-based scenario.” (1997 at 22).

7. Anticipating the Effects of Competition on Reliability: NERC’s Early Warnings  Threats to Reliability Under Completion  Conflicts Between Competitive Markets and the Traditional Approach to Reliability Transmission loading Planned transmission Locating generation relative to load Costs v. willingness to pay Disclosure of generation information to transmission planners Price volatility Generation and transmission margins

8. Stories Behind Reliability Problems: The Two Candidates  Story No. 1: Legitimate stress of competition, not yet remedied by the right amount, type, and location of investment?  Story No. 2: Anticompetitive conduct, justified in the name of reliability?

9. Stories Behind Reliability Problems: Reasons to Ask Questions Adequacy (average annual change from 1997 – 2002) Generator capacity reserve margins 2.2 % New transmission lines/MW peak demand -3.3% Transmission construction expenditures/MW peak demand 2.0% Operational Reliability (average annual change from 1998 – 2003) Level 3 TLR125% Level 4 TLR105% Level 5 TLR65%

10. Stories Behind Reliability Problems: Why to Take a Closer Look at TLR  TLR is cited historically as a method for “bumping” competitors’ transactions off the system, to enable the transmission owner to instead make the sale  Most TLR occurs in the Midwest, which has undergone significant M&A activity  TLR is used by a small number of entities that are large, integrated transmission system owners or organizations that are dominated by the same

11. Where are We Now? The Fork in the “Restructuring” Road Competition- Based Restructuring Reliability Problems Competition Reliability Competition and Reliability?

12. Reconciling Reliability and Competition: What Should the Agencies Prepare For?  FERC: Aggressively pursuing RTO formation Experiencing technical difficulties in meshing market-based policies with command-and-control reliability regulation Updating reliability measures Understanding relationships between reliability and competition  FERC and DOJ/FTC: Claims that reliability constitutes an efficiencies defense for otherwise anticompetitive mergers or conduct Deciding, ex ante, how to handle different outcomes based on the regulatory “public interest” standard and the antitrust “no harm to competition” standard