Break Out the Big Stick

Carrots haven't worked. FERC needs to get tough on backing its SMD vision.

The time for diplomacy is over. It is more than clear that if the Federal Energy Regulatory Commission (FERC) ever hopes to see its vision realized of a standardized market design, the agency will have to take a more aggressive stance with those who disagree. In particular, FERC should tackle head-on the utilities that want to protect their regulated home turf while playing in others utilities' competitive backyards, and the state regulators that do their political bidding.

It's time for FERC to come out swinging, especially because FERC Chairman Pat Wood's gentlemanly, collaborative approach, while it should be commended, hasn't attracted as much support from state PUCs as the market advocates had hoped for. In fact, the hardball politics that is being played by some state PUCs and congressional constituents can only explain, some say, the commission's recent backtrack on the SMD timeline.

Some observers feel that the announcement of an issuance of a "white paper" on SMD before moving forward on the plan is analogous to raising a white flag (see "FERC's Market Design: The End of a Noble Dream," p. 22). That would be disastrous, given the financial problems many utilities have been experiencing. Merrill Lynch's Steve Fleishman estimates that during 2002 the top 20 utilities had negative cash flow of almost $10 billion after paying dividends. Not to mention that some of that dividend money had to be financed externally at higher rates.