On Monday, the Federal Energy Regulatory Commission held a meeting in Washington, D.C. to discuss the impacts of state policies and wholesale energy markets on energy in the northeast. The meeting brought together representatives of various state energy boards and commissions, as well as industry representatives, to examine state energy needs and goals. Though at times the forum fell into detailed discussions of technical acronyms and confessions of fuel agnosticism, on the whole, the meeting centered around themes of reliability, cost, and environmental impact. Although all parties acknowledged that the primary focus was to keep the lights on, particularly in the face of a shutdown in gas supply or a natural disaster such as Hurricane Sandy, the meeting exposed the different weights states gave these priorities and the limits of market-based solutions.

In the northeast, the wholesale energy market spreads across state lines. Unlike, in the midwest, where energy markets are more often vertically integrated, in New England, the energy policies of one state can easily impact its neighbors. Although the states shared common goals, each has its own specialized energy market. This was evident from remarks by state representatives, who highlighted the unique mixes of nuclear, natural gas, hydroelectric, and renewable energy that powered their states.

Energy is an unusual market. Electricity generation is subject to different regulations in each state, but can be sold across state lines. In addition, energy markets involve several different layers, as generating companies sell to distribution companies, who in turn sell to households and businesses. With the increased complexity, there are limits of market-based solutions.

“What makes these [energy] markets unique is that the consumers do not participate directly in the market,“ said Brian Forshaw, principal of Energy Market Advisers.

This means that, while the price impact remains important, regulators are to some degree insulated from the effects of their legislative changes.

“State energy policies by definition are not resource neutral,” said Robert Erwin, president of the Maryland Public Service Commission.

Instead, these policies were created to serve the interests of the respective states. In New England, states wrestle especially with the balance between resource adequacy–ensuring that there is sufficient electricity available to satisfy consumer demands–and state green energy goals. Erwin went on to say that in New England, the industry no longer had “a uniform or a single resource adequacy standard.”

The uncertainty surrounding these standards limits the ability of energy markets to solve for consumer demands.

“After the standards are determined, it is the market’s job to meet those requirements,” said David Patton, president of Potomac Economics. ““The markets give us a mechanism to price all of those requirements [for renewable energy.]”

Pricing is not the same as supply, however. Nor do markets accurately reflect desires for sustainable energy development, argued some participants.

The meeting exposed some of the limits of carbon pricing. For those who wanted to promote green energy, legislation, rather than markets, became a primary concern. At the same time, they acknowledged the impact that these would have on consumers and ratepayers. It is next to impossible for electricity companies to raise additional revenue without raising their customer rates. This also means that state regulations that increase the cost of electricity generation, for instance, by requiring the use of less-efficient renewables, in the end cost the general public, rather than big business.

“Markets are not sacrosanct. They exist to serve state purposes,” said Brien Sheahan of the Illinois Commerce Commission.

Participants in the meeting paid lip service to markets, but spoke at length about the limits of market-based solutions for meeting state energy needs. Energy companies explained that they needed regulation to provide guidance for future development.

“The markets aren’t giving us what we want. States instead needed to step in with regulation in order to get what they want and what we need to have safe and secure energy,” said Peter Fuller, vice president of east region market and regulatory affairs for NRG Energy.

“NRG is fully committed to moving down the market-oriented path,” he continued. “But in the meantime, states are going to act. So we need to accommodate them in the markets.”

Both industry and government figures agreed that part of FERC’s role was to determine ways to improve markets. Although they acknowledged the limits of market-based solutions, on the whole, the conference avoided any suggestion of a mandate-driven, top-down regulatory approach.

In part, this role falls to FERC because, as a federal entity, it can help to balance the competing demands of various states. FERC’s representative on the panel discussions acknowledged that the commission has a mandate from Congress to accommodate and assist with state energy markets, but this requires cooperation from the states as well. In the end, it would fall to regional and local authorities to direct the production of clean, reliable, and affordable energy resources.

At the end of the day, the panels had discussed the complex reality of state energy markets, as well as the limits of market-based solutions. Everyone agreed that action was needed, but, there were few suggestions for specific regulatory changes that would assist this process.

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