Retail Generation Competition

A. Regarding each identifiable generation product --

1. Identify with particularity any defects in the wholesale market structure affecting Arizona.


We see two major defects in Arizona's current wholesale market structure. One is that incumbent utilities have large shares of the generation (and transmission) market and, if that market is restructured, they would likely be in a position to exercise market power, by raising prices above competitive levels and/or discouraging new entrants. In such a situation the incumbent utilities would be reluctant to work towards relieving the transmission constraints that enhance their market power. Second, transmission constraints limit generator access to Arizona load centers.

Third, we believe that the ISO/RTO arrangements at this time are inadequately developed to ensure an open, competitive, and stable wholesale market. The cure lies primarily with the FERC, which is attempting to move forward on these matters. The development of WestConnect under the aegis of FERC will be critical in this respect.

In light of these three defects, we believe it would be prudent for the Commission to wait before requiring jurisdictional utilities to place substantial reliance on the wholesale generation market.


2. Are there an adequate number of competitors to sell in Arizona to make the product sufficiently competitive? How many sellers are there?


There are at least seven generators now operating in Arizona that are not affiliated with any Arizona utilities. An additional five generators are currently constructing plants.

Notwithstanding new merchant power plant construction, incumbent utilities appear to be in a position to exercise market power in the wholesale generation market, especially for generation products required during peak periods. This is because of the significant transmission constraints in Arizona.

For retail products, there are no competitors currently operating in Arizona.


3. How have mergers and consolidations in the industry affected the competitiveness of the product in the region at the wholesale and retail levels?


Mergers and consolidations have not been a major factor in the Arizona or Southwest market.


4. Are competitors building new generation able to price their generation at rates competitive with existing generation?


In some areas of the country, such as the Northeast and (belatedly) California, the answer has generally been "yes", and a great deal of new generation construction has taken place.

Today, however, with falling wholesale market prices, the prospects for new power plant construction are changing. Although market prices will likely be sufficient to cover operating costs, they may not be sufficient to provide a reasonable return on investment. We believe there are delays or cancellations of some projects. However, merchant power producers are better able to answer this question.


5. How has the Independent System Administrator affected the success of (a) retail competition and (b) wholesale competition?


We believe the A.I.S.A. has developed protocols and tariffs for retail customers who directly access third-party suppliers. Presumably, the role of the A.I.S.A. will in time be absorbed into that of a regional RTO, and retail and wholesale protocols and tariffs will be complementary. Meanwhile, at least until recently, market prices have been so high relative to standard offer prices that little direct access has taken place

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