Academic journal article Chicago Fed Letter

Midwest Infrastructure: Shaping Electricity Policy

Academic journal article Chicago Fed Letter

Midwest Infrastructure: Shaping Electricity Policy

Article excerpt

Chicago Fed Letter

A recent Chicago Fed conference on electricity policy highlighted the importance of investment in generation and transmission capability. Furthermore, moving toward a less regulated and more market-oriented system will require the coordinated development of a regional transmission infrastructure. Developing or adapting institutions to guide this regional approach is a clear challenge to policymakers.

On January 17, 2002, 150 participants from business, government, and academia gathered at the Federal Reserve Bank of Chicago to discuss the status and prospects of electricity policy in the Midwest. This conference was the first part of a Chicago Fed initiative to study the infrastructure of the Midwest economy. The program focused on policy issues that will require multi-state regional cooperation. Federal, state, and industry representatives provided perspectives on how to create the proper regulatory environment to encourage needed investment in generation and transmission facilities.

In his opening address, Michael H. Moskow, president and chief executive officer of the Federal Reserve Bank of Chicago, underlined the importance of electricity policy in promoting the health of the region's economy. Moskow noted that there are few things as basic to an industrial- and information-based economy as the terms on which we acquire our electric power. However, he added, many analysts feel that an uncertain regulatory climate and volatile financial conditions may be discouraging needed investment in basic electricity infrastructure. In particular, Moskow noted that promoting an efficient electricity grid and the movement toward a less-regulated and more market-oriented system requires the coordinated development of regional infrastructure that addresses interstate transmission and interconnection. Developing or adapting institutions to guide this regional approach is a clear challenge to electricity policymakers.

Next, Robert Dixon, deputy assistant secretary for the U.S. Department of Energy, suggested that the energy industry will need to make significant capital investments in the next ten to 20 years to replace aging infrastructure and meet rising demand. Given that these investments are in long-lived capital assets, it is critical that the best technology choices are made to ensure that the most efficient, clean, and reliable electricity is produced. Although most electricity policy decisions are made at the state level, Dixon argued that the Department of Energy has a lead responsibility for developing a.national energy plan. An important element of the plan favors revising federal electricity law to reflect changes in the marketplace. In particular, this would require revisions to the Federal Power Act and the Public Utility Holding Company Act, both originally enacted in 1935.

Dixon identified the following core federal policy issues relating to electricity: regulation of interstate commerce, electricity transmission, ensuring reliability, protecting against the use of market power, consumer protection, defining the role of federal electric utilities, reforming existing electricity laws, and defining regulatory jurisdiction.

Developing emissions policies

The next presenter, Brian McLean, director of the Clean Air Markets Division of the U.S. Environmental Protection Agency (EPA), focused on the development of emissions policies. The generation of electricity is a major source of such air emissions as sulfur dioxide (S02), nitrogen oxides (Nox), and mercury. Current policies favor individual strategies for addressing each type of pollutant; however, the EPA is developing new policies that favor a more comprehensive multi-pollutant strategy. This could help reduce costs by consolidating regulations, increasing flexibility for meeting standards, and creating a predictable regulatory outlook for emissions sources.

Adopting market-based incentives is an important part of moving to a multi-pollutant strategy whose goal is to cut S02, Nox, and mercury emissions from power generators by 70% to 80%. …

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