The Federal Energy Regulatory Commission was irresponsible inderegulating the wholesale power markets in California andelsewhere when it did because it ignored warnings of the existenceof market power and capacity constraints in those markets,according to an analysis conducted by the Consumer Federation ofAmerica (CFA).

“FERC failed to reasonably analyze the market before itderegulated. It treated the state as one big market, when it isevident that there are distinct and separate north-south markets,”said Mark Cooper, CFA’s director of research, who authored theanalysis entitled “Behind the Headlines of ElectricityRestructuring.”

In California and other regions of the U.S., “FERC rubberstamped industry rules for operating the grid that are prone tomanipulation and abuse,” he wrote. “FERC’s voluntary approach toforming regional transmission organizations has failed to producenon-discriminatory access. [It] allowed a wave of mergers toconcentrate generation markets, rendering them more vulnerable tothe abuse of market power. FERC made matters much worse by refusingto exercise responsible oversight authority until very recently,when the abuse became just too blatant to ignore any longer.”Cooper noted that California and its utilities also share some ofthe responsibility for the market debacle.

“The inevitable result of greed, irresponsibility andmismanagement of a vital commodity in a volatile market [has been]a dramatic run-up in price and a massive, unjustified andeconomically inefficient transfer of wealth from customers toproducers,” he said.

“Gone are the fanciful claims of 40% savings that were used tosell electricity restructuring to the public,” Cooper noted, addingthat most of these claims were based on electricity being fueled bycheap natural gas. But “when cheap gas disappeared, so did thebenefits of electricity restructuring.”

Consumers are resisting efforts to “force price spikes intotheir bills, and rightly so, because a large part of the marketprice run-up is caused by artificial scarcity, abuse of marketpower and pure stupidity of poorly designed markets,” according toCooper. Until utilities can show that they have “wrung theinefficient and unjustified rents out of the system,” consumerswill continue to be “unwilling to bear the burden of dealing withlegitimate scarcity problems.”

Consumer resistance has been further reinforced by the fact thatmany of the solutions being espoused now to correct the marketflaws in California and elsewhere — long-term contracting andinterruptible and conservation programs — are the same ones thatwere used under regulation. “In other words, after wasting tens ofbillions of dollars, we find that the old system works better,” henoted.

Based on the lessons learned from California, Cooper believesthe first “Consumer Commandment of Electricity Restructuring”should be that lawmakers shouldn’t move forward with deregulation,if they haven’t already. If they have, however, they should startwith wholesale competition, pay very careful attention to creatingan open and adequate transmission system, build effective marketstructure, and ensure that there is adequate capacity andcompetition before deregulating, he said. In addition, policymakers”should require reserve margins, encourage fuel diversity includingdistributed generation, and have vigorous demand-side managementprograms in place,” as well as have “serious law enforcementmechanisms” on hand and take ultimate responsibility for the finalstructure and performance of the industry.

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