The Federal Energy Regulatory Commission was irresponsible in deregulating the wholesale power markets in California and elsewhere when it did because it ignored warnings of the existence of market power and capacity constraints in those markets, according to an analysis conducted by the Consumer Federation of America (CFA).
“FERC failed to reasonably analyze the market before it deregulated. It treated the state as one big market, when it is evident that there are distinct and separate north-south markets,” said Mark Cooper, CFA’s director of research, who authored the analysis entitled “Behind the Headlines of Electricity Restructuring.”
In California and other regions of the U.S., “FERC rubber stamped industry rules for operating the grid that are prone to manipulation and abuse,” he wrote. “FERC’s voluntary approach to forming regional transmission organizations has failed to produce non-discriminatory access. [It] allowed a wave of mergers to concentrate generation markets, rendering them more vulnerable to the abuse of market power. FERC made matters much worse by refusing to 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 responsibility for the market debacle.
“The inevitable result of greed, irresponsibility and mismanagement of a vital commodity in a volatile market [has been] a dramatic run-up in price and a massive, unjustified and economically inefficient transfer of wealth from customers to producers,” he said.
“Gone are the fanciful claims of 40% savings that were used to sell electricity restructuring to the public,” Cooper noted, adding that most of these claims were based on electricity being fueled by cheap natural gas. But “when cheap gas disappeared, so did the benefits of electricity restructuring.”
Consumers are resisting efforts to “force price spikes into their bills, and rightly so, because a large part of the market price run-up is caused by artificial scarcity, abuse of market power and pure stupidity of poorly designed markets,” according to Cooper. Until utilities can show that they have “wrung the inefficient and unjustified rents out of the system,” consumers will continue to be “unwilling to bear the burden of dealing with legitimate scarcity problems.”
Consumer resistance has been further reinforced by the fact that many of the solutions being espoused now to correct the market flaws in California and elsewhere — long-term contracting and interruptible and conservation programs — are the same ones that were used under regulation. “In other words, after wasting tens of billions of dollars, we find that the old system works better,” he noted.
Based on the lessons learned from California, Cooper believes the 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 start with wholesale competition, pay very careful attention to creating an open and adequate transmission system, build effective market structure, and ensure that there is adequate capacity and competition before deregulating, he said. In addition, policymakers “should require reserve margins, encourage fuel diversity including distributed generation, and have vigorous demand-side management programs in place,” as well as have “serious law enforcement mechanisms” on hand and take ultimate responsibility for the final structure and performance of the industry. Susan Parker
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