Centralized markets are failing consumers

During my 30-year career at the American Public Power Association (APPA), I’ve had a front-row seat for most of the major events in our industry’s recent history. So it disturbs me when my view of our history is 180 degrees out of phase with how others perceive it. Such was the case with the preamble to the Federal Energy Regulatory Commission’s (FERC’s) June 2007 notice of proposed rulemaking (NOPR) to improve the operation of centralized wholesale power markets run by regional transmission organizations (RTOs).

I find the commission’s view of history clouded by “competition-colored” glasses. In an apparent effort to buttress its policies promoting centralized spot markets, the commission misstates history—in particular the U.S. Congress’s rationale for passing the Public Utility Regulatory Policies Act of 1978 (Purpa). In the world according to FERC, the enactment of Purpa was the first hug in Congress’s 30-year embrace of competition as national policy for bulk power markets.

Today, Congress attaches fanciful names to legislation in an attempt to convey the bill’s purpose: No Child Left Behind, for example. In the 1970s, sponsors were much more direct. Bills generally contained a statement of congressional purpose. In Purpa’s case, it was “conservation of energy supplied by electric utilities; the optimization of the efficiency of use of facilities and resources by electric utilities; and equitable rates to electric consumers.” That was in keeping with the Carter administration’s national energy policy, which emphasized energy conservation and efficiency in response to the Arab oil embargo of 1973-1974.

Less than 20/20 hindsight

Purpa broke the utility stranglehold on generation and spawned the cogeneration movement, but it did so to promote conservation and efficiency, not competition. Purpa did include a wheeling (direct sales) provision that could be viewed as promoting competition at the wholesale level. However, it actually stifled it. FERC subsequently described its authority under this provision as so limited as to be “virtually ineffective.” And in allowing utilities to wheel power, Congress expressly prohibited any wheeling orders that would upset existing competitive relationships.

FERC’s view of history is equally skewed when it comes to more recent events. For example, the commission pointed out that by 2000, 24 states and the District of Columbia had opted for some form of electricity restructuring—without mentioning that this trend has peaked and that dozens of states are now reconsidering rolling back deregulation.

The commission also conveniently failed to note that both the House and Senate were poised to kill FERC’s standard market design (SMD) rulemaking in the Energy Policy Act of 2005—an extraordinary step—and dropped anti-SMD provisions only after the commission itself terminated the rulemaking. Those moves may not represent a rejection of wholesale competition, but they should not be construed as an endorsement of competition in RTO organized markets, either.

Competition in name only

Congress recognized what FERC does not: that the complex centralized spot markets run by RTOs do not automatically foster competition. As APPA pointed out in its comments on the June 2007 NOPR, FERC conflates two very different things: past congressional actions it claims were intended to foster wholesale competition and the specific design of RTO-run centralized markets.

Harvard professor William Hogan, widely considered the father of RTO-run centralized markets, said in his comments to the NOPR that the basic design of the centralized RTO-run markets “assumes a workably competitive market without material monopoly power in ownership and operation of generating facilities.” Aren’t electricity markets important enough to warrant reforming them on the basis of something better than assumptions like those? Now that we have several years of experience with RTO markets, we should be testing the assumptions’ validity.

APPA has commissioned research to test those and other assumptions about market performance. Among other things, the research has found that studies claiming that RTO markets benefit consumers are not credible, that some companies are making huge profits selling into the RTO markets, and that rising natural gas prices are not the sole cause of high electricity prices. Although all of our research was filed with FERC, none of it was mentioned in the NOPR. Can FERC really believe that higher electric bills are entirely due to higher gas prices, despite clear evidence to the contrary?

Broaden the inquiry

All this would seem to be enough reason for FERC to launch a broad investigation into the performance of the centralized markets, rather than the narrow inquiry into four specific issues that the NOPR proposes: (1) the role of demand response in organized markets; (2) increasing opportunities for long-term power contracting; (3) strengthening market monitoring; and (4) the responsiveness of RTOs and independent system operators to customers and other stakeholders. At a recent PJM forum on long-term contracting, three state government representatives separately offered the same warning: The proponents of these markets need to fix them so that consumers, not just suppliers, begin to see benefits, or else states will begin taking drastic actions.

In its 2004 report, “Restructuring at the Crossroads: FERC Electric Policy Reconsidered,” APPA recommended that FERC find a way to make RTOs a boon, rather than a bane, to consumers. That would be a good place to start trying to fix the centralized markets. We won’t get there if we misread our industry’s recent history and ignore the problems in our current wholesale market structure.

—Alan H. Richardson is president and CEO of the American Public Power Association (www.appanet.org).