Consumer group criticizes FERC for inaction

By the OGJ Online Staff

HOUSTON, Mar. 20�When cheap gas disappeared so did the benefits of electricity restructuring, warns an economist for the Consumer Federation of America in a new assessment of what's gone wrong in the market.

"Gone are the fanciful claims of 40% savings that were used to sell electricity restructuring to the public," said Mark Cooper, director of research for the Washington, DC, based organization.

"Rather than bring dramatic new innovation to the market and efficiency to the market, many of the entrants seem to have based their business models, and policymakers based their projections of consumer savings, on the ability to sell electricity powered by cheap natural gas."

Cooper said the Federal Energy Regulatory Commission bears much of the blame for flaws in the market. In California, he said, FERC failed to reasonably analyze the market before it deregulated. It treated the state as one big market, he said, when it is evident there are distinct and separate north-south markets because of a capacity constraint.

FERC failed to identify load pockets that would be constrained at peak times, and it deregulated ancillary services, even though the federal agency was warned market power existed in those markets. And FERC accepted on faith "must run" plants would mitigate market power without "any concrete plan to do so," Cooper said.

Moreover, FERC has "wasted years on voluntary approaches to forming independent, responsible transmission organizations that must be a cornerstone of the interstate market," Cooper said. And because of FERC's "remarkably permissive" merger policy, Cooper said, national and regional markets have become much more concentrated.

From the start of the deregulation debate, Cooper said, consumer advocates warned the fundamentals of electricity service make it virtually impossible to create orderly retail markets benefiting residential consumers. Cooper said in a network industry individuals cannot create their own reliability or capture its full value in private transactions.

"Denial of access to the service results in deprivation," he said. Electricity cannot be economically stored, has no substitutes, and requires perfect, instantaneous balance. Cooper pointed out rigorous real-time physics of the electricity network make it susceptible to disruptive accidents.

Surplus generation and transmission capacity are not generally available and take long lead times to build, and in a deregulated market, Cooper said, no one wants to take responsibility for building excess capacity.

"Since it takes so long to add capacity and capacity additions are so visible, it is easy to avoid the excess long-term capacity," he said. Inelasticity and weather-sensitivity of demand make electricity prone to severe peaks and programs to rapidly shed load have not been developed, he noted.

Cooper said premature deregulation led to profit maximization that tightened electricity markets by reducing supplies, limiting reserves, eliminating back up requirements, undercutting conservation programs, and preventing facilities from being built.

The small number of suppliers and the tendency for electricity product and geographic markets to be highly restricted in time and space made the exercise of market power and the implementation of gaming strategies that drive prices up easy to execute, Cooper said.

Price spikes produced huge windfalls with suppliers exhibiting OPEC-like behavior in which supplies are reduced, Cooper said, not increased, as prices rose.