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Spring 2003

Lessons Learned From Electricity Restructuring
The GAO Report, December 2002
http://www.gao.gov/new.items/d03271.pdf

This report is the result of a request from the House Subcommittee on Government Efficiency, Financial Management, and Intergovernmental Relations and the Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs to help Congress evaluate the state of electricity restructuring. The subcommittees asked the General Accounting Office (GAO) to determine (1) the goals of electricity market restructuring, (2) federal and state actions taken to restructure the electricity industry, (3) to what extent these actions have achieved the goals of restructuring, and (4) lessons learned from electricity restructuring efforts to date.

Basically, the GAO notes, the goal of restructuring the electricity industry is to increase the amount of competition in wholesale and retail electricity markets. Increasing the amount of competition requires structural changes to the electricity industry to allow more sellers and buyers to enter the electricity market. Competition is expected to produce benefits for consumers, including lower prices and a wider array of retail services, by increasing the efficiency of wholesale electricity generation and encouraging innovations in retail electricity services.

The GAO reports that it could not fully determine the current extent of competitive market development—one goal of restructuring—in wholesale markets and in the 24 states that have restructured (along with the District of Columbia). The agency’s review of relevant studies found a mixed assessment of how well competitive markets have developed and expected benefits achieved. Most studies found some progress in introducing competition in wholesale electricity markets, but the benefits of restructuring for retail customers have been difficult to measure.

The GAO’s own evaluation of restructuring is also inconclusive. It notes that while restructuring efforts by the federal government and the states have broadened electricity markets by making them more regional and allowing new generation companies to participate, questions remain about how competitive these markets really are. For example, while consumer prices have generally fallen since restructuring began—and more so in states that are restructuring than in non-restructured states—the falling prices continue a trend that began prior to restructuring, making it difficult to determine the precise role restructuring has played. In addition, the extent of expected benefits is uncertain, in part because restructuring is in the early stages of development.

The most important lessons to be learned from restructuring experience to date involve the structure of electricity markets and market oversight, according to the GAO, including: (1) the existence of different rules in electricity systems, (2) FERC’s limited jurisdiction in wholesale markets, (3) the separate development of wholesale and retail electricity markets, (4) federal, state, and local decisions on siting new power plants and the transmission infrastructure, and (5) the importance of better monitoring of restructuring.

GAO Recommendations

To help ensure the fullest benefits from electricity restructuring, and to better understand what progress has been made, the GAO recommends that the Federal Energy Regulatory Commission:

1. Collect data that would allow evaluation of market competitiveness (including, but not limited to, the extent of market power, efficiency of the industry, and ease of market entry) and the expected benefits to retail consumers (such as lower retail prices and the availability of new products).

2. Report annually to Congress and the states on the status of restructuring efforts, identify emerging issues and impediments to reaching FERC’s goal of achieving national competitive wholesale electricity markets, and recommend changes that will improve the functioning of these markets.

The GAO provided FERC with a draft of its report for review and comment. The commission agreed with the report’s principal findings and "lessons learned" and with the recommendation that FERC should report annually to Congress on the status of restructuring, noting that it plans to do so in the spring of 2003. However, FERC said that the recommendation directing it to determine how both wholesale and retail markets are performing is more problematic, largely because of the jurisdictional division between states and FERC—states have jurisdiction over retail and FERC over wholesale electricity markets.In addition, FERC stated that it does not have the resources or expertise to evaluate retail markets.

In response, the GAO says that it is not recommending that FERC step outside its jurisdictional boundaries or attempt to assume responsibility for the status and effectiveness of retail restructuring efforts. The agency revised the language of the recommendation to state that FERC should evaluate the impacts of wholesale market restructuring efforts on retail electricity consumers.

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