March 2003

Washington Senator Introduces Bill to Force FERC to Stop Energy Market Manipulation

(March 19)  Saying federal regulators let consumers down, Sen. Maria Cantwell is unveiling legislation designed to prevent the type of energy market manipulation that may have cost Northwest ratepayers more than $1 billion.

The Washington Democrat's proposal comes as the Federal Energy Regulatory Commission continues to consider claims from the region's utilities, including Tacoma Power, that they are owed nearly $500 million in refunds from electricity marketers who manipulated West Coast energy markets during the 2001 energy crisis.

Cantwell's legislation would require the commission to boost oversight of energy markets, quickly order refunds if market manipulation is proved and significantly reduce the rates companies found guilty of market manipulation can charge.

Cantwell said her legislation would prevent the "rate gouging" that resulted in wholesale electric rates surging to more than 10 times normal levels in late 2000 and early 2001. The senator said Enron and other companies manipulated markets that were already chaotic because of a drought in the Northwest, a shortage of electricity throughout the West and California's troubled deregulation effort.

"FERC has failed to protect us," Cantwell said in a statement. "I am announcing this legislation to force FERC to take action because Washington ratepayers deserve relief from high energy costs."

Cantwell, a member of the Senate Energy and Natural Resources Committee, said her legislation might be folded into a national energy bill that may be considered in the next few months. Some versions of a national energy bill have called for national deregulation of wholesale electric markets.

Source: Tacoma News-Tribune

FERC Approves Midwest Transmission Market Monitor Plan

(March 18)  The Federal Energy Regulatory Commission said it conditionally approved the Midwest wholesale power grid's market monitoring plan, despite criticism that it does not include a price cap to prevent runaway prices when supplies are tight.

U.S. utilities, publicly owned generators and merchant suppliers have closely watched the Midwest Independent Transmission System Operator's (ISO) proposal to create an independent market monitor. The plan came before FERC at a time the agency has been trying to finalize its own rules to ensure fair competition and trading in all regional power markets.

The newly created Midwest ISO stretches across 15 states, controlling the flow of electricity over some 86,000 miles of power transmission lines from the Appalachians to the Rockies and into part of Canada.

FERC's three commissioners said in an order issued late Thursday that the Midwest ISO could proceed with its plan to create a market monitor, which does not include a ceiling to rein in runaway prices. The neighboring PJM Interconnection grid has a bid cap equivalent to a generator's variable costs plus 10 percent when supplies are stretched tight.

Several companies urged FERC to reject the Midwest ISO proposal unless it included a safety net for when the market is volatile. They argued the Midwest ISO and PJM must have compatible policies to facilitate moving electricity between the two grids.

FERC did agree to hold a technical conference at an undetermined date to discuss the "adequacy, interaction and timing of various market design elements" such as bid caps.

The Midwest ISO's plan would impose financial penalties on any generators found to physically withhold supplies from a tight market, beginning in December 2003.

The plan is modeled after one used by the New York ISO.

Source: Reuters

States Protest FERC Grid-Building Incentives

(March 18)  State regulators and industrial customers told the Federal Energy Regulatory Commission (FERC) that consumers should not bear the cost of billions of dollars of incentives FERC wants to offer utilities to join in its grid-building efforts.

In January, FERC said it wants to offer up to three extra percentage points to encourage U.S. utilities to join a handful of regional transmission organizations planned across the nation. If finalized, the new rules would reward between 50 basis and 150 basis points to a utility's rate of return on equity if it agreed to join a regional grid, or sell transmission assets to an independent operator. A utility could earn up to a maximum of 300 extra basis points.

FERC usually sets the returns on a case-by-case basis. But the new rules could allow utilities to collect a 15 percent profit margin on their grid assets -- three percent higher than the 12.38 percent rate approved last year for some Midwest grid assets. This is an eye-catching incentive at a time when some companies have been hit with credit downgrades and slumping stock prices.

More than 100 companies, state commissions and others flooded FERC with suggestions during the two-month comment period that ended March 13.

About a dozen state public utility commissions hailing from the West, South and New England criticized the plan, warning it could raise electric rates and offer redundant rewards for utilities that are already pursuing grid-combination efforts.

Cost estimates, however, varied widely.

According to the Louisiana Public Service Commission, a coalition of state consumer advocates estimated that the cost of the incentives to consumers is $13.5 billion over 19 years, or $711 million per year. Meanwhile, an independent consultant working for ICF Consulting said FERC's grid-combination effort could yield $725 million per year in efficiencies.

The Edison Electric Institute, which represents most large U.S. investor-owned utilities, said the maximum cost of such incentives is $20 million annually, assuming financing for the $4 billion in new projects built each year is split equally between debt and equity.

FERC has not said when it plans to finalize its proposed rules.

Source: Reuters

House Energy Bill Includes Electricity Title

(March 14)  With the goal of sending the legislation to the House floor by mid-April, House Energy and Air Quality Subcommittee Chairman Joe Barton, R-Texas, unveiled a draft comprehensive energy bill Feb. 28. With the notable addition of an electricity title, the 283-page draft bill is based largely on portions of last year’s House-passed energy bill (with compromise language reached by House-Senate conferees).

Although the draft bill addresses primarily issues under the Energy and Commerce Committee’s jurisdiction, its 10 titles address a range of issues, including energy efficiency and conservation; oil and gas production; hydro licensing reform; nuclear energy; Department of Energy research programs such as renewable energy and distributed generation; clean coal technology; vehicle fuel economy (including the president’s hydrogen car initiative); and a placeholder for ethanol.

The electricity title includes provisions to:

• repeal the Public Utility Holding Act
• repeal FERC’s merger review authority
• reform the mandatory purchase provisions of the Public Utility Regulatory Policies Act
• provide FERC with back-up siting authority for critical transmission lines
• direct FERC to issue regulations on incentive and performance-based rates for transmission, with a requirement that, upon the request of an RTO, new transmission facilities be participant funded
• require FERC to establish rules for improving transparency in wholesale power markets, ban round-trip trades with the intent to distort prices, and increase criminal and civil penalties for violations of the Federal Power Act
• authorize the Tennessee Valley Authority and federal power marketing administrations to join regional transmission organization (with language stating that, should RTO contract provisions conflict with any statutory duty, authority or obligation of a federal utility, the statutory provision would be suspended);
• direct FERC to issue rules establishing a mandatory reliability standards system; and
• reform the Renewable Energy Production Incentive program, which provides payments to consumer-owned utilities for generating power using renewable resources.

The electricity title in the draft also includes a variation on "FERC-lite" language granting the commission partial jurisdiction over interstate transmission service of public power utilities, rural electric cooperatives and federal utilities. However, the Barton draft also provides that voluntary sales into spot markets — including sales by consumer-owned utilities — are subject to commission-ordered refunds.

The House Resources Committee is expected to attach to the energy bill language to allow drilling in the Arctic National Wildlife Refuge.  Also, the Ways and Means Committee will consider energy-related tax provisions that could be added to the legislation.

Source: American Public Power Association

National Director of Rural Electric Cooperatives Calls for Time-Out on Electricity Legislation

(March 5)  Glenn English, chief executive officer of the National Rural Electric Cooperative Association, recently voiced concern about the congressional leadership's timing and content of national legislation to restructure the electric industry.

Speaking at the NRECA’s national convention, attended by 12,000 representatives from the nation’s rural electric cooperatives, English said that Congress should take a "time-out" on electricity regulation: "They should take time to review the failed deregulation schemes of recent years and adopt a new approach, one that brings reliability and stability to an industry under fire -- reliability and stability for investors and consumers."

English questioned the wisdom of Congress legislatively undercutting the authority regulators already have. Specifically, he said, Congress must not:

• Require the commission to adopt incentive transmission rates that increase the cost of electricity to consumers without improving service.
• Codify an inflexible approach to funding needed new transmission infrastructure that discourages critical investment and reinforces existing market power.
• Deprive FERC of its existing authority to ensure utility mergers are in the public interest.
• Distract FERC from its core mission by unnecessarily expanding its jurisdiction over consumer-owned utilities.

NRECA is the national service organization that represents the nation's more than 900 consumer-owned electric cooperatives, which provide electric service to more than 36 million people in 47 states.

Source: PR Newswire

Despite Chaos, Power Deregulation Still Supported

(March 5)  Deregulation of the U.S. electricity market sowed far more pain and chaos than its proponents could possibly have foreseen, but energy experts say the badly tarnished effort still has merits.

"You would be hard pressed to say consumers are better off today after the restructuring of the electric markets. We made a lot of mistakes," said Ken Malloy, chief executive of the Center for the Advancement of Energy Markets, a think-tank that advocates the deregulation of energy markets.

In the 1980s, power-intensive industries like aerospace manufacturers in California threatened to move factories unless state regulators allowed them to sidestep local utilities to tap cheaper energy from neighboring states.

In an effort to preserve jobs and tax revenues, states adopted deregulation on the promise of turning an inefficient, tightly regulated market over to the laws of a free market, in turn bringing down power prices through competition.

Under the old system, states regulated prices based on the average cost of generating electricity 365 days a year. That resulted in artificially low prices in the summer, when power demand for air conditioning peaks, and artificially high prices the rest of the year, when demand is lower.

"The old system provided no incentives for consumers to conserve energy because they paid the same price at all times of the year. But by charging real prices, people would reduce their usage as prices rise," said Tim Brennan, professor of policy sciences and economics at the University of Maryland, Baltimore County, who specializes in electric restructuring.

For customers in the western United States, deregulation had devastating effects during the winter of 2000-2001. It triggered a tenfold jump in prices, sent California's biggest utility into bankruptcy and left residents without electricity during rolling blackouts.

In the East, there was a more orderly transition to a deregulated wholesale market.

Industrial and large commercial businesses, like auto manufacturers and department stores, have benefited the most as energy marketers have competed to offer cheaper electricity and services to these large customers.

Very few energy services companies, however, are competing to offer electricity to homeowners because they cannot compete with the still-regulated, low rates offered by the utilities.

"It remains to be seen whether (deregulation) will ever be worth a dime for homeowners. We're still years away from having energy services companies that provide the total energy needs for the home -- light, heat and air conditioning -- at a set price, like some ESCOs are now providing to their corporate clients," Brennan said.

Source: Reuters

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