PowerFacts

EPSA RESPONDS TO FIRST INSTALLMENT OF NEW YORK TIMES SERIES (EPSA PowerFact)

“Despite our best efforts to communicate with its reporter to help ensure that The New York Times would print a fair series about restructured electricity markets, last Sunday’s story represents a one-sided view of how competitive markets are developing and of their successes to date. The North American Electric Reliability Council affirmed on Monday that competitive suppliers will play a critical role in helping meet the nation’s increasing demand for electricity. We trust that the Times’ future stories in this series will take that into account, and present both sides of the ongoing debate.”

John E. Shelk
President and CEO
Electric Power Supply Association (EPSA)
October 18, 2006

EPSA’s Responses to Assertions Made in the New York Times Article, “Competitive Era Fails to Shrink Electric Bills,” (David Cay Johnston, October 15, 2006)

NYT:

“About 40 percent of all electricity customers — those in 23 states and the District of Columbia where new competition was approved — mostly paid modestly lower prices over the past decade. But those savings were primarily because states, which continue to have some rate-setting power, imposed cuts, freezes and caps at the behest of consumer groups that wanted to insulate customers from any initial price swings.”

EPSA:

As the Times states: “The disappointing results stem in good part from the fact that a genuinely competitive market for electricity production has not developed.”

In the early years of restructured markets, natural gas prices were far lower than they are today. Coal prices have also risen dramatically. Caps with artificially reduced rates do not represent the true essence of competition or actual cost-based rates. We agree that true competition has not been allowed to develop – certainly not to the extent of phone, air travel and trucking – thus, the comparisons to them are not relevant.

If the yardstick for any system – some form of competition or traditional regulation – is whether prices have gone up (failed) or down (succeed), then both systems have and will fail. Most, if not all of the states that sought and ultimately approved measures restructuring their electricity markets did so because of already traditionally high rates. Artificially reduced rates do not, however, reflect rising input costs and are therefore not sustainable.

NYT:

“The last of those rate protections expire next year, and the Federal Energy Regulatory Commission and other federal agencies warn in a draft report to Congress that “customers may experience rate shock” as utilities seek to make up for revenue they did not collect during the period of artificially reduced prices and to cover higher costs of fuel. They warned that “this rate shock can create public pressure” to turn back from electricity prices set by the market to prices set by government regulators.”

EPSA:

The writer clearly has not researched caps and their impacts fully. Not all rate caps expire next year. For example, both Virginia’s and Rhode Island’s caps expire at the end of 2009.

Companies are not allowed to make up for any perceived lost revenue. What companies today are seeking is to recover costs currently incurred. Rate increases in restructured – and non-restructured – states are a result of the current input costs (fuel, transportation, labor and taxes).

NYT:

“Joseph T. Kelliher, the commission chairman, said Friday that eventually “market discipline will deliver the best prices” and noted that every administration and Congress since 1978 had pushed the industry toward competition. He added that the commission recognized a need for “constant reform of the rules.”

EPSA:

FERC is responding to that need by, for example, reforming Order 888 to ensure non-discriminatory open access to transmission that will help meet the nation’s future electricity demand by giving customers access to more affordable electricity. The article did correctly point out that utilities owning generation and transmission do not always buy, as the writer referred to it, the “cheapest” power.

NYT:

“The new rules ‘will benefit the industry and consumers to the tune of billions of dollars every year,” Elizabeth A. Moler, then chairwoman of FERC, said at the time. She said the new rules would “accelerate competition and bring lower prices and more choices to energy customers.’ But that has not happened. A truly competitive market has never developed, and, in most areas, the number of power producers is small. In New Jersey, for example, only six companies produce power, and not all of them sell to every utility. Some utilities have decided to buy electricity not from the cheapest supplier but from one owned by a sister to the utility company, even if that electricity is more expensive.”

EPSA:

EPSA agrees that a “truly competitive market” has not developed, but the article failed to explain why. There have been more than 10 years of legislatively mandated price caps and other limitations on market forces. FERC has recognized that further reforms are necessary, such as an update of Order 888. FERC recently issued a unanimous decision on the proposed settlement of a Southern Company affiliate abuse case that included measures providing access to back-up power to “all similarly situated” generators.

The description of New Jersey indicates a fundamental misunderstanding of how regional electricity markets operate. New Jersey has access to the broader PJM market – access that will only grow if transmission lines to move power west to east are built. In addition to generators of power, there are marketers to expand the scope of potential suppliers. A return to monopoly regulation means one supplier. How is that an improvement?

NYT:

“Under the new system there have been some big winners — including Goldman Sachs and the Carlyle Group, the private equity firm — that figured out that there were huge profits to be made in one area of the new system. Such investors have in some cases resold power plants they just bought, making a large profit. In other cases, investors have bought power plants from the utilities at what proved to be bargain prices, then sold the electricity back at much higher prices than it would have cost the utility to generate the electricity.”

EPSA:

Competitive suppliers that have realized profits from the sale of previously-owned power plants have been able to do so in large part because of the efficiency gains that a competitive market demands. Decreases in refueling times at nuclear plants and lower heat rates at coal plants, along with an increase in capacity factors, are the signs that competitive market forces have pushed competitive power producers to streamline operations in an effort to be the lowest cost producer. These efficiencies ultimately are reflected in beneficial rates for consumers.

The article only referred to the transactions in which sellers made a profit. It failed to mention instances when competitive suppliers assumed the risk instead of the ratepayers. Under monopoly regulation, bad investments are borne by consumers.

A 2005 study by Global Energy Decisions, “Putting Competitive Power Markets to the Test,” examined the effects of competition on improvements in efficiency for coal plants and nuclear plants from 1995-2004. Coal plants realized a net efficiency gain of 16% during that period. Nuclear plants improved efficiency by 17% during that same period. Such efficiency gains translate into enough supply to power 10 millions homes for one year in the case of nuclear power and 25 million homes for one year in the case of coal plants (there are three times as many coal plants as nuclear, thus more efficiency gains).

NYT:

“The Federal Energy Regulatory Commission and five other agencies, in the draft of the report to Congress, are unable to specify any overall savings. ‘It has been difficult,’ the report states, ‘to determine whether retail prices’ in the states that opened to competition ‘are higher or lower than they otherwise would have been’ under the old system.”

EPSA:

A 2005 study by Cambridge Energy Research associates (CERA) was able to quantify the savings in retail rates for restructured regions. The study, “Beyond the Crossroads, the Future Direction of Power Industry Restructuring,” found that “U.S. residential electric customers paid about $34 billion less for electricity they consumed over the past seven years than they would have [paid] if traditional regulation had continued.” In particular, the CERA report found that the highest per-unit savings occurred in the Northeast – one of the regions which moved the furthest toward competition.

NYT:

“But critics say that, as in California five years ago in a scandal that enveloped Enron, the auction system can be manipulated to drive up prices, with the increases passed on to customers. What is more, companies that produce electricity can withhold it or limit production even when demand is at its highest, lifting prices. This happened in California, and the federal commission has found that it occurred in a few more instances since then. Critics say that more subtle techniques to reduce the supply of power are common and that the commission shows little interest in investigating.”

EPSA:

The reference to Enron in this regard is misplaced. The trading scandals at Enron, for which people are deservedly being punished, did not involve the type of state-supervised power auctions at issue in states like Maryland, Illinois and New Jersey. New market conduct rules issued by FERC, which carry substantial penalties of up to $1 million a day, are now in place, yet are never mentioned in the article.

NYT:

“In Virginia, a state that did not move to the new system, a report last month by the agency that regulates utilities found ‘no discernible benefit’ to customers in the 16 states that had gone the farthest and warned that electricity prices in those states ‘may actually be increasing faster than for customers in states that did not restructure.’”

EPSA:

The writer chose to cite a flawed report prepared for the state of Virginia, even though he was supplied with EPSA’s detailed rebuttal. He also chooses to ignore the reports prepared by other states about their own markets in favor of Virginia’s opinion on the success in those states. The Rose/Meeusen review within the Virginia report suffers from sweeping and unsubstantiated allegations without supporting evidence. The report is even internally inconsistent: statements and data in the report undermine claims elsewhere that imply that Virginia and other states would be better off abandoning restructuring and power purchases from wholesale markets. The Virginia report confirms but glosses over the fact that retail electricity rates have also increased greatly in traditionally regulated states. For example, from 2000-2005, rates rose by

• 46.7 percent in Oklahoma,
• 37.4 percent in Georgia,
• 67.3 percent in Louisiana,
• 53.1 percent in Mississippi, and
• 43 percent in Colorado.

A rate-gap between those that pursued a competitive model and those that did not existed well before restructuring. In addition, the gap between restructured and non-restructured states is shrinking.

CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660

EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.