PowerFacts

LATEST FROM THE TIMES: BALANCED STORIES ON COMPETITION NOT FIT TO PRINT? (EPSA PowerFact)

“Here again we have a narrow, one-sided presentation of a complex subject that requires a much broader study than the reliance on work of a handful of individuals without opposing views being presented. A balanced and comprehensive series would describe the various state and federal regulations that govern the industry and prevent the conduct alleged, as well as the number of studies from various economists, both in government and non-governmental organizations, that prove competition’s continuing benefits to consumers. Despite written assurances from the reporter following earlier stories that the series would presumably become more balanced in later installments, today’s diatribe does a disservice to the readers of The New York Times. The lack of a single quotation from anyone within the competitive power sector itself speaks volumes.”

John E. Shelk
President and CEO, Electric Power Supply Association
November 21, 2006

The Rest of the Story, Or What The Times Should See Fit to Print

1. The singular and misguided focus of the entire series has been the allegation that electricity markets have failed in restructured states because prices have not fallen as they did for other commodities subject to competition. EPSA has repeatedly said that if falling prices is the benchmark for success, then in an era of record fuel input prices, all electricity regimes (restructured and vertically integrated monopolies) fail and will continue to do so. The article ignores the rate increases everywhere.

2. The article devotes one sentence – buried in the middle of the article – to what data shows is the real reason for higher electricity rates, namely higher fuel prices. The basic thesis of today’s article is that electricity rates are only rising in states with a market approach and rising because of illegal conduct such as withholding of power during peak times and other gaming by electricity generators, marketers and traders. That assertion is patently false, again by rising rates and cost overruns in cost-of-service states.

3. Electricity rates are rising in restructured states and those with cost-of-service regulation alike. In fact, the gap between restructured and cost-of-service states is narrowing, as documented in an article in the current issue of Public Utilities Fortnightly. EPSA shared this information with The New York Times’ reporter. Instead, the reporter focused exclusively on selective critics, many of whom made deals for below market power whose costs were subsidized by residential and commercial customers under traditional cost-of-service rate regulation, but not under restructuring.

4. Fuel-adjusted electricity rates in constant dollars have actually fallen in restructured states, as documented by studies in a variety of states and regions, including New England and New York. EPSA shared this information with The Times, as well, and it has yet to be reported. For those who wish to truly understand electricity issues, EPSA recommends the November 14, 2006 op-ed in The Pittsburgh Post-Gazette by John Hanger, a former member of the Pennsylvania Public Utility Commission, appropriately titled, “Private Sector: Energy reporter, educate thyself” with the sub-headline, “Electric deregulation has been a bargain for consumers, but you wouldn’t know it from reading the press.”

5. The article is further contradicted by a study released this week by PJM documenting the substantial consumer savings from the very organized electricity markets that the article criticizes.

6. While the article claims that prices have been kept artificially high on a constant basis, there have been several findings that generators in the competitive markets are not recovering sufficient revenue to remain operational or to encourage new investment. Regulatory instruments to ensure sufficient recovery (i.e., capacity markets) are being implemented to resolve that problem.

7. The reporter continues to demonstrate a fundamental misunderstanding of how electricity is purchased across the country and within certain regions. It is simply false to assert that utilities in the restructured states such as New York, California, Connecticut, Illinois, Maryland and Texas, “must buy power every day.” That misstatement, combined with the one-sided description of the single-price auction used for short term sales, suggests that market design is why prices have gone up. If that were true, prices would not also be going up, as they are, in states and regions without that market design. Furthermore, only a portion of the electricity used to serve consumers is purchased on that short term basis. States employ a variety of competitive bidding mechanisms, including longer-term auctions, just as they do when procuring other goods and services for state governmental purposes.

8. There appears to be no factual basis for Robert McCullough’s implications in the article related to outages in California. Industry officials are unaware of documentation of the charge that generation was offline in July 2005. Furthermore, the claim is contradicted by the supply and price data for the record and unexpected peaks reached on multiple days during this past summer’s heat wave. If 20 percent of generation was offline, it occurred during a period in which that generation was unnecessary, with no impact on the market, likely the result of forced outages. Mr. McCullough is affiliated with lawsuits stemming from the California Energy Crisis years ago. The article states that lawsuits contend “prices are being manipulated,” but based on the vague reference in the article, research shows his involvement is in cases based on events five to six years ago, and do not reflect today’s market conditions and the extensive changes made to the federal and state enforcement and penalty regimes since the California crisis.

9. Market manipulation is illegal, is policed within the industry, and is heavily enforced by state and federal regulators. The article paints an entire industry, and the regulators who oversee them, with a tainted and slanderous brush. The Times reports hypothetical scenarios absent an enforcement mechanism, but offers no evidence of manipulation by any one company. A final rule issued in January 2006 by the Federal Energy Regulatory Commission (FERC), under the authority of the Energy Policy Act of 2005, makes the actions described in today’s article illegal, and establishes broad, severe prohibitions and penalties. FERC has the authority to fine companies up to $1 million per day, per violation. EPSA members’ own Code of Ethics and Sound Trading Practices for Electric Power Suppliers explicitly states: “No unlawful withholding.”

10. Under FERC order, any entity selling power at market-based rates must pass an extensive analysis process at the Commission. This analysis, which includes tests for pivotal supplier status and market share, tests for both monopoly and oligopoly power, despite the article’s claims to the contrary.

11. The article demonstrates an uninformed and unfair hostility toward regulators and market monitors that was palpable in EPSA’s first and only extensive interview with The Times’ reporter months ago. The reporter was dismissive of FERC and its enforcement staff. Additionally, the entities involved in these markets are largely publicly traded companies that would not risk their licenses to do business and their strong corporate reputations, to say nothing of FERC’s new enforcement authority.

12. The assertion that FERC “stymied” investigations into allegations of improper conduct by “withholding some of the data it collects” is misleading. In fact, it is essential to well-functioning markets that regulators observe legal and legitimate protections for certain business and proprietary information. This point also applies to the reporter’s assertion that FERC and “electricity exchanges stamp many trading records confidential.” The article incorrectly suggests that price information is not available in organized electricity markets, when in fact extensive price data is available from a variety of public sources. The article failed to note that much less data is available in states with cost-of-service regulation.

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.