PowerFacts

THE REST OF THE STORY ON ELECTRICITY RATES

"Electricity is a serious subject deserving of sober analysis and balanced news coverage. EPSA welcomes a national dialogue on how best to provide affordable, reliable and environmentally responsible electric power based on facts, not fiction, with solutions, not sensationalism. Sadly, once again, despite EPSA's best efforts, yesterday's New York Times article, "A New Push to Regulate Power Costs," came up short. This EPSA PowerFact and the attachment from a noted economist help to set the record straight."
John E. Shelk, EPSA President and CEO

<center>THE CENTERPIECE OF THE ARTICLE IS A FACTUALLY AND ANALYTICALLY FLAWED CALCULATION PURPORTING TO SHOW RATES RISING FASTER IN STATES WITH MORE, NOT LESS, COMPETITION</center>

• EPSA supplied the reporter with a detailed rebuttal from an expert at a major economic consulting firm on the absurdity of the claim that ratepayers in states with more competition and market-based rates could have gotten a better deal by somehow paying the average rate in states that retained traditional cost of service regulation. The article makes no mention of this well-reasoned rebuttal and the serious deficiencies it documents. To read what the New York Times apparently didn't want the public to know, click here for the report by the respected energy economist, the findings of which were supplied to the reporter days before the story was published.
• Any comparison of retail electric rates between states is fraught with peril because of the dramatically different fuel sources available or deemed desirable from region to region given that fuel costs are the primary driver of electric rates. For example, the author of the unscientific web entry cited in the article (Marilyn Showalter of Power in the Public Interest (PIP)) lives in Washington State, where rates are lower because of a high proportion of hydropower unique to the region, compared to consumers in areas like Boston, which are dependent as a matter of public policy and access on a much greater percentage of costlier fuels to generate electricity.
• PIP's and the article's state-by-state comparison is the product of data manipulation. PIP claims to compare states that "deregulated" with those that did not, yet by its own admission only looked at 12 "deregulated" states, classifying the rest as "regulated." However, this classification is at odds with the article's statement that half the states in the country and the District of Columbia have various levels of electric competition or "deregulation." Thus, based on the article's inconsistencies about which states did and did not pursue competition, a dozen states that rely on market forces and regional wholesale markets (e.g., Illinois, Pennsylvania, Ohio and New York) are misclassified by PIP as "regulated," thus seriously skewing the results.
• PIP's claims uncritically repeated in the article - that the electricity rate "gap" between states with more competition and those with less has been widening (and is caused by reliance on competition and market forces) is at sharp odds with two separate, independent, detailed analyses published earlier this year by the highly respected Public Utilities Fortnightly. EPSA referred the reporter to that scholarly work, but it was ignored.
• Unlike the article, PIP admitted the limitations of its work and thus what conclusions to draw. For example, PIP noted that, "This is not to say that deregulation is responsible for the whole gap, or that the gap can be closed" and also admitted that states with above average rates had them before competition. The article left them out.


<center>THE ARTICLE INCORRECTLY REPORTED ON THE TRENDS IN STATE-LEVEL DEVELOPMENTS, IMPLYING THAT EXCEPT FOR CALIFORNIA, STATES ARE TURNING AWAY FROM COMPETITION</center>

• The article mentioned the Illinois law signed by the governor last week without noting that the law expanded the scope of commercial and industrial customers placed in the competitive retail market and replaced how power is procured from the wholesale market; the legislation did not retrench from a primary reliance on the marketplace.
• In Connecticut, the state's utilities indeed sought a return to large scale utility self-built power generation in lieu of reliance on competition and market forces, but the legislature opted for a much more limited approach that preserves the competitive marketplace in that state.
• The article ignored information supplied to the reporter about serious moves toward a greater reliance on wholesale power competition in several states with cost-of-service regulatory models, including recent state-level decisions on how to meet their customers' power needs in Georgia and South Carolina that didn't fit the theme that states are moving away from power competition. Similarly, the article ignored information supplied to the reporter on an on-going joint federal-state regulatory project on competitive power procurement that will expand the range of competitive wholesale suppliers that could potentially build new power projects or otherwise supply electricity in these regions.


<center>THE ARTICLE MISCONSTRUED HOW WHOLESALE ELECTRICITY PRICES ARE REGULATED AND THE EXTENT OF VIBRANT COMPETITION IN MARKETS THAT SERVE TWO-THIRDS OF THE ECONOMY</center>

• The article repeated the past mistake of reporting on the competitive behavior of market participants only on the basis of academic theories and simulations, leaving out how competitive wholesale suppliers actually conduct business as confirmed by reports from independent market monitors and federal regulators. The artificial simulations identified in the article involving college students ignore the federal prohibition on market manipulation, significant monetary penalties for violations of these and other rules, and aggressive federal enforcement efforts that apply to professionals in the electricity business, most of whom are part of publicly-traded companies.
• If the article's trading theories were at all accurate, prices would always rise, not fall, in organized wholesale power markets. In fact, detailed reports from such leading organized competitive wholesale markets as those independently operated in New England, New York and California (summaries of which are available on EPSA's web site) confirm that wholesale prices went down from 2005 to 2006 as fuel input costs declined.
• The article completely misstated how the Federal Energy Regulatory Commission regulates market-based rates for wholesale transactions. For example, the article stated that FERC essentially "sets it and forgets it" once it determines that a market for electricity is in place. This is just not true. FERC requires every seller with market-based rate authority to regularly file extensive market data and then examines each participant in a given market to make sure that a seller cannot exercise market power. In addition, every organized wholesale power market has multiple "market mitigation" tools to restrain prices even for those without market power. If anything, there is too little reliance on market forces to determine appropriate prices at a time when policymakers expect the electric power sector and its customers to reduce peak electricity demand, expand electricity infrastructure, and reduce greenhouse gas emissions with new, cleaner technologies. These are all important goals that EPSA supports, but which realistically will require the investment of hundreds of billions of dollars and the discipline provided by market forces to reach in a timely and cost effective manner.

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.