PowerFacts

McCullough Research Myths Versus Facts

Despite recent detailed market monitor reports finding independently-run regional wholesale electricity markets to be competitive, some opponents of competitive wholesale markets continue to call for unnecessary overhauls without factual justification. These competitive markets are relied on by 19.2 million residents of New York and 14 million residents of New England, among many others, to provide reliable and efficient electricity. Maintaining and incrementally improving these competitive markets are critical to ensuring efficient operation of existing supply as well as providing the incentives for innovation and appropriate new investment.

Portland, Oregon-based McCullough Research is distributing materials with unfounded charges and unjustified recommendations purporting to know more from afar about specific regional wholesale electricity markets than both those who actually administer them and the independent market monitors officially charged with overseeing them. Such unfounded criticisms and calls for complete reorganization of the wholesale markets do nothing but create uncertainty and upheaval at an already challenging economic time. Listed below in green are some of the charges made by McCullough, along with just some of the facts that show competitive wholesale markets are providing customers with the most efficient sources of electricity.

"The prices calculated at the New York Independent System Operator are not competitive." The New York Independent System Operator's Market-Clearing Price Auction Is Too Expensive for New York, p.4

The Independent Market Advisor for the New York ISO annually assesses the efficiency and competitiveness of New York's wholesale electricity markets, and according to the New York ISO 2007 State of the Market Report, the Independent Market Advisor "analyzed the competitive performance of the overall market in New York, as well as a number of constrained areas within the market. Based on the results of these analyses, we find that the markets performed competitively" -New York ISO 2007 State of the Market Report, p.ii-iii

A recent report done at the request of the New York ISO also noted that "McCullough fails to mention that New York's wholesale electricity spot markets are heavily regulated Consumers are protected by three levels of market monitoring and oversight: the internal market monitoring group within the New York system operator; an external consultant who monitors the markets; and FERC's Office of Enforcement." In addition, the New York Public Service Commission regulates "the state's investor-owned utilities' participation in these markets, as well as their processes and decisions through which they procure power supplies for consumers." - An Evaluation of the McCullough Research Report on New York's Wholesale Power Market, Prepared by the Analysis Group, p. 6

"Move consumer supplies back again to fully allocated, cost-of-service electric generating plants. This would produce savings of $2.273 billion or a nearly 10% reduction in the electric bill for each New York residential household." - The New York Independent System Operators Market-Clearing Price Auction Is Too Expensive for New York, p. 10

A return to cost-of-service regulation would be a mistake. As NYISO President & CEO Stephen G. Whitley testified before the New York State Assembly in March of 2009, "While the cost of fuel has driven the cost of electricity higher in recent years, the numbers here in New York show that, after adjusting for the cost of fuel, the markets have produced wholesale energy prices approximately ten percent lower than they were in the year 2000. In fact, if it had not been for the increases in the cost of fuel, competitive markets would have yielded wholesale prices for electricity, including both generating capacity and energy, 18 percent lower than in the year 2000, or over $2 billion on a current annual basis."

"ISO New England is neither competitive nor transparent, as two recent documents reveal. First, the 2007 Assessment of the Electricity Markets in New England by an independent market monitor shown below gives thirteen recommendations for a range of improvements, while indicating that not all are feasible in the short term. The recommendations are indicative of the complexity and expense of the current market design." - The Need for a Connecticut Power Authority, p. 8

This is completely contradicted by a full reading of the ISO New England report. "Based on our evaluation of the markets in New England (in both constrained areas and the broader market), we find that the markets performed competitively in 2007. We find little evidence that suppliers withheld resources to raise prices in the New England markets. Although energy prices increased in 2007, this was due primarily to increases in fuel prices and demand. Because fuel costs constitute the vast majority of the marginal costs of generation, higher fuel costs translate to higher offer prices and market clearing prices." - Assessment of the Electricity Markets in New England, p. 2 by the Independent Market Monitor for ISO New England

"We observe that the prices in New York are much higher than else-where in the U.S., and they are even higher than in the states that have adopted the ISO-administered 'market-clearing price' auctions."
"Fossil fuel costs, in particular natural gas costs, do not explain the differential between electricity prices in RTO and non-RTO states." - Why Are Electricity Prices in RTOs Increasingly Expensive? November 2008 Update, p. 3 & 8

Rates in restructured and non-restructured states have largely increased at the same percentage rate in recent years. This is consistent with independent analysis and as one report found: "The fact that rates in restructured states have increased approximately the same as rates in non-restructured states appears to be good news, considering the more pronounced increases in average fuel and labor costs. While it is correct that average rates in restructured states significantly are above the rates in non-restructured states, that was already the case in the mid-1990s, before these states were restructured-which helped cement support for restructuring efforts."

It should also be noted that rates in non-restructured states are experiencing recent precipitous increases among all customer levels as can be seen at

http://www.epsa.org/industry/index.cfm?fa=rateHike.

Studies have shown that a move to a pay-as-bid auction structure - as advocated by McCullough - is not in the best interests of the consumer. According to Professor Ross Baldick of the University of Texas at Austin, "A fundamental observation, however, is that a change in the pricing rule from single market clearing price to pay-as-bid would result in a change in the offers submitted to the market. From a practical perspective, there is no empirical or experimental evidence that pay-as-bid would reduce prices significantly compared to single clearing price. In fact, some evidence suggests that pay-as-bid would increase prices compared to single clearing price. The theoretical, experimental, and empirical evidence does not support a change to pay-as-bid." - Single Clearing Price in Electricity Markets, p.10

McCullough Research Myths Versus Facts

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.