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FERC Dismisses Return To Re-regulation Despite Setbacks

Posted by Fereidoon P. Sioshansi on the April 10th, 2008

From the March 2008 issue of EEnergy Informer.

Competition in electricity markets has not been a stellar success in the US, but that does not mean returning to regulation would be any better.

Disappointed with performance of competitive electricity markets, some politicians are in favor of returning to more regulatory oversight (US Electricity Market: Is It Broke And Can It Get Fixed? Jan 07). A case in point is the current debate in Connecticut, where proponents of re- regulation point to the results in a report prepared by Power in the Public Interest (PPI) as evidence that competition has failed to deliver the expected results, suggesting it would be better to increase regulatory control.

The report points to selective evidence indicating that consumers in states with deregulated energy markets – such as CT – pay considerably more for electricity. The PPI analysis found that in states that deregulated power generation in the last decade, consumers on the average pay 4.4 cents more per kWh for electricity than those in states with regulated markets. In CT, the difference is more pronounced with consumers paying 8.4 cents more per kWh, or $2.8 billion a year, according to the PPI report.

“The theory [of deregulation] is wrong,” said Marilyn Showalter, executive director of PPI. “It is not just the theory is right and it didn’t work.” Not everyone, of course, agrees with the study’s analysis or its conclusions. Chris Kallaher, director of government and regulatory affairs for Direct Energy, a retail supplier said, “There are some fatal flaws with the (PPI) analysis.”

Flaws or not, the results are good enough for Steve Fontana, co-chairman of state legislature’s energy committee and its vice chairwoman Vickie Nardello, who are advocating more state control over electricity prices. While not in favor of returning to full regulation, they support taking a “few steps” to reverse the 1998 law that required utility companies in CT to sell their power plants and buy electricity on the open market.

Connecticut, of course, is not the only state where such issues are currently being debated. Trying to put an end to these arguments, the chairman of the Federal Energy Regulatory Commission (FERC), Mr. Joseph Kelliher, recently declared that the US “isn’t going to change its policy of allowing competitive markets to determine prices.”

Speaking at the CERA Week, organized by Cambridge Energy Research Associates (CERA) in Houston in mid February, he said, “Our goal at FERC is perfect competition, textbook competition. Competition that is so perfect and beautiful it would make an economist weep.”

He pointed out that, “Competition isn’t driving prices higher. Rising fuel costs are driving utility bills up,” adding, “Calls to re-regulate the market are actually calls to cut fuel prices. And regulators can’t do that. The country has become more dependent on expensive natural gas for power generation (see lead article in this issue). That’s not likely to change, as US power companies try to quickly build enough generation to meet growing demand, without risking getting smacked down by coming greenhouse gas regulations.”

Responding to calls by those state regulators who are not entirely happy with how competitive electricity markets have fared, he said FERC did not want to “step out of the electricity markets entirely,” or “to (further) deregulate, but to create a balance between rules and competition.” Echoing the FERC chairman, Donald Evans the CEO of Energy Future Holdings, formerly TXU, said, “Competition is working. Competition is the secret to our economy. It’s why America is the marvel of the world.”

Strictly speaking, FERC has little to say or do when it comes to state-level regulation of electricity markets – which are the prerogative of local legislatures. But nevertheless, what FERC says does matter and is noted.

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