Opposition to FERC proposal reflects fundamental economic characteristics, consumer report contends

Washington, DC, Oct. 8, 2002 — The opposition being voiced to the Federal Energy Regulatory Commission’s (FERC) proposed Standard Market Design (SMD) by elected officials, regulators and consumer groups in the West and South reflects the unique nature of supply and demand in those regions, a report released today by the Consumer Federation of America concluded.

Rejecting claims that the West and South are protecting parochial interests like cheap power or local monopoly utilities, the report — entitled “An Economic Explanation of Why the West and South Do Not Want to be Infected with FERC’s SMD” — argues that there are sound economic reasons these areas have decided to limit the role of markets in the electric utility industry.

The report was released Oct. 2 at the FERC Staff Conference on Market Monitoring.

“The FERC is trying to impose an economic model from the Northeast on the South and West,” Dr. Mark Cooper, CFA’s Director of Research, said, “but it just does not fit. The hot weather in the South and the reliance on hydro power in the West would expose consumers in those regions to much greater risk than in the Northeast, if they are forced into the volatile spot markets FERC is touting.”

“Two years of drought, for example, would lead to reduced hydro-electricity production and an increased need to purchase supplies on the spot market,” Cooper said. “FERC’s theoretical market model cannot handle this resource well, but hydro constitutes almost 40 percent of the capacity in the West.”

“The severe, hot climate of the South would expose consumers there to a much greater risk of overcharges because supply and demand are ‘tight’ a larger percentage of the time,” Cooper said.

The report estimated that if FERC’s auction works the way it is designed to, it would still lead to a 50% increase in the wholesale price of electricity because of the unique nature of supply and demand in the South.

The report argues that because deregulation of markets in the West and South would provide opportunities for transmission owners and power generators to exploit and manipulate the system, it is especially important to consumers in these regions for the FERC to have a highly developed and credible plan for preventing abuse.

Such a plan requires a clear definition of abuse, strong penalties, and a vigorous enforcement mechanism.

According to the report, in the FERC design, the agency defines market power with a complex array of potentially conflicting measures that could lead to indecisiveness. The report also said that FERC has not yet adopted a precise benchmark cost standard, based on the actual cost of production, against which overcharges should be measured. In addition, it contends that penalties are left to transmission organizations that haven’t yet been formed.

The report claims that FERC’s handling of the California crisis has destroyed its credibility as a consumer protection agency and it has done little to restore confidence in its abilities to enforce the law.

“FERC’s own studies show that there is little to be gained from reliance on market-based regional transmission organizations,” states Dr. Cooper. “This paper shows that in the South and West, there is a lot to be lost in terms of increased prices and monitoring to prevent market abuses is not the solution.”

The paper calls for FERC to go back to the drawing board and unravel the market manipulation that took place in the West, returning the tens of billions of dollars that it said were stolen from consumers by manipulation of the market.

The full report is available at http://www.consumerfed.org/westsouth.pdf.

The Consumer Federation of America is the nation’s largest consumer advocacy group, composed of two hundred and eighty state and local affiliates representing consumer, senior, citizen, low-income, labor, farm, public power and cooperative organizations, with more than fifty million individual members.

CFA is online at www.consumerfed.org.

Source: The Consumer Federation of America

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