Friday, September 21, 2007

Marketizer Revisionism: FERC Reinvents Itself as Overseer of Markets, Abandoning Review of Utility Rates

Traditionally, reasonableness of wholesale electric rates has been determined by some measure of cost and the level of utility profit, neither of which have been matters of much concern to FERC lately. This is because FERC is attempting to substitute competition and markets for price regulation. In essence, FERC prefers to be more like the SEC, which polices the stock markets, generally without concern about reasonableness of the price of any particular stock on any day.

Unlike the SEC, however, Congress requires all utility rates and charges for wholesale electricity and interstate transmission under FERC jurisdiction to be "just and reasonable." The Federal Power Act also declares that any unreasonable utility rates are illegal. Congress charged FERC with the duty to enforce the reasonableness requirement and gave it the power to review utility rates for reasonableness before they are implemented, and to revise current rates prospectively if they become unreasonable.

FERC's shift in emphasis from rate regulation to market oversight was clearly stated in a five-year plan adopted in 2002, which explicitly states its goal is to "foster nationwide competitive energy markets as a substitute for traditional regulation." A key assumption of FERC is that so long as the market cannot be skewed by any single seller, a market rate will be a reasonable rate. This becomes justification for not reviewing the rates and not providing effective refund remedies when a market rate is excessive and unreasonable.

Today, there is growing public and judicial disenchantment with FERC's market rate regime. See More Doubts About FERC's Market Rate Regime From Ninth Circuit.

FERC is now more circumspect and less direct in public statements about replacing traditional regulation with markets and competition than it was in 2002, but the effects of the agency's direction and recent actions remain the same: oversight of utilities and their charges for electric service is being reduced. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed.

In a recent rule making proceeding, FERC invoked a court decision to support its emphasis on market structure and competition rather than oversight of the level of rates set in the markets:
The Commission’s core responsibility is to “guard the consumer from exploitation by non-competitive electric power companies.”[citing National Association for the Advancement of Colored People v. FPC, 520 F.2d 432, 438 (D.C. Cir. 1975), aff’d, 425 U.S. 662 (1976)]. The Commission has always used two general approaches to meet this responsibility—regulation and competition. The first was the primary approach for most of the last century and remains the primary approach for wholesale transmission service, and the second has been the primary approach in recent years for wholesale generation service.
One might observe that in recent years, FERC's "primary approach" of relying on markets to set utility rates results in market manipulation, consumer exploitation, and many billions of dollars of wealth transfer from consumers to essentially deregulated "competitive" generators, marketers and energy traders like Enron. Also, since its enactment in 1935, the Federal Power Act has permitted sellers and buyers to set prices in contracts, so long as the contract prices, terms and conditions were just and reasonable and non discriminatory. FERC has eased up on review without authorization from Congress to change the regulatory system. The major deviation is to eliminate the statutory transparency requirements which require public notice by filing of all rates and contracts affecting rates in advance.

Interestingly, the snippet FERC quoted from the decision of the Court of Appeals in National Association for the Advancement of Colored People v. FPC, was not adopted by the Supreme Court when it reviewed the case. Instead, in its discussion of the statute's purpose, the Supreme Court said:
In the case of the Power and Gas Acts it is clear that the principal purpose of those Acts was to encourage the orderly development of plentiful supplies of electricity and natural gas at reasonable prices. **** 16 U.S.C. § 824a (a) (The purpose of the Power Act is to "assur[e] an abundant supply of electric energy throughout the United States with the greatest possible economy"); Pennsylvania Power Co. v. FPC, 343 U.S. 414, 418 ("A major purpose of the [Power] Act is to protect power consumers against excessive prices"); FPC v. Hope Gas Co., 320 U.S. 591, 610 (The "primary aim" of the Natural Gas Act is "to protect consumers against exploitation at the hands of natural gas companies").
Conspicuously absent in the Supreme Court's opinion is any reference to "non-competitive" companies. The statutes require all rates to be reasonable, without regard to whether the seller is "competitive" or "monopolistic." The Supreme Court had just decided a case the year before, in 1974, in which it emphatically rejected any conflation of the notion of a "competitive" market rate with the "reasonable" rate required by law:
Congress could not have assumed that "just and reasonable" rates could conclusively be determined by reference to market price.... This does not mean that the market price of gas would never, in an individual case, coincide with just and reasonable rates or not be a relevant consideration in the setting of area rates...; it may certainly be taken into account along with other factors.... It does require, however, the conclusion that Congress rejected the identity between the "true" [just and reasonable price] and the "actual" market price.
Thus, the lower court's emphasis on competition was at odds with longstanding teachings that the statute's purpose is protection of customers from excessive and unreasonable charges. See FERC Commissioner Kelly: The Purpose of the Federal Power Act is to Protect Consumers. Also, FERC's notion of "letting go" regulation of the charges of competitive providers and regulating only those who are monopolistic is at odds with the language of the Federal Power Act and teachings of the Supreme Court which do not allow the agency to forbear regulation of any rates based on its notions of competition. The wisdom of Congress is borne out by the example of "competitive" utilities extracting billions of dollars from consumers by exploiting their market rate waivers from rate review and FERC's blindness to market manipulation.

FERC's effort to recast the purpose of the Federal Power Act from reasonableness of prices to competition and regulating spot market structure is now being touted by a prominent advocate of deregulated spot markets as a foundation for even greater reliance on wholesale spot markets with even more "scarcity" pricing and fewer limits on market prices ultimately paid by consumers. See Looking for the “Vroom”: A Rebuttal to Dr. Hogan’s “Acting in Time: Regulating Wholesale Electricity Markets”. But no matter whether a utility is "competitive" or monopolistic, and no matter how "workable" the market is, the law still requires all rates and charges to be just and reasonable and subject to review and revision by FERC.

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