Tuesday, November 25, 2008

Obama Picks Transition Team for DOE, FERC

President-elect Obama has named Dr. Susan Tierney and Rose McKinney-James to his transition team for the U.S. Department of Energy (DOE) and the Federal Energy Regulatory Commission (FERC), which is organizationally within DOE. Both appointees, former state utility commissioners of Massachusetts and Nevada, respectively, have a record of supporting electricity industry deregulation, or, as it is euphemistically named, "restructuring."

Thirty five states did not restructure, no state has restructured since 2000, and several states halted plans to adopt it when they saw its results in states like California and New York.

The "restructuring" model strips the power generation function away from state-regulated utilities under the premise that the generation function can be deregulated if it is structured to be competitive. An implicit assumption of restructuring, which we reject, is that if the market price of a utility service is "competitive" it will then necessarily satisfy the legal requirement of being "just and reasonable." This regulatory fad peaked in the last decade of the last century when it was lavishly promoted by Enron's Ken Lay, embraced by some state regulators, accepted by both the Clinton and Bush administrations, and pushed by FERC. FERC's regime now lacks consumer support and confidence. See Pennsylvania Utility Regulator Holds Hearings on Flaws in Wholesale Power Markets.

To bring about functionally deregulated wholesale electricity markets without statutory authorization, FERC administratively morphed the Federal Power Act system of filed rate regulation into one of unfiled, unreviewable, and unrefundable wholesale market rates. The FERC system is now built upon "organized" spot markets for wholesale electricity such as those run by the NYISO and other Regional Transmission Organizations (RTOs), where energy is sold by sellers with "market-based rates." The FERC system has its greatest impact in restructured states that allowed utilities to sell off power plants whose output had been priced based on the cost of production, requiring most electricity to be bought at wholesale "market-based rates" eventually passed through to retail customers.

Mathematical game theory, economics lab simulations, and experience demonstrate that the wholesale electricity spot markets that are at the heart of restructuring can be gamed and manipulated to drive prices well above competitive levels beyond the capacity or will of FERC to correct. See
Even for those who would conflate the notions of competitiveness and reasonableness, the generation function is increasingly dominated by fewer large companies as the industry consolidates, undercutting the notion that many sellers will someday make electricity a buyer's market and preclude the need for rate regulation. According to Duke Power CEO James Rogers, in light of the recent financial market developments, "I think within 18 months you'll see either consolidation or acquisition of all of [the major independent power producers]." "The case for consolidation in our industry is more compelling today than it's been in my 20-year career as CEO because of what's going on in capital markets, because of the economy we're in and no growth...."

Although most consumer groups are disappointed by the results of restructuring, major utility holding companies formed as a result of restructuring and the repeal of PUHCA, investment banking institutions, energy producers and wholesale traders, deregulated retail sellers, and the energy derivatives industry still push hard for preservation and expansion of the restructuring model.

Proponents of deregulation such as EPSA and the NYISO occasionally announce reports or studies purporting to show advantages of deregulation. Typically, these reports and studies have loopy methodologies, fail to address how the ISO/RTO markets actually affect consumer prices, and fail to pass any reasonable test of academic rigor. See The Flaws in the Primary Methodologies Used to Assess Electricity Restructuring prepared byJohn Kwoka, Northeastern University, finding there is no "reliable and convincing evidence that consumers are better off as a result of the restructuring of the U.S. electric power industry."

There is mounting evidence that electricity prices rose faster in the restructured states than they did in the states that retained conventional regulation of the generation function:

Click to enlarge the above chart, from PPINet.

The Obama Transition Team

Susan Tierney
Dr. Tierney, a consultant with the Analysis Group, has also been mentioned in the trade press as a possible candidate for FERC Chairman. With Cornell degrees in regional planning, she has a long, extensive and varied background in energy issues, including work for the Department of Energy in the Clinton administration. Her bio indicates that in recent years a significant part of her consulting work has been on behalf of electric utilities and industry stakeholders in defense of electric industry deregulation or "restructuring." These include reports for the Electric Power Supply Association (EPSA) and a white paper for the New York Independent System Operator (NYISO) assessing its costs and benefits.

The NYISO Cost Benefit Paper
Dr. Tierney's paper for the NYISO attributes some reductions in power production costs to the advent of the NYISO, but does not discuss whether the benefit of any power production cost reductions has been passed on to consumers:
Given these benefits, then who has experienced them: consumers? owners of power plants? others? This question is not easy to answer, and our report has not attempted to determine in detail how these benefits have been allocated among various entities in New York and elsewhere.
It is telling that the NYISO, a seller/trader dominated institution, see NYISO Governance, did not inquire whether its markets benefit consumers. See NYISO Costs Skyrocket, Benefits Questioned. The impact of FERC-approved "organized" spot markets on prices paid by consumers is graphically illustrated in testimony from PJM Industrial Customers Coalition at the recent legislative hearings in Pennsylvania (Pennsylvania Utility Regulator Holds Hearings on Flaws in Wholesale Power Markets), showing how electricity from the same power plant costs far more when it is purchased in a restructured state influenced by wholesale market-based rates than when it purchased in a state with traditional cost of service regulation. Under restructuring and the FERC organized market pricing system which pays the same price to all sellers, the value of lower cost generation shifts from consumers to sellers. See It was the [NYISO] Market.

Reliance on Discredited Studies
In her report for the NYISO, which did not assess the impact on consumer prices, Dr. Tierney cited two other studies purporting to show consumer benefits from the NYISO: a report authored by anonymous NY PSC staff, and a consultant's report. The PSC staff report cherrypicked data (excluding years when prices were lower before the advent of the NYISO, and excluding recent periods when prices uncreased), excluded the effects of NYISO prices on LIPA, which serves all of Long Island and whose prices have spiked since the advent of the NYISO in 2000, and averaged together residential prices of upstate utilities -- which were temporarily frozen in their rate plans -- with much higher prices of utilities which had begun to flow through the impact of NYISO prices. As stated in Professor Kwoka's analysis of the NY PSC staff report:
the intention of this staff report of the New York State Department of Public Service seems not to be a careful or balanced assessment of the issues. Rather, it is at best an update on changes in the electricity (and gas) markets in New York and in state policies affecting these markets. Even as an update, however, it pays inadequate attention to causation and precision in its evidence and claims.
The consultant's report from LECG, funded by PJM, LLC., the utility operating of the largest wholesale electricity spot market in the country, attempts to compare prices paid by customers of publicly owned municipal utilities in Florida with prices paid by customers of municipal utilities in New York. It finds that the prices of Florida munis rose faster than those of New York munis, and attributes the slower rate of price increase in New York to the benefits of the NYISO. Omitted is the fact that Florida munis are far more dependent on natural gas-fired generation, the price of which rose during the study period, while New York munis in the sample receive allocations of cheap (less than 1 cent/kwh) hydropower from the New York State Power Authority, thereby greatly diluting the impact of the NYISO prices. Also omitted are the soaring prices of LIPA, the large publicly owned utility on Long Island whose prices skyrocketed after the advent of the NYISO. The effect of the NYISO markets on downstate New York rates, including LIPA, beginning in 2000, can be readily seen at PSC Typical Electric Bills Show Trend of Higher Prices and Volatility. As Professor Kwoka has said regarding the LECG report,
the study makes errors in its understanding of municipal and cooperative utilities, errors in excluding data points and relying on others, errors in model specification, errors in its estimation procedure, and errors in extrapolating its results to utilities and customers that clearly differ.
For all these reasons, the LECG study does not employ sound empirical methodology and its conclusions should not be relied upon in evaluating the restructuring of electricity markets.
Percentage Rather than Price Increase Comparisons
In a 2008 presentation for EPSA, Dr. Tierney included a slide purporting to compare percentage price increases of electricity in restructured and unrestructured states.
But an examination of the actual prices paid by customers shows that prices are rising faster in the restructured states. Click to enlarge the chart below from Electricity Price Trends Deregulated vs Regulated States, by Marilyn Showalter
The deceptive nature of percentage comparisons such as those put forward by Dr. Tierney for EPSA is explained by Marilyn Showalter in her comparisons of prices paid by customers:
[D]eregulation enthusiasts argue that some deregulated and regulated states have experienced comparable percentage increases in rates. They would argue that the price increase in Washington (eighth from the bottom in Figure 9) is “the same” as the price increase in Connecticut (second from the top in Figure 9) because both experienced about a 57-60% increase since 1999. But no business or consumer would agree that Connecticut’s increase from 10 to 16 cents/kwh is the same as Washington’s increase from 4.1 to 6.4 cents/kwh—among the lowest rates in the country.
Apologists for restructuring often claim that the price increases in restructured states are simply due to rising fuel costs. A report by McCullough Research, however, demonstrates that the rate increases are higher in restructured states even when rising fuel costs are factored out.

Rose McKinney-James
According to the website of President-elect Obama, another transition team member, apparently overseeing the FERC appointments, is Rose McKinney-James:
Rose McKinney-James is the Managing Principal of Energy Works Consulting. Previously she served as the President and CEO of the Corporation for Solar Technology and Renewable Resources (CSTRR) and Chair of the Nevada Renewable Energy Task Force. Past positions also include Commissioner with the Nevada Public Service Commission, Director of the Nevada Department of Business and Industry, Chief of Staff for the City of Las Vegas and Project Manager for the Nevada Economic Development Corporation. McKinney-James serves on the Board of Directors of MGM-Mirage, Employers Insurance Group, Toyota Financial Savings Bank, the Energy Foundation, the American Council for an Energy Efficient Economy (ACEEE), and the Nature Conservancy. She is the Board Chair for Nevada Partners.
According to Politico,
Rose McKinney-James single-handedly will lead the review on Federal Regulation and Oversight of Energy. She has a strong background in renewable energy and is currently the managing principal of Energy Works Consulting. She previously served as president and CEO of the Corporation for Solar Technology and Renewable Resources.
James was formerly a Nevada utility regulator. After the Western states experienced the results of market manipulation, she, along with numerous former state utility commissioners from restructured states, signed onto a 2003 "Declaration of Consumer Benefits from Wholesale Power Markets, a statement indicating support for the restructuring model, (Alliance for Retail Choice document listed at the EPSA website with a deactivated link).

Since then, however, James appears not to have been actively involved in the continued promotion of restructuring. For example, she has not joined with the former state utility regulators -- many of whom consult for beneficiaries of restructuring -- in signing onto further missives of the "COMPETE Coalition". She reportedly has a keen interest in renewable energy. See Obama Appointment Offers Another Green Signal.

Despite the exhortations of COMPETE and restructuring enthusiasts such as EPSA, the NYISO and RTOs, and Dr. Tierney, EIA's Electricity Restructuring Report by States shows that in recent years, eight states have drawn back from restructuring, including the State of Nevada, which suspended its restructuring plans in 2003.

Also, the appointment of Lawrence Summers to head the National Economic Council in the new administration does not lend confidence in this area of the economy. See Harvard Lightning Rod Seeks Renewal as Obama Adviser. As recently pointed out by Paul Krugman in California Energy Memories, when Summers was Treasury Secretary in the Clinton administration he was blinded by deregulation ideology to evidence of gross electricity market manipulation in California that led to price spikes and outages. Perhaps his infatuation with the idea of self-policing free markets unfettered by government regulation was just a genetic "guy thing" he has now overcome with the benefit of time, experience, and greater maturity.

We would certainly be more hopeful of change in the interests of consumers if the DOE/FERC transition team more reflected the judgment of most states not to restructure, and better realized the experience of consumers in the states that did. Nevertheless, it cannot be assumed that Obama transition team members will recommend candidates for key positions who would continue the relentless restructuring efforts of past administrations without reflection upon the results to date and without heeding consumer concerns. See Will President Obama Repurpose FERC?

Perhaps it is a hopeful sign of change that the latest rumored candidate for a FERC position is John H. Norris, Chairman of the Iowa Utilities Board. Iowa, a state that once considered but did not adopt restructuring.

Update, December 4, 2008
The Longview Washington Daily News, in a story about the controversial Bradwood LNG terminal project for the Columbia River, states:
Obama also could reshape FERC itself.

Terms of the four FERC commissioners who voted in favor of the Bradwood project will expire during Obama’s first term, starting in 2009, Tamara Young-Allen, a spokeswoman for the agency, said in an e-mail. The other three commissioners’ terms expire in 2010, 2011 and 2012. (Commissioners serve five-year terms.)

Obama can also appoint a new FERC chairman. That would shift the current chairman, Joseph Kelliher, into a regular commissioner seat. It’s unclear whether Kelliher would finish out his term, which lasts through 2012, if he is removed from the chairman’s position.

When asked about his plans, Young-Allen noted, Kelliher has said, “When I have something to announce, I will tell you.”

VandenHeuvel, of Riverkeeper, speculated that Obama will appoint Jon Wellinghoff as the new chairman. Wellinghoff is a Nevada Democrat who was the only FERC member to oppose the Bradwood terminal in the September vote.
See Will new administration reshape LNG landscape?

Update January 7, 2009
Today Chairman Kelliher announced he is resigning effective Jan. 20. See FERC chief Kelliher to step down; Energy Regulator Resigns; Top Energy Regulator's Exit Is Chance for Obama to Reverse Deregulation Fiasco, Put Families Over Power Company Profits.

Update January 14, 2009
"If history is a guide, the new chairman will come from within the pool of existing commissioners. The last five chairmen have been FERC commissioners at the time of their appointments."
Kelliher's Resignation Foretells Major Changes at FERC.

Update January 21, 2009
Cabinet: Susan Tierney to Become Energy Dept. Number Two
By Al Kamen Jan. 15, 2009, Washington Post

Susan F. Tierney, assistant secretary of energy for policy in the Clinton administration and more recently an energy and economics consultant with Boston-based Analysis Group, is expected to be named deputy secretary of energy, according to Democratic sources.

Tierney, a former Massachusetts public utility commissioner, chairman of the board of the Energy Foundation and member of the National Commission on Energy Policy, an expert on electric and gas industry issues, advises companies, government organizations and non-profits on energy markets, economic and environmental regulation and strategy, according to an Analysis Group biography. She's been on the Obama transition as a team leader for the Department of Energy.

January 20, 2009, 12:51 pm

See Wellinghoff Named Acting FERC Chairman, Jan. 23, 2009.


Anonymous said...

Gerry, this is brilliant commentary--well-reasoned and well-written. Thanks again for the (for you) routine pinprick to our collective consciousness

Stephen Ahearn

Anonymous said...

Until Obama addresses the revolving-door between FERC commissioners and senior staffers and the outside lobbying firms that really run the show at FERC, it will be business as usual for the energy industry. Just look at how Kelliher and Kelly both stripped down the anti-manipulation rules in Order 717 and other issuances. The industry associations are assisting their members on how to legally collude and escape detection by continuing to push for FERC's self-enforcement policy of regulatory accountability. Its a huge mess at FERC, just like all of the other agencies that impact Bush and Cheney's former financial base- the corrupt energy industry.