Senators Casey and Specter Ask FERC to Scrutinize Wholesale Electricity Prices as Pennsylvania's Retail Price Caps Disappear

Background
A decade or so ago, Enron and others urged state regulators and legislators to deregulate wholesale and retail electricity markets, claiming it would reduce rates. See Disconnected Policymakers. Pennsylvania, New York and California prominently led the way into the experiment. Since the demise of Enron in 2001, no state has gone down the deregulation road, and, according to EIA, eight have turned back. About 15 states remain in the predicament where the traditional state-regulated electric utilities no longer make electricity needed by retail customers because they sold off their power plants to new merchant power entities, requiring greater reliance upon wholesale purchases of power at rates that are under federal jurisdiction.

Pennsylvania caught the deregulation bug, but established firm temporary retail price caps -- at the wise and effective urging of its Consumer Advocate. This was done to ensure that after divestiture by traditional utilities of their power plants and de facto deregulation by FERC of wholesale generation prices in those markets, the state's retail electric prices, already high, wouldn't be even worse.

Industrial customers from other states in the PJM region -- who do not enjoy Pennsylvania's price cap protection -- initially supported the move to deregulation, but for several years have expressed their discontent with the price results of PJM's spot markets. Along with consumer groups, they have urged FERC to take remedial measures. See, Public Power, Industrial and Residential Consumer Groups Demand FERC Review of Organized Spot Markets, PULP Network, Dec. 17, 2007. To date, these efforts have been rebuffed by FERC. See No Evil: FERC Refuses to Examine Gaming of RTO/ISO Electricity Spot Markets, PULP Network, April 22, 2008. See Marketizer Revisionism: FERC Reinvents Itself as Overseer of Markets, Abandoning Review of Utility Rates.

After a decade, the Pennsylvania price caps have come off for approximately 4.8 million customers as of January 1, 2010. As a result, many Pennsylvania electric customers are likely to face sharp increases in electric bills, due to FERC's de facto deregulation of rates for wholesale power.

U.S. Senators Demand Action from FERC to Review Results of Electricity Markets
On December 18, 2009, Pennsylvania Senators Casey and Specter wrote a letter to FERC asking for action to protect consumers from the effects of FERC's "market-based rates" and the "organized" spot markets of PJM it has approved:

[O]ur home state is just one example of how wholesale markets have not produced the benefits of competition promised at the inception of their deregulation plans and instead have hurt consumers and the economy. These markets do not appear to be sufficiently competitive and thus have resulted in excessively high electricity rates for consumers and insufficient infrastructure investments to support future reliability.... [A] recent analysis of data from the Energy Information Administration found that electricity rates remain higher in deregulated states than in regulated states, and that this price disparity is increasing every year. This increasing disparity cannot be attributed to fluctuation in fuel or other costs.

We know you are aware that the Federal Power Act required that FERC ensure 'just and reasonable" rates for electricity. Further, in enacting the Federal Power Act, Congress' intent was to ensure consumers a "complete, effective and permanent bond of protection" from excessive wholesale electric rates, which the U.S. Supreme Court has upheld. Therefore, we appeal to you to scrutinize the operation of the wholesale electricity market in Pennsylvania, and whether the current market supports reasonable rates. We respectfully request that you conduct a review of the effectiveness and fairness of FERC policies regarding the wholesale electricity market in Pennsylvania, including the function of regional transmission organizations in administering markets.

**** Moreover, the assertions made in Order 719 as to the overall consumer benefits of RTO-run markets are not supported by any empirical evidence or any other substantiation that the prices these markets produce, are in fact 'just and reasonable" as required by the Federal Power Act. This was underscored by the United States Government Accountability Office in a 2008 report entitled "Electricity Restructuring: FERC Could Take Additional Steps to Analyze Regional Transmission Organizations' Benefits and Performance."

In short. we believe more needs to be done. On behalf of consumers in Pennsylvania and elsewhere, we urge you to undertake a substantive and comprehensive investigation, using various analytical tools and appropriate metrics, to determine whether PJM Interconnection and the other RTO-run markets are producing just and reasonable rates, and if not, to take the steps necessary to protect consumers.

Due to the FERC- approved spot markets and its dispensation of "market-based rates" allowing sellers to charge what they like. About 25 - 30% of the time in Pennsylvania, the price of natural gas fired generating plants sets the price for all energy in the spot markets. This includes energy produced at a much cheaper cost by nuclear or coal power plants. As a result, the new system benefits producers rather than consumers because lower cost power plants are no longer under state regulation and their new owners can sell the output based on the price demanded for output of a natural gas plant.

The end of Pennsylvania price caps comes at a time when natural gas prices have ebbed - perhaps only temporarily - from last year's high spikes. If there is a resurgence of natural gas prices over the next few years, electric customers will suffer even more.

New York
Like Pennsylvania's customers, in upstate New York, residential customers of Niagara Mohawk d/b/a National Grid have been somewhat protected in rate plans from the spiking and volatile prices set in the New York wholesale spot markets run by the NYISO. That rate plan will expire later this year.

New York's largest industrial and commercial customers (who beat the deregulation drums along with Enron) were not protected from NYISO price spikes. They have turned to New York state government to soothe some of the impact from the high NYISO prices, obtaining sales tax breaks on delivery service and more hydropower allocations from the state Power Authority (which produces very cheap power at the Niagara and St. Lawrence projects) to blend with their higher cost NYISO-priced power.

In contrast, downstate residential customers of Con Edison and Orange & Rockland are already significantly exposed to the effects of the NYISO spot markets. Their rates have become destabilized, change monthly, and have often spiked since the advent of deregulation, even though they are still tempered by some long term contracts and hedging. See PULP's chart of typical residential electric bills.