Energy Markets:

Public Citizen's Slocum discusses FERC conference on electricity restructuring

The Federal Energy Regulatory Commission is set to hold a daylong conference this week to discuss competition issues relating to utility companies. Have there been any successes over the past 10 years with the current competition structure? What should be done to improve the way electric markets function? During today's OnPoint, Tyson Slocum, Director of Public Citizen's Energy Program addresses these issues and talks about why he believes the implementation of smart meters will only provide a temporary solution to a much larger problem.

Transcript

Mary O'Driscoll: Welcome to OnPoint. I'm Mary O'Driscoll. Our guest today is Tyson Slocum, director of Public Citizen. Tyson, thanks for joining us.

Tyson Slocum: Glad to be here, Mary.

Mary O'Driscoll: A major emerging issue for consumer groups like Public Citizen is the issue of electric restructuring or competition in electric power markets. The Federal Energy Regulatory Commission is hosting a daylong hearing on this issue this week. And that this issue has been going on for the better part of 10 years. Why all the attention to it right now?

Tyson Slocum: Well, because you've got a bunch of problems that are coming to a head in a number of states where price caps that have been on since the states ushered in deregulation are now coming off. And so you're having a lot of political pressure, really for the first time on politicians in those states as consumers are reacting to the sticker shock of these huge rate increases. So from Maryland to New Jersey to Illinois and elsewhere consumers are extremely unhappy and politicians are feeling the heat. And they're starting to turn the heat on to the Federal Energy Regulatory Commission because, ultimately, FERC is in charge of regulating all these wholesale rates and obviously they're not doing a very good job.

Mary O'Driscoll: Well, the market operators though say that it's the cost of the fuel, coal, oil, natural gas, even uranium for nuclear power. The price of that is going up. That it's not the way they're operating the markets. They're saying that this is all reflecting the cost of fuel and that they're doing things that are making the markets much more efficient and helping consumers. You don't agree with that?

Tyson Slocum: No. And it's not just me that doesn't agree with it. I think there is a whole host of economic literature out there that has now assessed the situation and has come out clearly showing that deregulated states, rates are rising faster in deregulated states as opposed to regulated states. If you look at data from the Energy Information Administration, which is the statistical branch of the Department of Energy, and you compare rates in regulated states versus deregulated states they're rising much faster in those that are deregulated. And that's because the cost of power in deregulated states is the marginal cost, which increasingly is tied directly to natural gas which is peaking, which is the peaking cost. Whereas in regulated states the cost of electricity is an average cost among all energy sources. So it's the average of cheap coal and expensive natural gas. So that's the crux of the problem, is that deregulated states are tied to the most expensive fuel, and therefore all of that cost is being translated into higher rates.

Mary O'Driscoll: Oh, I see. So it's the fact that they're going with the highest cost when they're looking at the markets rather than just averaging everything out. But, I mean, if you're looking at - if you look at the reports that PJM puts out, the Midwest ISO puts out, all these reports that say everything is going great. Our markets are operating beautifully. That, you know, prices are down.

Tyson Slocum: Well, those are advocates. I mean PJM and Midwest ISO have enormous self-financial interest in keeping the concept of deregulation going. They've become self-perpetuating entities. They have huge lobbying operations here in DC, so they're not exactly the kind of neutral umpires that one would hope they would be. They are advocates. And I think that research that they put out -- releases that they put out need to be viewed in that context.

Mary O'Driscoll: Well, you've got -- not only for the consumer advocate point of view that you have, but then you're looking at the larger consumers. The big industrial users of energy are also complaining, you know, they see a lot of problems. But they have a very different kind of viewpoint from you, is that they think that the competition really isn't competition. It's just re-regulation and they want a lot of the regulations taken off. They want the market to be operating -- these markets, they want it to be much more market oriented than it is. But they're afraid a lot of these rules are really just a re-regulation of everything. Do you share that view point?

Tyson Slocum: Well, I'm not sure that that is the position of all of the industrial consumers. I mean from the comments and the materials that ELCON, a large alliance of large industrial consumers, has put out, they're not necessarily in favor of competition for competition's sake. They want whatever system is going to deliver just and reasonable, affordable energy to their constituents. And I don't see that they are pushing for greater market access. I don't see that at all. I think that the problem here is that trying to make these markets work is extraordinarily difficult. And we're finding out that after 10 years of this experiment, even the most sophisticated entities with millions of dollars at their disposal cannot adequately police these markets. And I think that's the crux of the problem, is that I'm not sure that these markets will ever be able to function efficiently. Sure, there were inefficiencies inherent in the old monopoly system. But I think that the benefits from that far outweighed the new types of inefficiencies that we've got right now.

Mary O'Driscoll: Well, I wanted to get into that. Can you work within the system or does the whole system that we have right now, which, admittedly, is kind of a patchwork. You have regional markets and then you have some states that still are regulated and then you have some others that are not necessarily regional markets, but there's wholesale competition going on, and some retail competition actually going on in Texas. You've got this kind of an amalgamation of these different processes going on. Can you work within the system or does the system need to be completely changed?

Tyson Slocum: Oh, we need to completely change it. I mean we've been trying to work within the system for the last decade, and every time they do tweaks they say, "Well, now that we've fixed this, the solution is right around the corner." And we keep waiting to get around the corner and all we're met with is higher rates and poorer service. What we need to do is first force FERC to start doing its job. It has one mandate under the Federal Power Act and that is to enforce just and reasonable rates. Simply relying on the market to translate into just and reasonable rates, which is what FERC currently does. They don't do any sort of analysis or protection or review. They just assume that if -- they assume that we've got competitive markets and that's an incorrect assumption. We don't have adequately competitive markets and you can see that in the results of all these power auctions that we've had. From Maryland to Illinois these auctions are being dominated by a handful of big suppliers. They're not based on true competition. And as long as we don't have true competition we're not going to have just and reasonable rates based upon that. So we've got to return back to a system where rates are tied to the cost of producing power.

Mary O'Driscoll: Well, isn't the fact that there are no real competitors because there were rate caps that were on and now these rate caps are coming off? So you should let the process does go on the way it is. Because once those rates are high and the rate caps are off then there will be more opportunity for someone to come in and actually compete for customer service.

Tyson Slocum: Well. I'm not sure I would agree. I think that what we've seen in those states that have removed the rate caps, we haven't seen a flourishing of great competition. All we've seen are consumers paying what are essentially inflated costs from the wholesale market, because the prices being charged to the wholesale market are not reflective of competition. They are reflective of a system where large suppliers dominate the market where they are allowed to charge the highest price possible based upon the most expensive generation in the natural gas. And you've got 40 year old coal-fired power plants earning 100 percent rate of return in some cases. So, to me, that shows that the market signal is saying build more old coal-fired power plants, because that's where the huge profit is. So it's nonsensical from a market perspective. It's not sending the right kinds of price signals. Consumers have inelastic demands, so they don't have a whole lot of choice to significantly moderate their energy usage and they're just paying inflated costs on the wholesale market.

Mary O'Driscoll: Well, from an industry perspective I think they're looking at now trying to give consumers more of this ability to choose, trying to get these meters, these sophisticated meters in, in the homes, and that kind of thing. I mean isn't it worth just kind of having this process go on and get those meters that everyone's been talking about for the past decade, but now they're actually realizing that the utilities themselves have to do it. Isn't it worth it trying to just kind of get that process going and dealing with the situation we have now? I mean it's the old saying, putting the genie back in the bottle. If you're going to start re-regulating again, it's a little difficult to unscramble all those eggs I guess.

Tyson Slocum: Of course it's difficult, but just because something is difficult doesn't mean it shouldn't be done. The fact is that we're going to see massive economic loss if we continue down a failed model of restructuring. And so the easiest thing to do now would be to abandon it and to start the expensive, long process of re-regulation. We made a grave mistake when we ordered these old utilities to break up. We need to start giving support to states to start slowly reacquiring their generation. And in terms of some of these demand signals, you know, smart meters and things like that, I think that they'll have limited success. The fact is, is that at the end of the day most households do not have an enormous amount of flexibility to moderate their energy consumption. All the smart meters are going to do is tell us how much we're being price gouged in real-time. I think a more effective thing to do is to regain control over these wholesale markets. You know, the United States used to be the envy of the world in our electric power system. We're not anymore. The rest of the world is no longer coming to us for advice about how to set up markets because we can't even figure out the problem ourselves.

Mary O'Driscoll: Wow, I'm almost afraid to ask this question, but have there been any successes, any successes at all with competition over the past 10 years? Anything that you can look at that has worked?

Tyson Slocum: Internationally?

Mary O'Driscoll: In the United States?

Tyson Slocum: In the United States? Absolutely not. I mean you've got Texas, which is probably the best case because the Federal Energy Regulatory Commission largely doesn't have jurisdiction. So the state is in full control of the wholesale transmission and retail market and it's a basket case. Texas is plagued with problems of market manipulation, of non-transparent markets. So Texas cannot get it right. I don't see the ability of states that have to rely upon bureaucrats in Washington, DC to police their markets. They're not going to be able to get it right. We need to return to a more transparent, orderly system where states are in charge of the wholesale market. It worked for a century and I think that if we're going to be successful in the 21st century we've got to return to that.

Mary O'Driscoll: OK. Well, that's all we have time for today. Thanks Tyson for joining us.

Tyson Slocum: Sure, my pleasure.

Mary O'Driscoll: And thank you for watching. I'm Mary O'Driscoll. This is Onpoint.

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