The Blackout Hearings High-Wire Act: Transmission for Households or More Profits for Corporate Marketers?

Sept. 3, 2003

The Blackout Hearings High-Wire Act: Transmission for Households or More Profits for Corporate Marketers?

A Public Citizen Analysis of Impact of Deregulation on Electricity Reliability and Price for Consumers

The first question before Congress must be whether our electric transmission system should be designed for reliability or for Enron-style power marketers. Unfortunately, the White House and certain members of Congress seek to exploit the recent blackouts by providing subsidies for the energy industry’s transmission deregulation dreams. The fact is that deregulating transmission (as proposed by the president and the House of Representatives) will erode reliability but provide hefty profits to an electric industry undeserving of such subsidies. If the blackout hearings are to have any merit, they must focus on how deregulation by federal and state governments has affected reliability and affordability in America’s electricity markets.

Electricity deregulation has eroded reliability by prioritizing the needs of power marketers (who move electricity over longer geographic distances in pursuit of higher profits) over the needs of consumers (who benefit from decentralized, local markets). America’s transmission system was designed to accommodate local electricity markets — not the large, freewheeling trading of electricity featured under deregulation. Sending power over a much wider area strains a transmission system designed to serve local utilities. Deregulation also ended the requirement that utilities reinvest a portion of their profits back into the transmission system. That’s why re-investment in wires has fallen by hundreds of millions of dollars since deregulation. Under deregulation, energy companies simply don’t have a financial incentive or responsibility to invest in transmission.

But rather than require electric companies to return to their century-old obligation to re-invest in transmission, the president and the House propose jacking up power prices by allowing owners of transmission lines to charge whatever price they choose. Section 16011 of the House energy bill would stick consumers with as much as $100 billion for the construction of new transmission lines that big energy companies want but consumers don’t need. This consumer-funded subsidy will prioritize the construction of power lines preferred by wire-hogging power marketers intent on moving large loads of electricity that will bypass the needs of local households. Instead of pandering to an electric industry that gave more than $40 million to Congress since 1999 (more than two-thirds to the GOP) and spent an additional $260 million lobbying the federal government over that same time period, the focus of the hearings should be on protecting consumers by re-evaluating the wisdom of deregulation.

A quick review of the facts reveals the enormous impact deregulation has had on reliability and prices.

Reliability

 

  • An analysis for the North American Electric Reliability Council of stress on the Midwestern and Eastern transmission grid shows that the grid has been under far more strain since the summer of 1999 — when states in the Midwest and Northeast began ordering utilities to break up their monopolies. The analysis shows that the monthly average on-peak deviation from the ideal frequency (a measure of strain on the transmission system) in the first seven months of 2003 increased by more than 2,000 percent over the same period in 1994. This huge deviation from the ideal frequency is caused by the new strains placed on the grid by deregulation. (Click here for more detail.)
  • Since deregulation was ushered in via the Energy Policy Act of 1992, the ability of states to order utilities to reinvest their profits back into the transmission system has been undermined. In 1990, utilities spent $3.3 billion (in today’s dollars) to upgrade and maintain the nation’s transmission system. In 2000, utilities spent less ($3 billion) at a time when more power was moving through the grid. In addition, deregulation forced the firing of thousands of utility workers, hindering the ability of utilities to adequately staff maintenance and operation.

Prices

 

Wholesale electric prices have increased in every deregulated market.

  • In New England’s deregulated wholesale market, prices have increased as much as 400 percent since 1994. (For details, click here.) As a result of these higher wholesale prices, states like Connecticut have had to increase retail rates for consumers. In June 2003, Connecticut Gov. John Rowland signed Public Act 03-135, which increases electricity rates for nearly all of the state’s residential consumers. Forced to admit that wholesale prices have actually increased under deregulation, Rowland now claims that retail prices have to increase in the hope that the higher prices entice “competitors” to enter the uncompetitive Connecticut market.
  • Even the most mature deregulated market — Pennsylvania-Jersey-Maryland (PJM) — experienced a price increase of 40 percent from 1998 to 2002, when the average annual wholesale price for a megawatt of electricity jumped from $22.52 to $31.58. (For details, click here.) But monthly peak prices have seen far more dramatic increases. For example, prices in the peak month of August increased 250 percent, from $21.85 a megawatt hour in 1997 to $76.93 in 2003.
  • As a result of the inefficient use of existing transmission infrastructure and uncompetitive wholesale markets, retail deregulation has been a total failure. Ten states over the past two years have repealed or significantly delayed their deregulation laws, and more are slated to raise rates. And all the while, America’s household consumers have no access to competitive suppliers. Of the 40.7 million households in deregulated states, nearly 96 percent have no ability to choose an alternative, or competitive, supplier. (For details, click here.) As a result, nearly all consumers continue to receive electricity from their original utility at retail prices that are heavily regulated by states (and not subject to market forces).
  • There are no projected savings to consumers from moving toward so-called Regional Transmission Organizations (RTOs). A March 2002 study conducted by the Federal Energy Regulatory Commission (FERC), which supports RTOs, found that consumers stand to enjoy only a 1 percent average total rate reduction from RTOs. FERC’s methodology failed to take into account, among other things, the frequent exercise of market power commonplace in deregulated markets.

Solutions Congress Should Pursue

 

Congress should:

  • Separate the electricity transmission reliability section of the House and Senate energy bills from the rest of the legislation;
  • Strengthen — don’t repeal — the Public Utility Holding Company Act by closing recent legislative and regulatory loopholes. (Click here for more on the act.)
  • Expand the investigations of market manipulation, currently limited to the California electricity market, to the entire country to determine the prevalence of market power abuses in America’s deregulated markets;
  • Order FERC to suspend authority for power generators and marketers to sell electricity at market-based rates until it has a full and complete remedy for consumer protections when manipulation, fraud and abuse is found (FERC currently lacks the ability to order a company like Enron to refund appropriate sums to consumers for the company’s actions in stealing money from California);
  • Investigate probable corporate mismanagement and/or negligence regarding the recent blackout and hold these specific corporations accountable for damages;
  • Provide incentives and assistance to states to help utilities re-acquire generation assets divested during deregulation;
  • Promote decentralized power sources such as distributed generation, wind and solar energy; and,
  • Invest in energy efficiency technologies, such as building weatherization, to reduce electricity demand.

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