FOR IMMEDIATE RELEASE

Contact: Mark Cooper (301) 384-2204

Executive Summary
Full Report (pdf format)

Washington D.C., June 21, 1999 - Wild price spikes in 1998 indicate structural flaws and institutional failures in restructured electricity markets that require vigorous policies to promote competition and protect consumers form abuse, a study released today by the Consumer Federation of America (CFA) and Consumers Union (CU) concluded.

"Last year's price spikes indicate that the electricity markets created by recent restructuring are not effectively competitive," Dr. Mark Cooper, CFA's Director of Research, said.

With more than half the electricity in the country being consumed in states that have enacted restructuring plans, the report stresses structural problems that must be addressed by public policy to improve the performance of these markets.

· The breakdown of coordination as restructuring takes place eliminates the incentive for market participants to cooperate and makes it difficult for system operators to manage the electricity network.

· Inadequate transmission capacity and restrictions on access to transmission limit the ability of power to flow.

· A lack of incentives for utilities to keep capacity on line or to discipline their bidding for power overheats the market.

· Outdated demand-side mechanisms fail to give consumers adequate options to either adjust their demand as prices rise or to have assurances of stable prices that will not expose them to wild price volatility.

· A complete absence of objective, public information about prices and market conditions prevents buyers from making sound decisions.

· Highly concentrated, local markets enable large generators to drive up prices by withholding supplies.

· Bogus financial transactions, like daisy chains, fuel price spirals.

"Uncontrollable factors, like weather and outages, that some claim were the cause of the price spikes, do not begin to account for 20 to 300-fold increases in price," said Cooper. "The price spikes were not accidents or aberrations; they are exactly the behavior one would expect when rational economic actors take advantage of market imperfections and institutional weaknesses."

The report recommends policies in four broad areas - basic conditions, competitive structures, conduct and market performance.

· The electricity market simply cannot function without open access to transmission and policies to prevent affiliate abuse and excessive market concentration.

· Transactions must be based on transparent pricing and enforceable terms and conditions. This requires registration and certification of traders and controls on trading practices including short selling, margin requirements, credit requirements and option rules.

· Sellers who take actions that tighten electricity markets, and then seek to exploit that situation through sales at inflated levels, should be presumed to have engaged in market manipulation. They should bear the burden of proving that they are not guilty of profiteering, and the penalty for market manipulation should be severe.

· Circuit breakers should be available to prevent markets from spinning out of control. These include suspension of trading, suspension of market-based pricing, or price ceilings.

"Before they unleash market forces, policy makers must ensure that the basic conditions are adequate to support competition and that state and local regulators have authority to monitor market conditions," concluded Janee Breisemeister, Senior Policy Analyst in the Southwest Regional Office of Consumers Union. "It is irresponsible to create markets that suffer from problems like inadequate generation or transmission capacity, or to let markets run wild as the result of abusive transactions or manipulative tactics."

The report entitled Electricity Restructuring and the Price Spikes of 1998: A Need for More Vigorous Effort to Protect Consumers is available at

The Consumer Federation of America is a non-profit association of some 240 pro-consumer groups, with a combined membership of 50 million that was founded in 1968 to advance the consumer interest through advocacy and education.

Consumers Union, publisher of Consumer Reports, is an independent, nonprofit testing and information organization serving only the consumer. We are a comprehensive source of unbiased advice about products and services, personal finance, health nutrition, and other consumer concerns. Since 1936, our mission has been to test products, inform the public, and protect consumers.