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February 1, 2001
The Honorable George W. Bush
President
The White House
1600 Pennsylvania Avenue
Washington, DC 20500
Dear Mr. President,
We are writing to urge you to reconsider your administration's recent public policy statements suggesting that electricity market problems - particularly those now plaguing California - are predominantly a state issue. In fact, federal authorities have made critical mistakes in restructuring interstate electricity markets that have contributed significantly to the current problems in the Western part of the country. These mistakes pose a long-term threat to electricity markets in the Midwest, East and South as well.
Unlike Texas, which is only lightly connected to the national grid, the rest of the states in the continental United States are interconnected to the interstate grid. This interstate market is solely and entirely under federal jurisdiction. For consumers in the 47 other states, a well functioning interstate market is essential to the proper functioning of the intrastate electricity market. Unfortunately, federal policies have failed to create a workable interstate market that can support competition or ensure reliable supply:
· By relying on voluntary approaches, the Federal Energy Regulatory Commission (FERC) has failed to create an open and adequate transmission system to support the movement of power among states; and
· The FERC has repeatedly allowed sellers to charge "market-based rates" when the underlying market conditions are highly concentrated and the level of competition is far from sufficient to discipline abusive and anticompetitive behavior by electricity suppliers, or to ensure effective market functioning.
It is critical to recognize that
three problems have converged in California - scarcity, imperfect market structures,
and abusive conduct - problems that are looming elsewhere. As long as the public
believes (correctly in our view) that it is being afflicted by poorly functioning
markets that make it easy to exploit vulnerable consumers or manipulate prices,
consumers will refuse to bear a disproportionate burden for cleaning up market
failures. While California made mistakes of its own, a substantial part of the
problem was caused by failed federal policies. Federal authorities must shoulder
part of the burden of developing a solution with immediate, short-term policies
and a major overhaul of long-term approaches.
In the short-term there are several steps the federal government can take to
alleviate the crisis. FERC and the Department of Energy (DOE) must ensure that
all bottleneck transmission routes are open to ensure adequate capacity will
flow to the West Coast, not only to promote reliability, but also to alleviate
price pressures on the market.
FERC should suspend, on an interconnection-wide basis, market-based rates and make all future rates subject to refund, pending investigation of abusive conduct. The price gouging that results when distribution utilities try to keep the lights on under crisis conditions does not send "efficient price signals." Instead, it encourages dominant sellers to keep markets tight by withholding supply or taking their plants off line.
Since many of the problems in short-term rates reside in the federal jurisdiction, the federal government should also participate in the work-out to long-term contracts in California.
Law enforcement is critical to establishing public trust in these new market institutions. The behavior of for-profit entities that have taken advantage of tight market conditions by refusing to transmit, by taking capacity off-line, or by gaming market rules thus contributing to the market tightening, should be reviewed, with penalties imposed if abusive conduct is found.
Since the interstate market is tight, the DOE should develop federal demand-side management programs to provide incentives for peak reduction.
Long-term approaches also are needed.
It is clear that the voluntary approach to formation of interstate transmission
systems that are imbued with the public interest has failed to produce any progress
in the eight years since the passage of the Energy Policy Act. It is time for
the FERC to recognize that the interstate electricity grid is a highway system,
not a market, whose sole purpose must be to serve the public interest. It must
mandate participation in regional transmission systems that are independent
of all generation owners, and dedicated to the purpose of providing nondiscriminatory
access to transmission facilities with adequate capacity to prevent price shocks.
FERC must not allow market-based rates until there are truly competitive markets.
Highly concentrated product and geographic markets should never be deregulated.
Moderately concentrated product and geographic markets should be allowed incentive-based
regulation. The FERC must actively monitor market structure and market conduct
and be prepared to withdraw market-based pricing at the first signs of abusive
conduct or ineffective market performance.
If public policy is going to pursue competitive markets in generation, federal policymakers must take much more aggressive steps, including structural changes, to promote competitive sources of supply. The FERC and the Department of Justice must study the feasibility of effectively competitive markets and make recommendations for achieving a competitive outcome.
One thing the federal government should not do is encourage any rollbacks of environmental standards under the guise of attempting to ease the crisis. Enforcement of environmental laws did not cause California's problems, nor will it prevent solutions.
We therefore urge you to reconsider your position on the electricity crisis and take immediate steps to prevent monopolistic manipulation of energy supply and distribution from harming consumers through artificial electricity shortages or abusive price increases.
Sincerely,
| Dr. Mark N. Cooper
Director of Research Consumer Federation of America |
Adam J. Goldberg Policy Analyst Consumers Union |
cc: The Honorable Richard Cheney
The Honorable Paul O'Neill
The Honorable Spencer Abraham
The Honorable Curt Hebert
The Honorable Frank H. Murkowski
The Honorable Jeff Bingaman
The Honorable W.J. "Billy" Tauzin
The Honorable John D. Dingell
