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UNITED STATES OF
AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Remedying Undue Discrimination
through Open Access Transmission Service
and Standard Electricity Market Design
Docket No. RM01-12-000
INITIAL COMMENTS
OF
THE CONSUMER FEDERATION OF AMERICA
AND CONSUMERS
UNION
November 14, 2002
EXECUTIVE SUMMARY
Based upon extensive analysis of
efforts to create electricity markets in the United States and abroad and a
review of the record in several recent Federal Energy Regulatory Commission
(FERC) proceedings, the Consumer Federation of America and Consumers Union conclude
that the Standard Electricity Market Design (SMD) proposal is not in the public
interest. Forcing all regions of the country to rely on single price auctions
in spot markets and basing transmission services on a pricing principle that
charges "whatever the market will bear" with no relationship to actual
costs will not result in just and reasonable rates or promote efficient service.
In Section II we show that the economic fundamentals of electricity are
severe and make for very weak market forces. The Federal Power Act and its interpretation
by the courts over sixty years recognize that electricity is a special service.
Monopoly rents from the abuse of market power are a pervasive problem.
Low elasticity of demand and supply are now recognized as the most critical
factor in rendering the market volatile and vulnerable to abuse. When demand
is inelastic, consumers are vulnerable to price increases, since they cannot
cut back or find substitutes for their use of the commodity. When supply cannot
respond quickly to price, producers gain a strong interest in withholding supplies
to increase prices.
Excessive scarcity rents are a pervasive problem in electricity markets.
The inelasticity of supply and demand gives rise to a second deviation from
a typical competitive market; excessive rents. Excessive scarcity rents accrue
where changes in supply are slow or nonexistent. Because supply cannot respond
to price signals, the owners of existing facilities just collect windfall profits.
The high rates of return that result from scarcity rents are unjust and unreasonable,
just as are excessive returns resulting from abuse of market power.
The experience with restructured electricity markets demonstrates that the unique
and severe economic characteristics still dominate electricity service. Supply
dislocations, market manipulations, transmission bottlenecks and non-market
factors (like weather and drought) opened the door to market manipulations and
dislocations, which result in huge price increases. Under these circumstances
abandonment of cost-based ratemaking creates numerous and substantial opportunities
to demand unjust and unreasonable rates.
In Section III we present the legal and policy context in which the SMD
exists.
The nature and extent of discrimination in the interstate market does not
justify the radical change proposed by the FERC. The FERC has failed to
demonstrate that the problem the SMD claims to solve, undue discrimination in
access to transmission services, merits the radical restructuring and deregulation
it proposes. The cure is far worse than the disease. There has been no showing
by the FERC that undue discrimination is the cause of a significant number of
unjust and unreasonable rates or substantial inefficiencies in interstate transactions.
Indeed, the FERC's own efforts to estimate the benefits of the elimination of
undue discrimination through the formation of the Regional Transmission Organizations
found remarkably little "efficiency" gains to be had.
The FERC's evidentiary record on undue discrimination is thoroughly corrupted.
The FERC relies on a few formal complaints, in which findings of undue discrimination
were never made, and informal hotline calls, statements and public conferences
complaints from companies who proved to be far from trustworthy. Subsequent
facts have shown that they have engaged in fraudulent and abusive behaviors,
some of which would directly undermine their claims of discrimination. Moreover,
many of the practices FERC cites as unduly discriminatory may, in fact, be efficient
actions taken by entities possessing economies of scale or exhibiting economies
of vertical integration.
The Federal Power Act is quite clear and explicit that every rate or charge
for transmission or electricity subject to FERC jurisdiction must be just and
reasonable. Under the Federal Power Act reliance on markets and market forces
is a means to an end, not an end in itself. The radical change and extreme reliance
on spot markets that FERC has proposed goes well beyond the Supreme Court's
interpretation of reliance on markets to ensure just and reasonable rates.
Under the SMD, the FERC has no assurances, whatsoever, that the rate demanded
(bids offered) for any of the six electricity products it requires will bear
any relationship to the cost of production. Moreover, under the single price
auction, which is the only type of market it will allow, the price paid for
all but the last unit offered is likely to exceed the cost of production. It
takes a heroic set of assumptions, which have rarely, if ever, been observed
in the electricity industry, to claim that this scheme will produce prices that
are just and reasonable even on average.
In the pricing of transmission services, the FERC does not even pretend to be
attempting to establish charges that bear any relationship to costs. Here it
explicitly adopts a value-based approach that intends to charge whatever the
market will bear. The FERC's approach to the provision of transmission services
also contradicts its obligation to promote efficient operation of the interstate
transmission network because its obsession with the deintegration of transmission
and generation destroys any economies of vertical integration.
In Section IV we present a critique of the details of the SMD and propose
an alternative that allows the FERC to deal with any problems of undue discrimination
without undermining the basis for just and reasonable rates in interstate jurisdiction.
Structural Conditions for Competition Must be Created First: It is a
widely accepted principle of economic practice that structural remedies are
vastly superior to conduct or behavioral remedies. Under the severe conditions
that obtain in electricity markets, it is clear that both are needed, but the
fundamental principle is even more important. No amount of market design, which
is essentially a behavioral matter, can compensate for a lack of actual competition.
FERC has failed to address the structural problems in the electricity market.
The structural criteria by which the FERC proposes to deregulate markets will
not ensure that rates are just and reasonable.
Given the recent experiences in electricity markets, the FERC must design its
structural test of competitiveness taking into account not only the unilateral
actions of dominant firms (pivotal suppliers), but also potentially collusive
actions and non-collusive games of multiple market players. It must not deregulate
markets unless the number of competitors is so large and the redundant capacity
available sufficient to make even non-collusive games unprofitable for market
participants. FERC should limit grants of authority to price at market until
these conditions are met. But FERC has not determined how investors would build
redundant capacity.
The reserve margin requirement proposed by the FERC is far too low to create
a bulwark against the abuse of market power. The 12 percent figure chosen by
the FERC is barely at the level of operating reserves traditionally used in
vertically integrated, non-market situations. It does not create an economic
reserve, which is necessary to prevent the abuse of market power. The FERC cannot
abdicate its responsibility to ensure that rates are just and reasonable by
stating that state authorities can adopt higher reserve margin requirements.
The FERC must demonstrate on the basis of its own action within its jurisdiction
that rates are just and reasonable.
The SMD has failed to deal with the problem of vertical integration between
the gas market and the electricity market. It has now become apparent that natural
gas prices in the West were manipulated by market participants who were active
in both the electricity and natural gas markets and this poses an entirely new
threat to just and reasonable rates in the electricity market.
A much less radical approach to independent transmission organizations can
control undue discrimination without exposing consumers to the risk of spot
markets and auctions. There is no evidentiary basis for concluding that
truly independent transmission organizations could not operate the grid in a
non-discriminatory manner that would not expose the public to the risks and
volatility of the spot market FERC would impose. The new transmission organization
can accomplish the fundamental goals of promoting efficient operation of the
grid while preventing undue discrimination at just and reasonable rates by applying
existing principles in a rigorous fashion:
· Least cost planning for grid expansion by conducting a competitive bidding process
· Implement engineering driven, least cost dispatch for grid operation
· Tariffs should be distance sensitive and based on actual cost
· All users of the grid should pay for their use out of one network access service
Both monopoly and excessive scarcity
rents must be controlled. To the extent that the FERC relies on markets
it must adopt decision rules and benchmarks for market operation and market
monitoring that yield just and reasonable rates.
Excessive scarcity rents must not be allowed. Because of the strong likelihood
that the severe market fundamentals will create excessive scarcity rents, the
FERC must adopt decision rules that seek to squeeze those rents out. In establishing
benchmarks, the FERC should choose the lowest possible price, which is what
a competitive market would do.
When an electron is bid into multiple markets - either product or geographic
markets - the FERC should ensure that the electron sells at the lowest possible
price. The lowest of bid prices would be the closest to the marginal cost at
which the seller is willing to make the electron available. That is the theory
underlying the FERC's single price auction; that must be the practice. The FERC's
failure to apply the lowest price rule means, by definition, rates will not
be just and reasonable under the SMD.
In a single price auction, bids must be at marginal costs and the FERC has no
justification to allow adders or provide "make whole" procedures for
sellers. The SMD is riddled with these biases in favor of sellers and against
buyers. The fact that the FERC is considering including in its marginal cost
benchmark costs other than the rigorously defined real marginal cost of production
is another deviation from the theory underlying the SMD. Any additional costs
included in the benchmark will guarantee rates that are not just and reasonable.
Market power mitigation must be much more aggressive. FERC must also
ensure that market monitoring detects all situations with the potential for
the abuse of market power and mitigation measures effectively addresses these
threats to just and reasonable rates.
All hours: The FERC cannot look only at peak hours in monitoring for the abuse
of market power. Withholding and strategic bidding have occurred and driven
up prices during hours where demand was far from the peak in numerous markets.
All products: The FERC cannot focus only on selective products in spot
markets in its monitoring for the abuse of market power. Unjust and unreasonable
prices have been demanded and (because of imperfect market conditions) paid
in bilateral contracts. If structural conditions are not adequate to ensure
competitive outcomes, all products must be monitored.
All markets: The FERC cannot assume that it can rely on competitive spot
markets to ensure competitive bilateral markets. The fact that the FERC recognizes
it needs a reserve requirement attests to the inability of short term markets
to elicit long term supply. Indeed, existing interstate transmission organizations
recognize they need long-term markets and that they have been plagued by market
power problems.
All significant suppliers: The thrust of the past quarter century of
economic analysis and the empirical evidence in electricity markets shows that
unilateral actions by a dominant market participant are not the only sources
of abuse of market power. Collusive and non-collusive behaviors by groups of
large market participants can cause rates to be unjust and unreasonable, especially
where interactions in the market are repeated.
I. THE SMD LACKS AN EVIDENTIARY, LEGAL AND EMPIRICAL BASIS AND IS NOT IN
THE PUBLIC INTEREST
A. IDENTITY AND INTEREST OF COMMENTERS
The Consumer Federation of America
(CFA) and Consumers Union (CU) respectfully submit these initial comments in
response to the Notice of Proposed Rulemaking (NOPR) "Remedying Undue Discrimination
through Open Access Transmission Service and Standard Electricity Market Design"
(SMD), issued by the Federal Energy Regulatory Commission (FERC).(1)
For over two decades, CFA has played a leading role in advocating on behalf
of residential consumers in the electricity restructuring debate at the federal
level, while our member organizations have been active in restructuring across
the United States. Indeed, CFA was a litigant in the first case dealing with
the creation of the Western Systems Power Pool.(2) At
that time we expressed concerns about the premature deregulation of markets
that presaged the problems the Western market faces today. Experience over the
past decade has proven that those concerns were well founded.
As recently as January 2000, pointing to our analysis of the failure of restructured
electricity markets to perform well, CFA cautioned the FERC that it was moving
down a path leading to disaster for residential electricity consumers.(3)
Throughout 2000 CFA participated in every one of the Regional Transmission Organization
Workshops conducted by the FERC and continued to present analysis of the electricity
market. In May 2001, CFA intervened in the complaint of San Diego Gas &
Electric Company.(4)
In June 2001, CU petitioned the FERC to suspend market-based rate authority
for power providers in the Western States in response to large price spikes
that were occurring throughout the western electricity market that we believed
were caused by the manipulative behavior of energy traders.(5)
Electricity prices in the western market had increased some ten to twenty times
the price of the previous year. Our petition, which was joined by Southern California
Edison and the California Electricity Oversight Board - and opposed by energy
marketing firms such as Dynegy and Mirant - also sought refunds of unreasonable
power costs.
While the FERC ultimately held that its orders imposing a price cap and a "must
offer" requirement made the CU complaint moot, recent evidence has confirmed
that energy traders were in fact engaging in market manipulation in the western
electricity market in 2000 and 2001. Legal action has been brought against trading
firms, and guilty pleas have been elicited. More recently, the Williams Companies
agreed to pay more than $400 million to settle accusations that it manipulated
electricity prices in California.(6) In addition,
the General Accounting Office(7) and a Senate
committee(8) have criticized the FERC for its
handling of the western electricity crisis, primarily due to its failure to
properly oversee the activities of energy traders leading to manipulative practices
by those traders.
B. CONCLUSIONS AND RECOMMENDATIONS
Based upon extensive analysis of
efforts to create electricity markets in the United States and abroad and a
review of the record in several recent the FERC proceedings, the Consumer Federation
of America and Consumers Union conclude that the FERC proposal to force all
regions of the country to rely on single price auctions in spot markets for
energy and transmission services for interstate electricity transactions is
not in the public interest and will not result in just and reasonable rates.(9)
Electricity markets around the country are in turmoil and consumers'
electricity service is becoming more costly and more risky. Rather than bring
stability to markets, this proposal will introduce more costs and more risks
for consumers. Electricity markets have failed more often than not, not because
of poor market design, but because of failure to recognize the economic fundamentals.
As we show in these comments, the proposed SMD largely ignores those fundamentals.
These comments demonstrate that the FERC has not established an evidentiary
basis for concluding that the interstate electricity jurisdiction is afflicted
by a significant problem of undue discrimination. The problem demonstrated in
the record is insufficient to justify the FERC's proposal to radically alter
the nation's energy markets. The comments go on to show even if the FERC has
the general authority to implement a Standard Market Design, the specific rules
it has a chosen violate its other obligations under the Federal Power Act. That
is, in pursuit of the elimination of undue discrimination, it has violated the
principle that service should be efficient and rates should be just and reasonable.
There are alternative mechanisms
to deal with undue discrimination that are well within its authority and would
not violate the other objectives of the statute, most importantly, FERC's duty
to ensure that the public is provided efficient service at just and reasonable
rates.
C. OUTLINE OF THE COMMENTS
The comments are divided into three
parts following this introduction.
In Section II we discuss the empirical reality of electricity service. In order
to promote the public interest and ensure that rates are just and reasonable,
public policy must be based on a clear understanding of the severe and difficult
economic conditions that obtain in the electricity sector.
In Section III we present the legal and policy context in which the SMD exists.
The Federal Power Act as interpreted by the courts requires public policy to
be oriented to the practical outcome of efficient provision of electricity service
at just and reasonable rates. Markets are a means to this end, not an end in
themselves. Theoretical market outcomes do not satisfy the Federal Power Act;
reliance on market forces is allowed only if the goals of the Act are furthered
in reality. In this section, we show that the FERC has not met the legal burden
under the Act to justify the radical change in public policy it proposes.
In Section IV, we show numerous ways in which the failure of the SMD to deal
with the reality of electricity service will result in unjust and unreasonable
rates to consumers. This section includes a complete rewrite of the market power
monitoring proposal. Here we propose an alternative approach to the problem
of undue discrimination that is consistent with the magnitude of the problem
that actually exists and the authority and objectives granted to the FERC under
the Federal Power Act.
II. THE UNIQUE CHARACTERISTICS OF ELECTRICITY
The Federal Power Act and its interpretation
by the Courts are premised on a number of fundamental assumptions about the
nature of electricity service. The continuing commitment to the concept of just
and reasonable rates that are based upon the cost of service reflects the recognition
that electricity is a special service. Its economic fundamentals are severe
and make for very weak market forces. Its physics are demanding, so that many
decisions are dictated by engineering and demand coordination and cooperation,
which is better supplied in centralized, integrated institutions. There are
no close substitutes for electricity. The implementation of public policy to
achieve the goals of the Federal Power Act must be based upon a careful understanding
of this empirical reality. Unfortunately, the FERC's SMD is not.
In order to make a market, there must be a competitive supply side, demand side
options and an open and adequate highway of commerce in between. In electricity,
we have none of the above (see Exhibit 1). The SMD does not provide the missing
elements. The market cannot be relied upon to be competitive and it will not
produce just and reasonable rates under current circumstances.
A. DEMAND
Electricity is a necessity that has
no substitute on the demand side in the short-term.(10)
Denial of access to this service results in deprivation; access based only on
price and the ability to pay results in discrimination. Demand is highly sensitive
to weather and geographically focused. Typically, many consumers can be affected
by the same factors that increase demand at the same time. This makes the demand
on local and regional networks and commodity markets subject to extreme peaks
and valleys.
Moreover, for the vast majority of consumers and over the relevant range of
economic values, reliability is an externality. This is a network industry in
which the fate of each depends upon the actions of all. Individuals cannot create
their own reliability or capture its full value in private transactions.(11)
Allocation of costs and benefits in this shared network is a difficult and ultimately
arbitrary task.
The price elasticity of market demand is very low in the short-term and low
in the long-term. The demand side cannot be counted on to discipline abusive
pricing behavior. Inflexibility of demand and its sensitivity to weather renders
the market volatile and vulnerable to abuse.(12) The
best evidence from electricity markets is that the short run elasticity of demand
is considerably less than -.1. In other words, a 10 percent increase in price
results in less than a 1 percent decrease in demand. In San Diego, where prices
doubled during the summer of 2000, the elasticity of demand was less than .03.(13)
A recent study finds that elasticities of demand exhibited in programs targeted
at demand reduction are quite low.(14) The model
programs achieve elasticities in the range of .03 to .1.(15)
Long run elasticities may be somewhat higher, but they are generally considered
to be considerably less than 1.(16)
B. SUPPLY
Because of the basic physics of electricity,
the production, transportation and distribution networks are extremely demanding,
real-time systems. Electricity cannot be stored economically. The system requires
perfect integrity and real time balancing much more than other services and
commodity systems do.(17) The infrastructure to
produce, transport and deliver electricity is extremely capital intensive and
inflexible. It takes a long time to build and bring power plants and transmission
lines into service and they last a long time. Thus, the ability to expand supply
in the short and medium term is severely limited.(18)
This is the critical factor that creates volatility and vulnerability to the
abuse of market power on the supply-side.(19)
Empirical studies show that strong economies are achieved by coordinating electricity
supply and demand.(20) Before restructuring, the
electricity industry was a reasonably well-run, complex, integrated network
that was under some stress.(21) Creation of markets
for electricity services leads to a huge growth in the number of transactions
conducted every day and creates heavy administrative requirements. An entity
that once maintained real-time balance as an insulated operation that could
oversee its own supply, demand and delivery must now contract to achieve real-time
balance simultaneously in five, six or seven different markets over broad geographic
areas.(22) This is a daunting task(23)
that consumes substantial resources.(24)
Accidents have a special role in market networks such as these. Because of the
demanding physical nature of the network, accidents are prone to happen. Because
of the volatile nature of the commodity, accidents tend to be severe. Because
of the integrated nature of the network and demanding real-time performance,
accidents are highly disruptive and difficult to fix. To keep things in balance,
the system needs either plentiful reserves close at hand, ample amounts of transmission
capacity readily available to move abundant supplies from far away, or a great
deal of load that can be quickly shed. Most electricity markets do not have
those luxuries today,(25) or any chance of acquiring
them any time soon.
In sum, the elasticity of supply is low. The best evidence from California and
elsewhere is that the short run supply elasticity is considerably less than
1. In fact, the supply elasticity is probably less than .2 on the basis of 1999
prices.(26) This is probably a higher price elasticity
than observed in 2000-2001, which suggests a supply elasticity considerably
less than .1 for the peak of 2000.(27) Short-term
supply responses are constrained by the difficulty of storing electricity. Provision
for reserve margins is uncertain in a competitive market because the provision
of reserves is unattractive to business interests, unless peak prices are extremely
high. Consequently, electricity markets free of reserve planning and coordination
may be chronically tight or subject to extreme price instability.
Transmission services are particularly strained under current conditions. The
interstate highway system for the movement of electrons is inadequate and was
not designed to handle market transactions.(28) Transmission
capacity is constrained and extremely difficult to expand for environmental
and social, not economic, reasons.(29) Getting
approval to site new transmission lines is also complicated and time consuming
because of the negative impact on public spaces and concerns about public health.
Similar constraints on the availability of distribution exist.(30)
Wires are difficult to repair or replace in response to outages.(31)
This places a premium on flexibility of supply and reserve margins, but neither
of these is well accommodated in the industry.(32)
C. SEVERE MARKET CONDITIONS MEAN MARKET POWER IS A PERVASIVE PROBLEM
Low elasticity of demand and supply
are now recognized as the most critical factor in rendering the market volatile
and vulnerable to abuse. When demand is inelastic, consumers are vulnerable
to price increases, since they cannot cut back or find substitutes for their
use of the commodity. When supply cannot respond quickly to price, producers
gain a strong interest in withholding supplies to increase prices.
The conceptual depiction of the exercise of market power over price is presented
in its simplest form in Exhibit 1 and Exhibit 2. The exercise of market power
allows suppliers to set price above their costs and achieve above normal profits.
Scherer and Ross - two leading, liberal economists - describe this concept as
follows, in the terms identified in Exhibit 2.
The profit-maximizing firm with monopoly power will expand its output only as long as the net addition to revenue from selling an additional unit (the marginal revenue) exceeds the addition to cost from producing that unit (the marginal cost). At the monopolist's profit-maximizing output, marginal revenue equals marginal cost. But with positive output, marginal revenue is less than price, and so the monopolist's price exceeds marginal cost. This equilibrium condition for firms with monopoly power differs from that of the competitive firm. For the competitor, price equals marginal cost; for the monopolist, price exceeds marginal cost…
[The] Figure .. illustrates one of the many possible cases in which positive monopoly profits are realized; specifically, the per-unit profit margin P3C3 times the number of units OX3 sold. As long as entry into the monopolist's market is barred, there is no reason why this profitable equilibrium cannot continue indefinitely.(33)Landes and Posner - two prominent, conservative economists -- offer a similar concept, described as follows with reference to Exhibit 3.(34)
Our concept of market power is illustrated in [Exhibit 3] … where a monopolist is shown setting price at the point on his demand curve where marginal cost equals marginal revenue rather than, as under competition, taking the market price as given. At the profit-maximizing monopoly price, pm, price exceeds marginal cost, C', by the vertical distance between the demand and marginal cost curves at the monopolist's output, Qm; that is, by pm -C'.The most frequent starting point for a discussion of the empirical measurement of the price impact of monopoly power is the Lerner Index. The Lerner Index, is defined as
M= (Price - Marginal Cost)/ Price.
Its merit is that it directly reflects the allocatively inefficient departure of price from marginal cost associated with monopoly. Under pure competition, M=0. The more a firm's pricing departs from the competitive norm, the higher is the associated Lerner Index value. A related performance-oriented approach focuses on some measure of the net profits realized by firms or industries.(35)
Conceptually, the Lerner Index is
at the center of the definition of market power in this and several other proceedings
ongoing at the FERC. This is the index of market power used by the California
Independent System Operator (CAL-ISO) in documenting abuses in the California
market.
Returning to Exhibit 2, the Lerner Index represents the ratio of the monopoly
overcharge (P3 - C3) divided by the total price (P3). The total value of the
overcharge is derived by multiplying the per unit overcharge times the total
number of units sold (OX3). This is equal to the area of the rectangle P3 BA
C3. Both Scherer and Ross and Landes and Posner note that direct empirical measurement
of the Lerner Index is difficult to obtain. Therefore, economists transform
these price cost analyses into other economic measures for which they have data
or which they can estimate.
Scherer and Ross describe a series of profitability measures. The measures of
profitability include profit margins, return on equity and return on investment.
As a surrogate, researchers have chosen diverse profitability measures that can be used, with varying degrees of reliability, as proxies for the evaluation of price above marginal cost.
A good long-run approximation to the Lerner index is the ratio of supra-normal profits to normal cost. This is approximated by the ratio:
____ Supra-normal profit / /S = ________________
Sales revenue
where supra normal profit = sales revenue - noncapital costs - depreciation - (total capital x competitive cost per unit of capital).
Second-best surrogates falling into three categories.
One is the accounting rate of return on stockholders' equity:
____ Accounting profits to stockholders / /E = ___________________________________
Book value of stockholders equityOr on capital:
____ Accounting profits + interest payments / /E = ___________________________________
Total Assets (36)
Landes and Posner take the discussion
in a different direction. The price/cost margin is converted to the reciprocal
of the elasticity of demand. They transformed the index into an expression that
used the market share of the dominant firm and decomposed the elasticity of
demand into two components.
We point out that the Lerner index provides a precise economic definition of
market power, and we demonstrate the functional relationship between market
power on the one hand and market share, market elasticity of demand, and supply
elasticity of fringe competitors on the other.
In words, this formula says that
the markup of price over cost will be directly related to the market share of
the firm and inversely related to the ability of consumers to reduce consumption
(the elasticity of demand) and the ability of other firms (the competitive fringe)
to increase output (the elasticity of this supply).
Interestingly, the point of the Landes and Posner article was to argue against
the rote use of market shares in market power analysis. This has recently become
a major focal point of debate in the electric utility industry. One aspect of
particular concern to Landes and Posner is critically important in the electric
industry - the elasticities of supply and demand.
Market Share Alone Is Misleading. - Although the formulation of the Lerner index in equation (3) provides an economic rationale for inferring market power from market share, it also suggests pitfalls in mechanically using market share data to measure market power. Since market share is only one of three factors in equation (2) that determine market power, inferences of power from share alone can be misleading. In fact, if market share alone is used to infer power, the market share measure in equation (2), which is determined without regard to market demand or supply elasticity (separate factors in the equation), will be the wrong measure. The proper measure will attempt to capture the influence of market demand and supply elasticity on market power.(37)
Once one brings these elasticities into play in an industry like electricity, the analysis become extremely troubling. Landes and Posner point out that when demand elasticities are low, market power becomes a substantial problem - the formula "comes apart."
[T]he formula "comes apart" when the elasticity of demand is 1 or less. The intuitive reason is that a profit-maximizing firm would not sell in the inelastic region of its demand curve, because it could increase its revenues by raising price and reducing quantity. Suppose, for example, that the elasticity of demand were .5. This would mean that if the firm raised its price by one percent, the quantity demanded of its product would fall by only one-half of one percent. Thus its total revenues would be higher, but its total costs would be lower because it would be making fewer units of its product.(38)
Raising price in these circumstances necessarily increases the firm's profits, and this is true as long as the firm is in the inelastic region of its demand curve, where the elasticity of demand is less than 1.
If the formula comes apart when the elasticity of demand facing the firm is l or less, it yields surprising results when the elasticity of demand is just a little greater than 1. For example, if the elasticity of demand is 1.01, equation (la) implies that the firm's price will be 101 times its marginal cost.(39) There is a simple explanation: a firm will produce where its demand elasticity is close to one only if its marginal cost is close to zero, and hence a relatively low price will generate a large proportional deviation of price from marginal cost.
In simple terms, when we talk about
market forces, we mean the ability of consumers to cut back or shift their demand
and the ability of producers to increase their output in response to price increases
-- we mean supply and demand elasticities. If these elasticities are too small,
market forces are weak and the exercise of market power will take place. The
formula "comes apart" because real world markets with elasticities
this low cannot work well. Firms raise prices to increase their profits because
they do not lose enough sales to competitors, or because consumers lack alternatives.
As we have seen, electricity presents a very severe market from this perspective.
Supply and demand elasticities are extremely low by these standards. The presumption
must be that market power will be abused - real world experience certainly supports
that conclusion. The FERC bears a heavy burden of proof in proposing to rely
on markets to deliver electricity at rates that are not inflated by the exercise
of market power. As discussed in the next section, the SMD does not adequately
address the problem of market power.
D. SEVERELY CONSTRAINED MARKETS MEAN EXCESSIVE SCARCITY RENTS ARE A PERVASIVE PROBLEM
The inelasticity of supply and demand
gives rise to a second deviation from a typical competitive market; excessive
rents. An economic rent is "a payment to a factor in excess of what is
necessary to keep it at its present occupation."(40)
More importantly, "in perfect competition, no rents are made by any factor,
because changes in supply bid prices of inputs and labor down to the level just
necessary to keep them employed."(41)
In economic theory, these sources of overcharges could be competed away if supply
and demand elasticities were high and electricity markets worked well. In reality,
because of the economic characteristics and social impacts of the electricity
industry, supply and demand do not respond. The results are elevated prices
and a transfer of wealth from consumers to producers that achieves little or
no real costs savings or efficiency gains.
Excessive scarcity rents accrue where changes in supply are slow or nonexistent,(42)
exactly the circumstances that apply to electricity markets. The supply curve
is so steep (supply is so inelastic) that the scarcity rents make up the vast
majority of the market price, as demand moves toward the peak. Supply cannot
respond to price signals, so the owners of existing facilities just collect
windfall profits. The high rates of return that result from scarcity rents are
unjust and unreasonable, just as excessive returns resulting from abuse of market
power.
While the FERC worries about ensuring that adequate scarcity rents are embodied
in prices so that generators can cover their costs, it is well established in
the economic literature that excessive scarcity rents can be eliminated without
harming economic efficiency.(43) Thus, the FERC's
over zealous pursuit of scarcity rents does not contribute to its obligation
to promote efficiency in the industry.
Scarcity rents also pose a transitional problem in electricity markets. Existing
facilities have proven to be far more valuable than their book costs, which
are all that can be reflected in regulated rates. If utilities capture those
plants at book value, but can price them at market in the future, the cost of
electricity increases. The assets that would earn these rents have gained their
advantage from historic utility financing. Unless the market windfall is passed
back to the consumers, electricity prices increase. If they are not passed back
to consumers, they can be used by incumbents, as a cross-subsidy, to frustrate
competition.
The definition of just and reasonable rates is quite clear and it does not admit
an excess scarcity rents. A just and reasonable rate is one that recovers for
the seller the cost of service plus a reasonable return. If scarcity rents result
in returns that are not reasonable, then the rates are unjust. Given the nature
of the electricity industry, the FERC must be on its guard against excessive
scarcity rents. As discussed in the next section, it is not and, as a consequence,
the rates under the SMD are very likely to embody excessive scarcity rents and
therefore not be just and reasonable.
E. THE RISK OF UNJUST AND UNREASONABLE RATES IS PERVASIVE UNDER CURRENT CONDITIONS
IN MOST ELECTRICITY MARKETS
The prevalence and huge magnitude
of these potential sources of excess prices poses a major challenge for the
FERC. Abandonment of cost-based ratemaking creates numerous and substantial
opportunities to demand unjust and unreasonable rates.
Exhibit 4 uses the actual supply curve for Florida to identify and distinguish
scarcity rents and monopoly rents. The order of magnitude between these two
sources of excessive prices is very large. Even in a competitive market, the
price of electricity would likely rise. The theoretical market-clearing price
in Florida - marginal cost as represented in the cost curve - would be about
50 percent higher than the regulated price. The scarcity rents created by the
steep supply curve are very large. The amount collected in scarcity rents would
be about $2 billion. The market price of electricity including scarcity rents
would rise to about $39/MWH, well above the cost of $25.5/MWh. In California
in 2000, excessive scarcity rents were in the range of 40 to 50 percent.(44)
The exercise of market power would drive prices even higher. A single firm,
acting alone but knowing that a substantial part of its capacity will be needed
in many hours of the year, would have the ability to raise prices substantially.
Substantial markups can be expected in virtually every hour in which the pivotal
supplier is called upon. In the dominant firm case, prices would rise to in
excess of $500 per MWh for a few hours and would be above $100 per MWh for about
2 percent of the hours. In the dominant firm case, the average price would rise
to almost $46 per MWh from the regulated price of $25.5 and the competitive
price of $39. In the cartel case, prices would hit the $1,000 cap almost 10
percent of the time and prices would be above $100 about a third of the time.
The average price would rise to over $370 per MWh. Before the meltdown in California,
we would never have considered such a possibility, but that is the price that
was sustained in California for almost half a year, during the off-peak period.
Exhibit 5 shows the results of a number of analyses of markets. It includes
simulations and actual results. The most extensive problem occurred in California,(45)
but virtually all markets, even those like PJM and the upper Mid-west that are
well endowed with transmission capacity and excess generation, have been beset
by the problem.
The actual experience in electricity markets substantiates this analysis. For
the first year of the reliance on the spot market in California, the exercise
of market power has been estimated to have increased costs by 22 to 30 percent,
driving prices up by $400 million to $600 million.(46) From
1998 to the summer of 2000, well over a billion dollars of rents was collected
in California.(47)
Policymakers are struggling to avoid a similar problem in Montana.(48)
As recently as April 2000, Montana was a very low cost state, with the price
of electricity forty percent below the national average.(49)
However, with restructuring industrial customer prices went "to market"
very quickly and their rates almost quadrupled, driving the statewide average
price above the national average. While the legislature made a deal with the
merchant generator who bought most of the capacity in the state to keep residential
rate increases "down" to only 50 percent when they "go to market,"(50)
the public utility commission battled to keep prices at just and reasonable
levels,(51) and a referendum to reclaim the resources
and recapture the scarcity rents for consumer was on the November ballot.(52)
The abuse of market power and the impact of tight markets that have been so
much in evidence in California are not limited to that market. PJM, the poster
child for deregulation, has suffered similarly near vertical supply and the
exercise of market power that parallels the problem in California in its early
days.(53) In the PJM pool, the mark-up in the
first year was estimated at 29 percent, increasing prices by $400 to $600 million.(54)
In one week in 1998 in the Midwest, $500 million changed hands;(55)
$70 million was collected in New York in one day.(56)
The New England power pool experienced price run-ups.(57)
In the UK, the mark-up of price over cost has been sustained at the 25 percent
level over a long period of time.(58) Examination
of bidding patterns in California and elsewhere makes it clear that strategic
bidding takes place at many hours far from the peak (see Exhibits 6-9).
The result of withholding and excessive scarcity rents to drive prices far above
costs is supranormal profits.(59) The CAL-ISO
analysis shows that by February 2001, the costs of a new plant brought on line
in California when the restructured market commenced in May 1998 would have
been fully recovered in just three years.(60) Excessive
returns have not escaped the attention of the analysts dealing with the situation
in the UK, although that market has not exhibited the extreme dysfunction of
the California market. As Wolak and Patrick put it, "the return to capital
in this industry is increased by 25% as a result of this strategy."(61)
Indeed, when windfalls become as massive as they have been in electricity markets,
they distort economic incentives. Producers make more by withholding supplies
(demonstrating a backward bending supply curve) than by increasing output.(62)
Reserve margins and excess capacity emerge as such critically important factors
for maintaining system reliability and for disciplining market power that they
deserve to be singled out for particular attention by policy makers. In a restructured
industry, keeping the lights on involves two problems, not one. Not only must
the electrons be available, but the consumer must also be able to afford to
flip the switch.
Provision for reserve margins is uncertain in a competitive market because the
provision of reserves is unattractive to business interests, unless peak prices
are extremely high. Consequently, electricity markets free of reserve planning
and coordination may be chronically tight or subject to extreme price instability.
Based on restructured market performance, reserve margins need to be well above
traditional levels of 15 to 20 percent and perhaps as much as 30 to 40 percent
to prevent the abuse of market power.(63) In addition
to the normal operating reserve that the industry has required, there must also
be a competitive, or economic, reserve whose primary function is to restrain
pricing abuse.
The message that emerges from the real world experience in electricity markets
is that they must be both unconcentrated and have substantial excess capacity
if the abuse of market power is to be prevented. Bidders into the market must
face the prospect that a substantial part of their capacity will not be called
upon a significant part of the time if they bid high.(64)
Analyses of other markets like Australia confirm this.(65)
Simulations based on American cost and demand data, for system with
twenty percent excess capacity, lead to a similar conclusion.(66)
Similarly, in analyzing the California market, even at moderate levels
of demand (in the 300th highest capacity hour of December), a substantial market
power threat exists.(67)
F. MARKET DESIGN CANNOT SOLVE THE PROBLEM OF WEAK MARKET STRUCTURE
The FERC devotes a great deal of
attention to market design - bidding mechanisms and decision rules framed in
terms of auction theory. Unfortunately, no amount of market design can compensate
for flawed market structure. In fact, there is no conflict between auction theory
and structural analysis because under the necessary conditions for competitive
structure, the mechanism of the auction does not matter.(68)
The fundamental issue is the underlying competitive structure.(69)
Not surprisingly, the FERC's set of assumptions is roughly equivalent to a perfectly
competitive market made up of small competitors. After a decade of debate over
electricity markets between the auction theorists and the supply function theorists
it is quite clear that the auction and supply function approaches lead to the
same conclusions.(70) Inadequate market forces
will frustrate any bidding mechanism.(71)
The problem is simply that those who have been concerned about efficient auction
design have failed to ask the basic question, "does the empirical reality
comport with the theoretical assumptions underlying the market?" The traditional
market structure concern with the elasticity of supply and demand plays out
in the auction literature as a "deviation" from the assumption that
bidders in California face(72) uncertainty. The
empirical evidence from the United Kingdom, the oldest "deregulated"
market, whether framed in terms of market structure or auction theory, invariably
and consistently demonstrates the exercise of market power.(73)
Needless to say, the evidence from California leads to the same conclusion and
it is clear that the institutions chosen were particularly vulnerable to market
power abuse.(74) An early analysis from the auction
literature gives the most direct indication of this.(75)
The empirical evidence that Klemperer cites on the U. K. shows not only that
market power is being exercised, but that the bidding strategies fit his auction-theory
based explanation.(76) The California bidding
certainly fits the pattern, although the detailed econometric studies will be
published years after the disaster commenced.(77)
One of the most interesting hints is the CAL-ISO analysis of support prices
(next highest and next lowest bid).(78)
Empirical and theoretical analysis of auction also identifies institutional
problems that drive the result away from optimal, or competitive market equivalent
outcomes. In particular, where participants enter repeatedly into auctions with
multiple units the ability to game the process and earn excess profits is apparent.(79)
Perhaps the clearest lesson to be learned from this literature is
that given the vulnerability of these markets and the huge windfalls to be gained,
market participants will devote a great deal of effort to developing strategies
to game any system.
It is noteworthy that this problem was also recognized in the theoretical market
structure literature. An improvement in the Landes and Posner formula was immediately
suggested.(80) It can be adjusted to take into
account the key factor of strategic interactions. A term can be included which
adjusts for the special impact of the market shares of other firms.
where k = the effect of strategic interaction
If the likelihood of strategic interaction will reinforce the efforts of the
dominant firm to raise prices, then k can be set positive. If there is likely
to be a uniquely vigorous competitive response, then k can be set negative.
When k equals zero, there is no strategic interaction effect. Estimating the
value of k is a subjective process, but it does add an important element to
relating market structure to performance through conduct. The auction literature
teaches that repeated auctions with multiple units create conditions in which
non-collusive signaling, paralleling and sympathetic behaviors increase the
likelihood that market power will be abused. This line of reasoning has had
a strong basis in market structure analysis.(81)
Weak market structure and a market design that has repeated interactions of
a small number of players leads to the analytic conclusion that regulators must
be keenly aware of collusive and noncollusive conduct among market players.
It cannot focus solely on dominant or pivotal suppliers. Economic policy has
come to routinely recognize this issue.
The Department of Justice Merger Guidelines are oriented toward conditions under
which certain types of anticompetitive behaviors are sufficiently likely to
occur to require regulatory action.
The rule of thumb reflected in all iterations of the Merger Guidelines is that the more concentrated an industry, the more likely is oligopolistic behavior by that industry.... Still, the inference that higher concentration increases the risks of oligopolistic conduct seems well grounded. As the number of industry participants becomes smaller, the task of coordinating industry behavior becomes easier. For example, a ten-firm industry is more likely to require some sort of coordination to maintain prices at an oligopoly level, whereas the three-firm industry might more easily maintain prices through parallel behavior without express coordination.
The Merger Guidelines recognize that market power can be exercised with coordinated, or parallel, activities and even unilateral actions.
Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time.*/ In some circumstances, a sole seller (a "monopolist") of a product with no good substitutes can maintain a selling price that is above the level that would prevail if the market were competitive. Similarly, in some circumstances, where only a few firms account for most of the sales of a product, those firms can exercise market power, perhaps even approximating the performance of a monopolist, by either explicitly or implicitly coordinating their actions. Circumstances also may permit a single firm, not a monopolist, to exercise market power through unilateral or non-coordinated conduct --conduct the success of which does not rely on the concurrence of other firms in the market or on coordinated responses by those firms. In any case, the result of the exercise of market power is a transfer of wealth from buyers to sellers or a misallocation of resources.
*/ Sellers with market power also may lessen competition on dimensions
other than price, such as product quality, service or innovation. (82)
Lawrence Sullivan and Warren S. Grimes, describe the DOJ approach as follows:
The coordination that can produce adverse effects can be either tacit or express. And such coordination need not be unlawful in and of itself. According to the 1992 Guidelines, to coordinate successfully, firms must
(1) reach terms of interaction that are profitable to the firms involved and
(2) be able to detect and punish deviations. The conditions likely to facilitate these two elements are discussed separately, although they frequently overlap.In discussing how firms might reach terms for profitable coordination, the Guidelines avoid using the term "agreement," probably because no agreement or conspiracy within the meaning of Section 1 of the Sherman Act is necessary for the profitable interaction to occur. As examples of such profitable coordination, the Guidelines list "common price, fixed price differentials, stable market shares, or customer or territorial restrictions." Sometimes the facilitating device may be as simple as a tradition or convention in an industry.
They go on to note the mechanisms
that might be used and the usefulness of the HHI in this regard.
Oligopoly conditions may or may not require collusion that would independently violate Section 1 of the Sherman Act. A supracompetitive price level may be maintained through price leadership (usually the leader is the largest firm), through observance of a well-established trade rule (e.g., a convention of a 50 percent markup in price among competing retailers), or through strategic discipline of nonconforming members of the industry…
To the extent that one or very few members of a concentrated industry have much higher market shares than other members, the opportunities for strategic disciplining may expand… The expanded ability of the larger firm to coerce price discipline is reflected in the Herfindahl-Hirschman Index (HHI), which will assign a high concentration index to an industry with a very large participant. An industry with the same number of participants, each of them roughly equal in size, will have a lower index. (83)
The area of noncollusive, oligopoly
behavior has received a great deal of attention in the academic literature.
A variety of models have been developed in which it is demonstrated that small
numbers of market participants interacting in the market, especially on a repeated
basis, can learn to signal, anticipate, and parallel one another to achieve
outcomes that capture a substantial share of the potential monopoly profits.
III. LEGAL AND POLICY CONTEXT
A. THE SMD AND UNDUE DISCRIMINATION: A SOLUTION IN SEARCH OF A PROBLEM
The FERC has failed to demonstrate
that the problem the Standard Market Design claims to solve, undue discrimination
in access to transmission services, merits the radical restructuring and deregulation
it proposes. The cure is far worse than the disease.
There has been no showing by the FERC that undue discrimination is the cause
of a significant number of unjust and unreasonable rates or substantial inefficiencies
in interstate transactions.(84) Indeed, the FERC's
own efforts to estimate the benefits of the elimination of undue discrimination
through the formation of the Regional Transmission Organizations found remarkably
little "efficiency" gains to be had. The cost-benefit calculation
prepared under the direction of the FERC to support this rule is unconvincing.
Cost savings of 3 to 5 percent were projected, (85)
even though transaction cost increases, market imperfections and market power
are not taken into account. Even these small gains have been challenged as being
too large.(86)
Given that the FERC could find little in the way of harm from the purported
discriminatory operation of the grid, we should not be surprised to find that
the claim in the SMD NOPR that there is extensive undue discrimination in interstate
markets lacks specificity.(87) The FERC makes
no effort to directly link discrimination to negative market outcomes.
The FERC's evidentiary record on undue discrimination is thoroughly corrupted.
The FERC relies on a few formal complaints, in which findings of undue discrimination
were never made ( 50) and informal hotline calls, statements and public conferences
and complaints. These are hearsay at best, lies at worst. The FERC's claim of
undue discrimination is based on the complaints of companies who have proven
to engage in an extensive and repeated pattern of market manipulation and fraud
across a number of markets and over a number of years. In light of revelations
of recent trading abuses, their claims of abuse cannot be given any credence
by the Commission. How many of the transactions they claim were frustrated by
discrimination were really wash trades, or reflected manipulation of schedules?
The second problem with the FERC's evidentiary record on undue discrimination
is that many of the practices it cites as unduly discriminatory may, in fact,
be efficient actions taken by entities possessing economies of scale or exhibiting
economies of vertical integration. The benefits of vertical integration ( 48)
and the long term commitment of load serving entities to their franchise customers
( 36) are, in fact, driven by efficiency. They reduce transaction costs and
lower the cost of capital. The FERC's proposal destroys these economies based
on the mislabeling of them as undue discrimination, needlessly driving up the
cost of electricity.
A handful of isolated, anecdotal and misconstrued examples of undue discrimination
in the interstate transmission jurisdiction does not create an evidentiary basis
to support the radical overthrow of the current approach to managing the provision
of transmission service in the interstate jurisdiction or the dramatic extension
of the FERC jurisdiction into retail transactions that bundle transmission services.
B. UNDUE DISCRIMINATION VS. JUST AND REASONABLE RATES
The Federal Power Act is quite clear
and explicit that every rate or charge for transmission or electricity
subject to FERC jurisdiction must be just and reasonable.
All rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electricity subject to the jurisdiction of the Commission, and all rules and regulations affecting or pertaining to such rates or charges shall be just and reasonable, and any such rate or charge that is not just and reasonable is hereby declared to be unlawful.(88)
Reliable service at just and reasonable
rates is the goal of the Act that the FERC must achieve, with or without market
mechanisms. Under the Federal Power Act reliance on markets and market forces
is a means to an end, not an end in itself. Moreover, they alone cannot determine
the reasonableness of rates, for as the Supreme Court noted, "Congress
could not have assumed that 'just and reasonable' rates could conclusively be
determined by reference to market price."(89)
The FERC may rely upon market-based prices in lieu of cost-of-service regulation
to assure a just and reasonable result but in the absence of a competitive market
it must return to cost of service regulation.(90) In
other words, the FERC cannot abandon cost of service regulation until and unless
it finds that markets are sufficiently competitive to produce a result that
approximates cost of service regulation. The FERC must return to cost of service
regulation if competition in a market subsequently proves to be inadequate to
yield just and reasonable outcomes.
The just and reasonable standard requires that rates not be exorbitant under
sections 205 and 206. The statutory aim is "to protect consumers from exorbitant
prices and unfair business practices";(91)
not permit abusive pricing practices because "[r]ates that permit exploitation,
abuse, overreaching or gouging are by themselves not just and reasonable,"(92)
The Commission's responsibility is to allow only reasonable returns
by ensuring "just and reasonable rates which will be sufficient to permit
[suppliers] to recover [their] cost of service and a reasonable return on [their]
investment").(93) Thus exorbitant prices,
abusive practices and unreasonable profits are three interconnected criteria
for evaluating whether rates are just and reasonable. Underlying all three is
the cost of the service.
Under the SMD, the FERC requires the creation of new interstate entities called
Independent Transmission Providers (ITP) and requires them to establish six
different electricity markets. It has no assurances, whatsoever, that the rate
demanded (bids offered) for any of the six electricity products it requires
will bear any relationship to the cost of production. Moreover, under the single
price auction, which is the only type of market it will allow, the price paid
for all but the last unit offered is likely to exceed the cost of production.(94)
It takes a heroic set of assumptions, which have rarely, if ever,
been observed in the electricity industry, to claim that this scheme will produce
prices that are just and reasonable even on average.
The FERC cannot make such heroic assumptions; it must demonstrate the justness
and reasonableness of rates with much greater certainty. The Federal Power Act
"makes unlawful all rates which are not just and reasonable, and does not
say a little unlawfulness is permitted." (95)
In the pricing of transmission services, the FERC does not even pretend to be
attempting to establish charges that bear any relationship to costs. Here it
explicitly adopts a value-based approach that intends to charge whatever the
market will bear.
The adoption of a market-based locational marginal pricing (LMP) transmission congestions management system is designed to provide a mechanism for allocating transmission capacity to those who value it most.(96)
Locational marginal pricing makes
no reference to the cost of providing transmission. It derives the price strictly
from the scarcity value of electricity at adjacent nodes of the system. Any
similarity between the price and cost of transmission under this approach would
be purely accidental and almost certainly infrequent. Deregulating of transmission
pricing, as the FERC has done by totally severing the relationship between the
cost of transmission and its price, violates the Act. Setting the price of transmission
at the highest possible level, as the FERC has done by relying on locational
marginal pricing, inevitably creates massive scarcity rents that will accrue
to transmission owners, even if the abuse of market power in transmission markets
can be prevented by the new, and untried, ITPs.
The FERC's approach to the provision of transmission services also contradicts
its obligation to promote efficient operation of the interstate transmission
network. As suggested above, the obsession with the deintegration of transmission
and generation destroys the economies of vertical integration. This complete
deintegration is necessary to implement LMP. Further, LMP will frustrate long
term planning because the FERC insists on relatively short periods for allocation
of congestion revenue rights, abolishes the right to designate load and resources
and cannot create the authority in the ITPs to actually implement expansion
of the grid.
C. THE SMD, MARKET POWER AND JUST AND REASONABLE RATES
To the extent that FERC claims legal
authority to rely on market-based rates, it cites a series of D.C. Circuit Court
rulings as noted above. These decisions were not appealed to the Supreme Court,
perhaps because they were narrow in scope. Given the fact that the Supreme Court
has taken a rather different view of Congressional intent in defining just and
reasonable, whenever the issue arrives before it, we believe the radical change
FERC has proposed goes well beyond what the Supreme Court will tolerate. More
importantly, we believe the FERC proposal does not even comport with the District
Court rulings.
In an introductory economic text book, under a set of assumptions that bear
no resemblance to the electricity industry, the FERC's single price auction
for electricity and its value-based pricing of transmission, could produce just
and reasonable rates. While that might produce an A in economics 101, such a
theoretical exercise cannot satisfy the demands of the Federal Power Act. The
FERC must document the existence of market forces and must have "empirical
proof" that competition "would ensure that the actual price is just
and reasonable."(97)
The FERC's claim that ridding the interstate jurisdiction of undue discrimination
will ensure just and reasonable rates is simply wrong. Nondiscriminatory access
may or may not be a necessary condition for effectively competitive markets,
but it certainly is not a sufficient condition. At least three other conditions
are necessary and probably more important to ensure effectively competitive
markets - vigorous competition in generation, adequate physical infrastructure
for transmission, and transparent institutions for trading.
The hope that sufficient competition in generation would grow to discipline
market power that was created by the Energy Policy Act of 1992 is fading fast.
The landscape of the competitive generation sector has changed dramatically
since the FERC issued its analyses of the market power problem. The extent of
bogus trading and market manipulation has moved far beyond anything the FERC
was confronted with in the past. The competitive generation sector has all but
collapsed as investors run scared. Competition without competitors cannot result
in just and reasonable rates.
Similarly, the FERC's claim that the ex ante market monitoring and market power
mitigation are sufficient to protect the public are unconvincing. The FERC has
barely begun to scratch the surface of market abuses in the West Coast fiasco.
For example, the recent revelations about manipulation of the price of gas threaten
the fabric of the FERC's market power mitigation, since the price of gas will
drive the benchmark competitive price. Structural separation of gas and electricity
may be necessary to prevent abuse in electricity markets. Our comments in Environmental
Action and the Consumer Federation of America v. FERC (one of the central proceedings
the FERC cites as a justification for its proposed rule) demanded an investigation
into the manipulation of natural gas markets in California. After months and
months of delay, the FERC has barely begun that investigation.
To date, the FERC has not only failed to deal with past abuses, but it has still
not instituted a mechanism to identify situations under which there is a high
likelihood of market power abuse. The FERC has failed to revise its approach
to defining when market-based rates authority is granted. The FERC has inappropriately
granted market-based rate authority in many cases and therefore created the
problem of unjust and unreasonable rates being charged. In other words, the
FERC itself has created a larger problem of unjust and unreasonable rates by
permitting deregulation when inadequate competition exists. The current proposal
to eliminate undue discrimination will only make matters worse, not better.
Given that the industry is in a state of turmoil and the evidentiary basis is
weak, FERC's radical, "one-size fits all" deregulation proposal poses
a severe threat to the public interest, as outlined in the following comments.
IV. THE SMD CANNOT CREATE JUST AND REASONABLE RATES
The previous section has pointed
toward a large number of areas in which the SMD is inadequate to deal with the
reality of electricity markets. Our review of the conditions in the electricity
market indicates that they favor sellers at the expense of buyers. The imbalanced
market conditions indicate that the exercise of market power is highly likely
and that even in the absence of market power, excessive scarcity rents are likely
to accrue to sellers. Under these circumstances, the SMD should lean heavily
against creating conditions that enable the exercise of market power and the
control of excessive scarcity rents. Unfortunately, the SMD does neither.
· The SMD fails to address the underlying structural problems in the industry in any meaningful way.
· In the design of the market, it is driven by a desire to ensure that scarcity rents are maximized, favoring sellers at the expense of buyers.
· Its monitoring and mitigation of market power is totally in adequate.
As a consequence, the SMD does not
have a reasonable probability of ensuring that rates will be just and reasonable.
A. STRUCTURALLY COMPETITIVE MARKETS ARE A NECESSARY CONDITION FOR DEREGULATION
- MARKET MONITORING AND MITIGATION ARE NOT SUFFICIENT
It is a widely accepted principle
of economic practice that structural remedies are vastly superior to conduct
or behavioral remedies. Under the severe conditions that obtain in electricity
markets, it is clear that both are needed, but the fundamental principle is
even more important. No amount of market design, which is essentially a behavioral
matter, can compensate for a lack of actual competition. Prices cannot be presumed
to be just and reasonable unless markets are effectively competitive at the
structural level. Moreover, because market fundamentals (elasticities of supply
and demand) are so weak, the structural standards must be particularly high.
Because the market fundamentals are so weak, conduct oversight must also be
highly developed.
Institutionalizing a game of cops and robbers, as the Commission has proposed
with its overemphasis on market monitoring and market power mitigation, will
not protect the public interest because the robbers have more resources and
much greater incentives than the cops. The Commission must ensure that the structures
are competitive before it deregulates markets (i.e., before it grants market-based
rate authority), so that it can diminish the incentives for the robbers. In
other words, instead of relying so heavily on a regime that increases the probability
that the cops can catch the robbers, the FERC must develop a regulatory mechanism
that decreases the probability that the crime will be profitable.
The structural criteria by which the FERC proposes to deregulate markets and
the behavioral rules it proposes to oversee those markets are entirely inadequate
to protect the public interest and they will not ensure that rates are just
and reasonable. They focus in on a single actor (from a structural point of
view) and a restricted set of products (from a conduct point of view). The FERC
must design its structural test of competitiveness taking into account not only
the unilateral actions of dominant firms (pivotal suppliers), but also potentially
collusive actions and non-collusive games of multiple market players. It is
utter hypocrisy to claim that collusive and non-collusive games of market participants
have not or cannot raise the price of electricity to unjust and unreasonable
levels. Given the recent experiences in electricity markets, the FERC must assume
that this behavior will take place, unless structural conditions are sufficiently
competitive to prevent it. The number of competitors must be so large and the
redundant capacity available sufficient to make even non-collusive games unprofitable
for market participants.
One premise of the SMD is that most power sales will be made through bilateral
contracts. Yet, there is no requirement that generators will enter into such
contracts and, in fact, there is some disincentive for them to do so. Throughout
the NOPR there is language around these markets being just a small part of the
overall purchasing of energy, that buyers and sellers will continue to enact
bilateral transactions. "Standard Market Design is premised on the use
of bilateral contracts. While LSEs may purchase energy in the spot markets,
these purchases should constitute a small percentage of their actual purchases."(98)
However, there is no guarantee that sellers will be encouraged or required to
enter into such transactions and thus no guarantee that buyers won't be forced
to purchase larger and larger shares of their total energy need in the spot
markets, making them more vulnerable to price fluctuations and higher prices.
And the language in the NOPR is inconsistent on whether bilateral contracts
will constrain market prices or simply be another vehicle for paying them. Will
"bilateral contracts generally reflect buyer and seller expectations of
prices in spot markets"(99) or are "bilateral
contracts…an effective way for a buyer to mitigate the market power of
a seller"?(100) Clearly, it is the latter.
Because the price of any power sold in the market (no matter the cost of producing
it) will rise to the highest accepted bid, generators will have no incentive
to enter into long-term contracts at lower rates. Sellers will expect to get
the market price, either by moving more of their sales into the market or by
revising the price at which they are willing to enter into bilateral contracts.
That the FERC thinks this will happen is confirmed in the section on bidding
rules for the day ahead energy market. One possible option laid out in the NOPR
is for those suppliers with very high start-up costs to "submit bids that
are self-schedules, that is, that would indicate an amount to be supplied at
a location regardless of the applicable energy price. The supplier would receive
the applicable market-clearing price for its energy. This option may be useful
for suppliers with very high start-up costs such as nuclear facilities."(101)
Yet if most power is to be supplied through bilateral contracts, nuclear facilities
are exactly the type of power that we would expect to be under such contracts.
We can only assume that the FERC does not really expect that most power will
be provided through bilateral contracts.
Before the FERC deregulates a market, it must ensure that each of the markets
in which electricity is traded - spot and bilateral - for each of the products
it proposes to deregulate is structurally competitive all of the time. The Federal
Power Act does not say that rates must be just and reasonable some of the time
for some of the products subject to the FERC jurisdiction. Cost-based regulation
covered all of the products all of the time. The FERC's deregulation cannot
provide less protection.
After a decade of struggling to implement the Energy Policy Act of 1992, the
FERC should know what the problem is. For technological, economic and social
reasons, market forces are weak in the electricity sector. The SMD, as an experiment,
would like to change some of these things (e.g. with demand-side bidding), but
it cannot assume it will succeed in doing so and deregulate rates before it
has demonstrated that the market disciplining mechanisms can work. Until it
can demonstrate that its approach has dramatically strengthened market forces,
it cannot claim that rates will be just and reasonable.
The SMD devotes almost no attention to the issue of competitive structure. It
is entirely focused on market design and market monitoring. In this it contradicts
the generally correct view that structural remedies for market power are superior
to conduct remedies. The FERC must demonstrate that the market is structurally
competitive before it deregulates - i.e., relies on market-based rates. This
means it must rely on empirical facts, not theoretical assumptions about markets.
The SMD leaves markets vulnerable to the abuse of market power through two fundamental
oversights. The reserve margin requirement is far too low to create a bulwark
against the abuse of market power. The 12 percent figure chosen by the FERC
is barely at the level of operating reserves traditionally used in vertically
integrated, non-market situations. It does not create an economic reserve, which
is necessary to prevent the abuse of market power.
The FERC cannot abdicate its responsibility to ensure that rates are just and
reasonable by stating that state authorities can adopt higher reserve margin
requirements. The FERC must demonstrate on the basis of its own action within
its jurisdiction that rates are just and reasonable. Based on the reserve margin
requirements of the SMD, it has failed to properly exercise its charge to protect
the public.
The SMD has failed to deal with a critically important structural issue - vertical
integration between the gas market and the electricity market. It has now become
apparent that natural gas prices in the West were manipulated by market participants
who were active in both the electricity and natural gas markets. This manipulation
strikes at the heart of the fabric of the SMD, since a market clearing price
in a single price auction is likely to be driven by the cost of natural gas.
Structural separation between the natural gas and electricity markets may be
the only way to effectively control this threat of abuse.
There are practical implications of this observation that could inform the FERC
efforts to reform. For example, we recommend, as a practical matter that the
FERC spend a substantial period of time demonstrating that the new regional
transmission organizations prove that they can operate and expand the grid.
It is folly for the FERC to launch transmission and generation markets when
transmission facilities were never designed to support market transactions and
are constrained. It must also adopt decision rules and benchmarks for market
operation and market monitoring that yield theoretically just and reasonable
rates. The SMD has failed to do so on both counts.
The FERC has proposed a highly complex series of markets to be operated by entities
that do not presently exist in most of the country. The NOPR glosses over the
logistics of creating and operating the proposed markets. Despite the current
lack of entities to manage these markets, FERC assumes that they will be created
and will seamlessly implement the multiple auctions. And they are multiple.
The FERC has proposed day-ahead, real-time, and possibly pre day-ahead markets
in energy, transmission service, regulation and frequency response, operating
reserve-spinning, operating reserve-supplemental, as well as periodic markets
for congestion revenue rights and the procurement of replacement reserves.
Implementing these markets will require coordination across a variety of entities
and issues. The logistics of how some of these various coordinating activities
will work are addressed in the NOPR. However, in many cases, neither the mechanics
nor the issues to be resolved are even addressed.
ITPs will need to coordinate energy auctions with auctions in neighboring ITPs
for energy that is to be sold across borders. They will need to synchronize
decisions about energy purchases with decisions about scheduling transmission
that will determine whether in fact the purchased energy can be transported
from seller to buyer. If a buyer requests service at a receipt point and a seller
offers at a delivery point, the ITP will have to compare all requests and offers
not only for price but for feasibility of delivery and creating the least congestion
in transmission. Because sellers could offer the same capacity in the various
ancillary service markets, as well as the energy market, the ITP will need to
determine results of various auctions and market prices simultaneously.
The FERC's authority and ability to create and oversee these entities is dubious.
The ability of these entities to operate, plan and expand the transmission system
is doubtful to say the least. There is no reasonable basis on which to conclude
that the new institutional structure the FERC proposes for the interstate jurisdiction
will result in just and reasonable rates.
At best, the effort to create these entities and markets is premature. The original
concept of regional transmission organizations was essentially to create entities
to administer the regional transmission grid in a non-discriminatory manner.
For reasons outlined in our earlier comments in the relevant proceedings,(102)
regional transmission organizations never came into existence, so
the administrative approach to nondiscriminatory operation of the grid by an
independent entity was never tried. The FERC essentially assumes it would have
failed, and now declares the mandatory creation of entities to operate the grid
with one-price spot auctions for six different electricity products and several
components of transmission service.
There is no evidentiary basis for concluding that truly independent transmission
organizations could not operate the grid in a non-discriminatory manner that
would not expose the public to the risks and volatility of the spot market.
The leap to spot markets without having created the institutional and physical
infrastructure to support them places the consumer at great risk. Excessive
scarcity rents that flow from inadequate physical transmission infrastructure
and monopoly rents that flow from inadequately competitive generation markets
are both very real dangers under the FERC's proposal. Both result in unjust
and unreasonable rates.
It would be foolish, if not arbitrary and capricious, to abandon the regime
of cost-based transmission services, which has performed reasonably well, in
favor of a risky, spot market approach for which the FERC has failed to lay
the proper groundwork.
In order to promote the public interest and ensure just and reasonable rates
in the interstate jurisdiction, the FERC should start by creating interstate
institutions to administer interstate transmission services. The FERC needs
to demonstrate that these institutions can be brought into existence to effectively
administer and expand the grid. These institutions should be allowed to rely
on tried and true cost-based regulation, which controls both excessive scarcity
rents and the abuse of market power. A survey of the grid will readily identify
a round of high priority grid expansions. The regional organizations should
demonstrate that they can operate and enlarge the grid. They should be allowed
to rely on administrative approaches to implementing non-discrimination.
The new transmission organization can accomplish the fundamental goals of promoting
efficient operation of the grid while preventing undue discrimination at just
and reasonable rates by applying existing principles in a rigorous fashion:
· Least cost planning for grid expansion by conducting a competitive bidding process
· Implement security constrained least cost dispatch for grid operation
· Tariffs should be distance sensitive and based on actual cost
· All users of the grid should pay for their use out of one network access service
B. EXCESSIVE SCARCITY RENTS
Because of the strong likelihood that the severe market fundamentals will create excessive scarcity rents, the FERC must adopt decision rules that seek to squeeze those rents out. In establishing benchmarks, the FERC should choose the lowest possible price, which is what a competitive market would do. In a discussion of market power mitigation, the NOPR addresses increases in price that could result from possible "unanticipated and sustained market conditions that would give the ability and the incentive to exercise market power:"
These kinds of events, which are not transitory, can provide opportunities to exercise market power even in a market that is normally workably competitive. … Although market-clearing prices would be expected to rise in these situations, and perhaps sharply and significantly, it may be important for the market to have the assurance that the price increases are attributable to the extreme circumstances and not to the exercise of market power. (103)
We would instead ask why we should
accept the premise that prices for all energy should rise under these circumstances.
The cost of the power that was produced and transmitted before the onset of
the immediate market conditions would not have changed. Why, therefore, should
buyers suddenly pay "significantly" higher, even exorbitant, rates
for this energy whose costs have not increased?
When an electron is bid into multiple markets - either product or geographic
markets - the FERC should ensure that the electron sells at the lowest possible
price. The lowest of bid prices would be the closest to the marginal cost at
which the seller is willing to make the electron available. That is the theory
underlying the FERC's single price auction; that must be the practice. The FERC's
failure to apply the lowest price rule means, by definition, rates will not
be just and reasonable under the SMD. (104)
When electrons are bid into multiple markets across time, FERC selects a solution
that maximizes price, rather than minimizes it. When electrons are bid into
a specific geographic area, it allows the bid price to include an opportunity
cost of the price that could have been bid into another geographic market. Language
elsewhere in the NOPR seems to indicate that in fact FERC's aim is to ensure
highest price to sellers under any and all circumstances. Take for example the
setting of prices for ancillary services in the day ahead market.
Because of the way that prices would be established in each market, the market
into which each bidder of generation capacity or demand-side resource is scheduled
would also be the market that is the most profitable for the bidder. That is
because…the prices in each market would reflect marginal opportunity costs
of the bidders in that market. Thus, the price in each market would be high
enough to allow each accepted bidder in that market to receive at least as much
profit as it could have received in any other market operated by the Independent
Transmission Provider that it is technically capable of participating in. (105)
Sellers in one market where the market-clearing price has been set would in
fact be able to reap a higher price if such a rate were set in another market.
This is accomplished by the creation of a new definition of marginal costs,
one that has nothing to do with actual costs and everything to do with maximizing
profits. Under this new definition, marginal cost equals the highest total bid
cost of any seller which equals "the sum of: (1) the generator's availability
bid per MW and (2) the opportunity cost of forgoing sales in other markets operated
by the Independent Transmission Provider, expressed on a per-MW basis."(106)
Sellers would now be compensated for the money they could have earned
by selling the same resource into a different market. To call "lost"
opportunity a cost of producing energy is simply incorrect; to institutionalize
that end-users should pay producers this additional amount is beyond defense.
The FERC should be protecting consumers, not producers. Finally, what is the
justification for the FERC's assumption that ITPs will need to second-guess
producers because the producers are not capable of protecting their own interests
in their bidding offers?
After placing its faith in a single price auction, the FERC repeatedly jiggles
the outcome of bidding to favor sellers at the expense of buyers. Bidders have
a make whole provision in the uplift payment. (107)
The FERC establishes a safety-net bid cap, but them immediately offers the provision
that "if the monitor establishes that some units may provide power at a
cost that exceeds the safety-net, a higher price for those units would be justified."(108)
Before this is allowed, there would have to be agreement on what
constituted the "cost" of producing the power in question and a mechanism
for confirming the basis for this calculation.
There is a similar "scarcity" payment allowed for peaking units whose
costs would not be recovered because the market price was set at marginal cost.
Given the lack of clarity about exactly how marginal cost is being defined,
there should be no additional payments allowed without explicit documentation
that costs are not truly being covered.
The fact that the FERC is considering including in its marginal cost benchmark
costs other than the rigorously defined real marginal cost of production is
another deviation from the theory underlying the SMD. Any additional costs included
in the benchmark will guarantee rates that are not just and reasonable.
C. MARKET POWER MONITORING: ALL, ALL, ALL, ALL
The empirical reality and real world
experience of electricity markets makes it clear the FERC cannot focus on part
of the market part of the time. It must monitor markets for the abuse of market
power in
All hours: The FERC cannot look only at peak hours in monitoring for the
abuse of market power. Withholding and strategic bidding have occurred and driven
up prices during hours where demand was far from the peak in numerous markets.
All products: The FERC cannot focus only on selective products in spot
markets in its monitoring for the abuse of market power. Unjust and unreasonable
prices have been demanded and (because of market conditions) paid in bilateral
contracts. If structural conditions are not adequate to ensure competitive outcomes,
all products must be monitored.
All markets: The FERC cannot assume that it can rely on competitive spot
markets to ensure competitive bilateral markets. The fact that the FERC recognizes
it needs a reserve requirement attests to the inability of short term markets
to elicit long term supply. Indeed, existing interstate transmission organizations
recognize they need long-term markets and that they have been plagued by market
power problems.
All significant suppliers: The thrust of the past quarter century of economic
analysis and the empirical evidence in electricity markets shows that unilateral
actions by a dominant market participant are not the only sources of abuse of
market power. Collusive and non-collusive behaviors by groups of large market
participants can cause rates to be unjust and unreasonable, especially where
interactions in the market are repeated.
The abuse of market power has certainly not been confined to peak periods where
one or a few suppliers may control peak supply. For instance, California demand
was at half its peak; in the U.K., bidding above marginal cost extends at least
half-way down the supply curve. The abuse of market power appears to extend
to all products and all contracts.
V. CONCLUSION AND RECOMMENDATIONS
The FERC's efforts to create a standard
market design are vastly premature. The transmission network has not undergone
a comprehensive review in decades and no planning process exits for grid expansion.
To make up for the lost decade of the 1990's, FERC should devote a decade of
coordinated resource planning to transmission, including mandated reserve margins
and open access rules. Information exchanges must be developed before the FERC
attempts to define market structure.
Based upon the analysis cited in these comments, the Consumer Federation of
America and Consumers Union conclude that the Standard Electricity Market Design
proposal is not in the public interest. Forcing all regions of the country to
rely on single price auctions in spot markets and basing transmission services
on a pricing principle that charges "whatever the market will bear,"
with no relationship to actual costs, will not result in just and reasonable
rates or promote efficient service. The Federal Power Act is quite clear and
explicit that every rate or charge for transmission or electricity subject to
FERC jurisdiction must be just and reasonable. Under the SMD, the FERC has no
assurances, whatsoever, that the rate demanded (bids offered) for any of the
six electricity products it requires will bear any relationship to the cost
of production.
CFA and CU recommend an alternative (See Section IV) that allows the FERC to
deal with any problems of undue discrimination without undermining the basis
for just and reasonable rates in interstate jurisdiction:
· A much less radical approach to independent transmission organizations can control undue discrimination without exposing consumers to the risk of spot markets and auctions.
- Least cost planning for grid expansion by conducting a competitive bidding process
- Implement engineering driven, least cost dispatch for grid operation
- Tariffs should be distance sensitive and based on actual cost
- All users of the grid should pay for their use out of one network access service
· Control both monopoly and excessive scarcity rents. To the extent that the FERC relies on markets it must adopt decision rules and benchmarks for market operation and market monitoring that yield just and reasonable rates. In establishing benchmarks, the FERC should choose the lowest possible price, which is what a competitive market would do.
· Market power mitigation must be much more aggressive. FERC must also ensure that market monitoring detects all situations with the potential for the abuse of market power and mitigation measures effectively addresses these threats to just and reasonable rates. Market monitoring must cover all the bases: All hours, all products, all markets, all suppliers.
The FERC should withdraw approval of the market-based rates allowed under the fundamentally flawed approach that gave rise to the pervasive patterns of abuse that have taken place in these markets. The FERC needs to start with a clean slate and build an open and adequate transmission system and transparent information institutions.
EXHIBIT 1: CAUSES
OF ELECTRIC UTILITY INDUSTRY MARKET FAILURE DEMONSTRATED
BY THE FIRST THREE YEARS OF U.S. DEREGULATION
BASIC CONDITIONS: SUPPLY
| Technology | Long lead times
5(7) 6(1),Delayed replacement 6(16) 11(2) Inability to store electricity 5 |
| Product durability | Generation Outages
1(2-11, 4-6) 3(15) 5(40) 10(1-2), Transmission shutdowns 1(4-10), Failures take time to repair 6(9) Summer impairment of performance 6(7, 18, 22) |
BASIC CONDITIONS: DEMAND
| Price elasticity | Extremely low short
run 2(24) 5(39) 11(2) Limited conservation 6(2,19, 23) |
| Substitutes Cyclical/seasonal |
Lack of substitutes,
Restriction on self-supply 8 Weather-related demand 1(4-6) 2(37) 10(1-2), Inadequate reliability criteria 6(21) |
| Purchase method | Obligation to serve
1 (4-1) 2(25), Lack of incentive to cut back 1(4-4) 4(46)6(2, 19) |
MARKET STRUCTURE
| Number of sellers | Few sellers 2(ii) 3(21) 4(49-56) 5(6,7) 7 |
| Number of buyers | Constrained demand
by utilities 1(4-1) 2(25) 5(30,31), Constrained distribution 6(30) Limited end-user choice 5(42,57) |
| Barriers to entry | Transmission constraints
1(2-15,5-7)5 (11,12) Load pockets, inadequate system 6(10,32) Self-supply blocked 8()Emergencies 1(2-15), Substation inflexible 6(31) |
| Cost structures | High fixed |
| Vertical integration | Affiliate relations
distort market 2(38) 6(38), Integration restricts entry 11(3) |
| Diversification | Utilities Add Brokerage
2(24,28) Inadequate Planning/Spending for maintenance 6(29,34 - 37) |
| Inadequate Market | Lack of timely,
objective 1(5-3) 2(ii), Load projections 6(8), Unit ratings 6(11) |
| Information | Planning tools
6(13), Cable condition, incipient failure 6(5,14) Refusal to share best practices 6(15), Forecasting 6(17, 28) Inadequate notice 6(20) Dispatch software 6(27) Inadequate coordination Breakdown of coordination 1(2-37, 3-3), ISO lacks authority 6(4), Lack of data 6(6) |
CONDUCT
| Pricing behavior | Hoarding, gouging
4(65) 5(3,38) Above cost 10(1-4) 11(17) Reliance on nonfirm power 6(24) 10(2-1) 11(3) |
| Legal tactics | Defaults, abrogation
of contracts, daisy chains, two-way deals1 (4-10, 5-2) 2(4) Refusal to provide market monitoring information 5(4) Inefficient short term sales 6(25), Records not preserved 6(33) |
| Regulation |
Transmission rules create problems 1(4-40) 2(20) 11(3) Market rules not developed 6(3) |
SOURCES:
The analytic categories are from Scherer, F. M. and David Ross, Industrial Market
Structure and Economic Performance (Boston, Houghton Mifflin: 1990.
The substantive references are as follows:
1 = Federal Energy Regulatory Commission, Staff Report to the Federal Energy
Regulatory Commission on the Causes of the Pricing Abnormalities in the Midwest
During June 1998 (Washington, D.C.; 1998)
2 = Public Utilities Commission of Ohio Report, Ohio's Electric Market: June
22-26, 1998, What Happened and Why: A Report to the Ohio General Assembly (Columbus,
Oh; 1998)
3 = Bohn, Roger E., Alvin K. Klevorick and Charles G. Stalon, Market Monitoring
Committee of the California Power Exchange, Report on Market Issues in the California
Power Exchange Energy Markets (August 17, 1998)
4 = Bohn, Roger E., Alvin K. Klevorick and Charles G. Stalon, Market Monitoring
Committee of the California Power Exchange, Second Report on Market Issues in
the California Power Exchange Energy Markets (March 9, 1999)
5 = Klein, Michael and Loretta Lynch, California's Electricity Options and Challenges
(August, 2000)
6= Department of Energy, Interim Report of the U.S. Department of Energy's Power
Outage Supply Study Team, January 1999; Horizontal Market Power in Restructured
Electricity Markets, March 2000
7 = Department of Energy, Horizontal Market Power in Restructured Electricity
Markets, March 2000
8= Alderfer, R. Brent, et al., Making Connections: Case Studies of Interconnection
Barriers and their Impact on Distributed Power Projects (National Renewable
Energy Laboratory, May 2000)
9 = Energy Information Administration, The Changing Structure of the Electric
Power Industry 1999: Mergers and Other Corporate Combinations, December 1999
10 = Staff Report on the Federal Energy Regulatory Commission on Western Markets
and the Causes of the Summer 2000 Price Abnormalities (November 1, 2000)
11= Wolak, Frank A., et al., "An Analysis of the June 2000 Price Spike
in California ISO's Energy and Ancillary Service Market," Market Surveillance
Committee of the California Independent System Operator (September 6, 2000)
EXHIBIT 2: SHERER AND ROSS ON MONOPOLIST PRICING
EXHIBIT 3: LANDES AND POSNER ON
LERNER INDEX
EXHIBIT 4: SCARCITY
RENTS
EXHIBIT 5: MARKET POWER INDICATOR CHARACTERISTICS
EXHIBIT 6: STRATEGIC BIDDING IN CALIFORNIA, 1998-1999
Unavailable on the web. Please
contact (202) 462-6262 and ask for exhibit 6 of this report.
EXHIBIT 7: COMPARISON OF 1999 AND 2000 CALIFORNIA PRICES
EXHIBIT 8: STRATEGIC BIDDING AT MODERATE LEVELS OF DEMAND IN THE UK, 1993
Unavailable on the web. Please
contact (202) 462-6262 and ask for exhibit 8 of this report.
EXHIBIT 9: STRATEGIC BIDDING IN THE UK 1995
Unavailable on the web. Please contact (202) 462-6262 and ask for exhibit 9 of this report.
ATTACHMENT A: FEDERAL ACTIVITIES OF THE CONSUMER FEDERATION OF AMERICA IN
ELECTRICITY AND NATURAL GAS ISSUES
"Statement Of Dr. Mark Cooper
on Electricity Markets: California," Subcommittee On Energy And Air Quality
House Energy And Commerce Committee's Subcommittee, March 22, 2001
"Consumer Federation Of America, Request For Reconsideration Regional Transmission
Organizations," Federal Energy Regulatory Commission, Docket No. RM99-2-000;
Order No. 2000, January 20, 2000
"Testimony of Dr. Mark N. Cooper on behalf of the Consumer Federation of
America and Consumers Union," Electricity Restructuring at the Federal
Level, Subcommittee on Energy and Power, U.S. House of Representatives, October
6, 1999
"Testimony of Dr. Mark N. Cooper on Electricity Competition: Consumer Protection
Issues," before the Subcommittee on Energy and Power, Energy and Commerce
Committee, United States House of Representatives, May 26, 1999
Member, Advisory Committee on Appliance Efficiency Standards, U.S. Department
of Energy, 1996 - 1998
"Electric Industry Restructuring: Who Wins? Who Loses? Who Cares?"
Hearing on Electric Utility Deregulation, National Association of Attorneys
General, November 18, 1997
"Testimony of Dr. Mark N. Cooper on The Regulation of Public Utility Holding
Companies," Committee on Banking, Housing, and Urban Affairs, United States
Senate, April 29, 1997
"Statement of Dr Mark N. Cooper,"
Project on Industry Restructuring, Public Utility Commission of Texas, Project
No. 15000, May 28, 1996
"Testimony of Dr. Mark N. Cooper on Behalf of the Consumer Federation of
America and the Environmental Action Foundation on Exempting Registered Holding
Companies from the Public Utility Holding Company Act for Diversification into
Telecommunications," Committee on Energy and Commerce, United States House
of Representatives, July 29, 1994
"Testimony of Dr. Mark N. Cooper on Regulatory Reform in the Electric Utility
Industry," Subcommittee on Energy and Power Energy and Commerce Committee,
United States House of Representa-tives, May 2, 1991
Member, Energy Conservation Advisory Panel, Office of Technology Assessment,
1990-1991
"Testimony of Dr. Mark N. Cooper on Regulatory Reform in the Electric Utility
Industry," before the Committee on Energy and Natural Resources, U.S. Senate,
March 14, 1991
"Testimony of Mark Cooper and Scott Hempling on Electric Utility Policies
of the Federal Energy Regulatory Commission," before the Subcommittee on
Environment, Energy and Natural Resources of the Government Operations Committee,
U.S. House of Representatives, October 11, 1990
Member, Increased Competition in the Electric Power Industry Advisory Panel,
Office
