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Electricity Markets: Lessons Learned from California.
Subcommittee on Energy and Air Quality
Mr. Mike
My name is Mike Travieso. I am the People's Counsel of the State of Maryland. I also serve as Secretary of the National Association of State Utility Consumer Advocates (NASUCA), on whose behalf I am testifying today. NASUCA is an organization of 42 state utility consumer advocate offices from 39 states and the District of Columbia, charged by their respective state statutes with representing utility consumers before state and federal utility commissions and before state and federal courts. For the most part, consumer advocates represent residential and small commercial consumers. As a result, NASUCA members are intricately involved in electric utility restructuring debates in their respective states, and - through NASUCA - in Washington as well. NASUCA greatly appreciates the opportunity to testify at this legislative hearing. I. Introduction First, I would like to commend Chairman Barton, the members of the Committee, and your staffs for your consistent recognition throughout your careful deliberations that it is the impact of your actions on consumers of electricity that is of paramount importance. NASUCA truly appreciates your continuing efforts seek out the views of consumers and consumer representatives. We look forward to continuing to work with you in developing policies and legislation that benefit all consumers and complement what many states have already chosen to do. As this Committee proceeds with consideration of restructuring legislation, NASUCA is confident that you will continue to keep the interests of consumers foremost in your mind. Electricity is an essential component of modern life. The actions taken by this Committee -- and ultimately the Congress -- will have a profound effect not only on electric consumers, but on the future of the nation as a whole. Therefore, NASUCA urges Congress to adopt those policies and principles that are fair and benefit all electric consumers. We will have accomplished very little if the end result of our labors is to bring competitive benefits to only a small segment of the electricity market, while rendering basic service less affordable and less reliable for all other Americans. I also want to commend you for holding this hearing specifically on the California energy crisis. I think we can learn much from our friends on the West Coast. While it is interesting to compare and contrast the retail schemes in California to other states such as Maryland or Pennsylvania, I want to take the few minutes I have before you today to talk about wholesale markets. The fact is that each state retail plan will differ to accommodate the particular needs of its own, but the need for a federal role to assure a vibrant wholesale market remains constant. The reality is that retail competition will fail unless there is a vigorous wholesale market. The truth is that Congress will and should have little to say about a state's retail market, but it is ultimately your responsibility to insure that the wholesale markets work. They don't in California, and, for the most part, do on the East Coast within PJM. However, even the PJM wholesale market has some shortcomings. I would like to take the next few minutes discussing these and finish with a few suggestions on what you can do to help. II. California What went wrong in California? By now you may have heard the answer to this question from a number of other witnesses. Therefore, I will try to be brief and specific on the problems which NASUCA members in California have identified. 1. California relied on inaccurate estimates of future supply and reserve capacity in 1996 when it deregulated. 2. California relied on inaccurate projections of demand-side management acquisitions by its investor owned utilities post 1996. 3. California relied on capacity from out-of-state generators which was not under any contractual obligation to the California market. 4. California required that utilities which had retail price guarantees with their customers purchase all of their power from the California Power Exchange. Much of this power was purchased on the spot market and utilities were either not allowed or not encouraged to enter into forward, long-term power purchase agreements to hedge their future retail obligations. 5. The Power Exchange was separated from the California Independent System Operator and the two organizations did not routinely share data. The operation of the California wholesale market was unnecessary complex and provided an opportunity for generators to maximize profit by artificially creating emergency situations, leading to extraordinary prices. 6. The California PX and ISO were entities created and designed by parties with vested economic interests. They were brand new in 1998. 7. There was not an efficient, pre-existing wholesale market operating in California prior to 1996. 8. California does not have a capacity market. III. PJM Could what happened in California happen in Maryland? There are no guarantees when markets are deregulated but Maryland, as a member of the PJM ISO has the benefit of a wholesale market that is better designed and operated. Also, the PJM wholesale market better reflects the results which would occur in a workable competitive market. What are the differences? 1. PJM has been in existence for many years. It is a regional wholesale market and system which includes Pennsylvania, New Jersey, Maryland, Delaware and the District of Columbia. It functions as an ISO and power exchange. PJM has control of the transmission lines; a set of market rules requiring each load serving entity to have a reserve capacity commitment; an independent board; and it operates both an energy and capacity market. 2. Because the PJM wholesale market is established and stable, it appears to be able to attract investment in new generation sufficient to meet expected future demand. 3. Generators, load serving entities, marketers and retail customers can arrange for bi-lateral contracts and do not have to buy power/sell power through the spot market. 4. PJM has an internal planning process designed to identify market flaws and to remedy them. Customers are active participants. 5. About 2500 MW's of new plant is under construction in the PJM region and much more is waiting PJM evaluation, although there is no guarantee that any of these units will actually be built. 6. In Maryland, while we have retail price freezes like in California, the utilities were able to retain their assets or arrange for long-term power purchase agreements to meet these future obligations. 7. In Maryland, when the price freezes end, customers who have not switched to a new provider will not face spot market prices. Instead each utility's load at that time will be subject to an RFP process so that if the wholesale market is competitive, suppliers will submit bids producing reasonable prices. III. Congressional Action What can Congress do to protect consumers and to insure that truly competitive wholesale markets develop? NASUCA believes that the key to future reliability, as well as to reasonable retail prices, is a vigorously competitive wholesale market. If the wholesale market is subject to easy manipulation, insufficient market power monitoring and little or no investigation of market abuses and no strong enforcement actions, the retail market will fail. Steve Ward, NASUCA President testified last year before the Senate Energy and Nature Committee on the importance of giving FERC specific authority relating to market power: 1. The authority to monitor wholesale markets; 2. The authority to eliminate undue concentrations of market power in any relevant market; 3. The authority to remedy anti-competitive conduct or the abuse of market power by any player, including the authority to administer both behavioral and structural remedies. Market participants must have a lot to loose if they are caught engaging in market abuses. 4. FERC needs the authority to require the creation of independent ISO's which all transmission owners must join. FERC must have the authority to investigate and remedy practices which give an unfair advantage to affiliates of transmission owning companies. 5. FERC must be able to assure reliability of electric supply throughout the United States. Federal legislation ought to give states a prominent role in assuring that consumers have an adequate and reliable source of power within their borders. 6. Encouragement should be given to the development of load shifting and load management programs which are designed to reduce peak demands. One way to do this is to foster a demand side market which allows demand-side resources to be bid against supply side resources. 7. Efforts to continue with the research and development of renewable energy resources should be continued and expanded. Reliance on natural gas alone for new plants is dangerous, as we have seen from the doubling of the price of natural gas over the last ten months. 8. NASUCA does not believe that this is the appropriate time to repeal the Public Utility Holding Company Act or to remove FERC merger review authority. IV. Conclusion Deregulation does not necessarily lead to vigorous competition. In fact, NASUCA believes that truly competitive wholesale markets cannot develop without effective controls on those who are in a position to distort the market. It remains to be seen whether electric deregulation will produce the consumer benefits promised by those who championed it. Certainly in California and some parts of New York State it seems to have produced just the opposite of what was promised, customer savings. Maryland's residential customers are concerned about what will happen when the price freezes are lifted. Some problems exist in the PJM market, like the practice of "delisting" (withdrawing capacity and energy from the market). Current prices in the energy and capacity markets do not reflect actual marginal costs. Current PJM market prices seem to indicate that residential customers may not see any savings, but the proof will arrive in July, 2004 when the market will begin to serve PEPCO's Maryland customers. Thank you for the opportunity to present these comments.
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