Just Don”t Do It

The draft Energy Bill cobbled together in the fall of 2003 was justly excoriated
by everyone from actor Robert Redford to Sen. John McCain for the environmental
problems it would have created and the lavish, budget-busting pork it contained.
However, the subsequent version contained even more landmines for ratepayers
across the country.

The revised bill contained provisions that fundamentally upend the 70-year
balance between states and the federal government concerning how citizens are,
or are not, protected from exorbitant energy prices and over-reliance on fossil
fuels. Moreover, it would destroy one of the fundamental safeguards against
the globalization of US electricity companies and could prompt a merger frenzy
that further imperils electric reliability at a time when our nation is reeling
from recent electricity experiments that left wide swaths of the country in
the dark.

The bill included expanded deregulation of electricity markets. This deregulation
is accomplished by eviscerating the Public Utilities Holding Company Act of
1935 (PUHCA), a key component of the Federal Power Act (FPA), and by severely
limiting the ability of states to regulate the electric companies operating
within their borders.

Proponents promise that effective regulation will be carried out by the Federal
Energy Regulatory Commission. Californians, who experienced first-hand the
see-no-evil, hear-no-evil reality of FERC oversight during the California energy
crisis of 2000-2001, know how hollow and expensive ersatz FERC regulation can
be. More insidious, once California embarked on a dangerous deregulation experiment
and transferred effective control of electric prices to FERC, it stood helpless
as the precarious market it created morphed into all manner of manipulation.
California was reduced to pleading with FERC, which could not or would not
stop the manipulation, the profiteering, the withholding of electricity production,
and the resulting economic damage.

Congress enacted the FPA in 1935 to fill in the gaps in energy regulation where
states had not yet acted, but also to respect and work with states that were
already regulating their electricity systems. California had been regulating
its electric companies since the 1911 creation of the Public Utilities Commission
(CPUC). Then called the Railroad Commission, the CPUC was created by voter
initiative to regulate the prices and practices of the twin economic engines
fueling California’s growth: the railroads as the major transporter of
goods and the electric companies as the major producers and transporters of
the fundamental economic lifeblood – electricity.

At the start of the 20th century, when reliance on electricity was in its infancy,
policymakers knew how crucial an uninterrupted, reasonably priced electric
supply was to the well-being of each state’s economy. They found out
then, through bitter experience, that the free market alone cannot guarantee
a reliable supply of reasonably-priced electricity.

At the start of this century, our elected officials are again faced with critical
policy choices about this fundamental building block of our economy and our
society. We should not be seduced by the rhetoric and the false promises of
the free market. As applied to electricity, theoretical free market models
fail in practice, resulting in inadequate investment in needed infrastructure,
less environmentally sound power options, and higher prices. If we ignore the
past, electric reliability and reasonable prices will become relics of the
20th century. If further deregulation is imposed on the states and FERC is
allowed to use the states as guinea pigs in ill-considered, unformed and ill-fated
experiments to shore up the shaky and unstable foundation of deregulation,
our states’ and our nation’s economies will founder all the more.

Virtually every state will be subjected to the vagaries of FERC’s deregulation
and enforcement whims, and its expensive experiments in enticing companies
to make needed investments and serve customers through providing them excessive
profits from ratepayers’ pocketbooks.

Three particularly dangerous elements found their way into the bill:

Federal Eminent Domain

First, the federal government should not hold the power to condemn land for
transmission lines. This power, disingenuously called “back-stop” siting
authority is right up front in allowing the federal government to use new powers
of federal eminent domain to condemn land in the path of a transmission line,
regardless of whether a state finds that line is needed to provide reliable
electric service in that state. Because the federal government also assesses
the costs of building that line, primarily local ratepayers, businesses, and
families in each state will not only bear the environmental and health burdens
of the transmission line but will also bear the costs, regardless of whether
that line is needed in that community or even in that state.

Proponents of expanding federal eminent domain authority to condemn private
property raise the specter of the August 2003 Northeast blackout for support.
But no evidence exists that state transmission siting processes had anything
to do with the blackout. Moreover, deregulation efforts, not the lack of federal
powers to condemn land for transmission projects, constitutes the primary driver
in the financial uncertainties surrounding transmission financing today.

Ultimately, the Northeast blackout and the California energy crisis were
used as cover for an unprecedented federal power grab from the states and
from state
laws that contain significant safeguards before condemnation can occur. As
the US Conference of Mayors, the League of Cities, and the National Association
of Regulatory Utility Commissioners have all noted, federal eminent domain
will not solve the infrastructure problems confronting the electric industry,
just as the granting of federal eminent domain authority for natural gas pipeline
siting did not solve any natural gas pipeline capacity problems.

Land use decisions, including transmission siting decisions, are best made
at local and state levels, which are more attuned to balance community, environmental,
and cost concerns, and to develop a public, evidentiary record to determine
the need for these major projects.

Indeed, once California began ordering its utilities to upgrade the transmission
infrastructure under a cost-of-service system, California utilities have invested
over $2.3 billion in transmission upgrades alone. The electric infrastructure
can and will be maintained at a reasonable cost, but only if the federal government
does not interfere by overbuilding and overpaying in its zealous pursuit of
making a market work.

Merger Mania

Perhaps the most pernicious aspect of the Energy Bill involves the removal
of the major impediment to go-go mergers and acquisitions of electricity companies
on the scale we saw with Internet and telecommunications companies in the 1990s.
The AOL-Time Warner merger provides but one example of high-flying companies
with no knowledge of how to run an old-economy business gobbling up those businesses
only to run them virtually into the ground through greed or incompetence. Imagine
what will happen to the backbone of our economy, our electric system, when
tomorrow’s darlings of the moment buy up newly unfettered electric companies
without a thought for service and an eye only for profits. Prices will shoot
through the roof, and reliability will drop through the floor.

Now envision layering on multinational and foreign ownership of America’s
electric companies. And of course, the same financial institutions that have
been embroiled in all manner of accounting tricks and fraudulent and preferential
practices for select customers are just itching to bring their style of business
to loot the utility cash cows. In both scenarios, the opportunities for mischief
are even more legion than opportunities for ineptitude. Even Fortune magazine
raised the question whether the blackout had something to do with First Energy’s
1990s buying spree of energy companies in anticipation of deregulation. What
more will like-minded energy companies do with ratepayers’ cash when
freed to launch risky new ventures in areas about which those energy companiesknow

Standard Market Design

Third, FERC’s attempt to shoehorn all states’ electric systems
into the misnomer of a “standard market design” is a blatant attempt
to force states concerned about or opposed to energy deregulation into the
deregulated fold. Along the way, consumer and physical protections embedded
in a state-by-state electric system will be tossed aside in the name of free
markets so that all areas of the country can be subjected to the problems California
and the Northeast have experienced under deregulation. As just one example,
standard market design would eliminate the electric system’s “seams,” which
from a reliability standpoint help to compartmentalize outages. The issue concerning
the August 2003 blackout is not, “Did something go wrong in Ohio?,” but
instead, “Why was a problem in Ohio the cause of blackouts in New York,
Canada, and Maryland?”

California has experienced the weak-kneed enforcement of FERC which has bent
over backward not to find the blatant manipulation and market rigging that
cost California’s economy more than $30 billion and for which FERC is
settling purportedly on behalf of California consumers for cents on the dollar.
While FERC refuses to connect the dots, it continues to settle in private without
any coordination with state law enforcement authorities. California has been
barred from the back room where the deals are made with the same companies
that took California to the cleaners. And FERC tried every procedural move
it could to bar California’s appeals to a federal court to examine FERC’s
untoward behavior and settlements.

For the past century, states have proven far more effective in ensuring just
and reasonable electricity prices and in ensuring reliable supplies of electricity
so that businesses and families do not have to wonder, much less worry, if
the lights will turn on when needed. Thus, expanding FERC jurisdiction, at
the direct expense of state protections, subjects businesses and families to
needless risk and unnecessary costs.

And those costs are substantial. As the color-coded map of the United States
in Figure 1 shows, those states that deregulated or started down the deregulation
path now endure much higher electricity costs than those states that never
deregulated. This map contains price data only for 2002 and thus does not reflect
the price increases experienced by many of the deregulated states in 2003,
increases that widen the disparity between the deregulated and regulated states
and that bring home the divergence in the costs of doing business state by
state. While deregulation is not the sole reason for energy prices within a
state, analyzing the national map by this factor shows important differences
that policymakers should consider before ordering deregulation nationwide.

Instead of coercing states to follow FERC’s pied piper of energy deregulation,
Congress should expand the tools that FERC needs to protect consumers when
gouging and manipulation occur. Expanded remedial authority for FERC is necessary,
but not sufficient to get FERC to do its job. Congress should also expand its
direction to FERC to work with state and federal law enforcement agencies to
bring full redress to victims of market malfeasance in the future.

As even free-market observers of California have realized, the structure
of the energy markets is such that before we can authorize market-based
and rates, we have to eliminate oligopoly and the structural imbalances caused
by the specific ways that California and every other state have divested
their power plants. More importantly, before electricity markets can
work, if in
fact they can ever work, Congress and FERC must shut down the modern forms
of conspiracy and collusion played out through new styles of market-rigging
and market information trading such that regional market power can be exercised
by pivotal suppliers in critical regions.

In the absence of action on these issues, Congress should not set states
on the roller coaster ride of electricity deregulation that went so far
off track
the first time.