Federal Trade Commission
Public Workshop on
September 13, 1999
Written Comments of
Dr. John A. Anderson
I am John Anderson, the Executive Director of the Electricity Consumers Resource Council (ELCON).(1) ELCON appreciates the opportunity to appear before you today to address market power and consumer protection issues that arise as the U.S. electric industry moves towards competition. We are actively involved in the process by which the traditional monopoly industry is being subjected to a healthy dose of retail competition.
The specific subject of this panel is an: "Assessment of the Results to Date of Pioneer State Reform Efforts." "Pioneer states" are defined by the Federal Trade Commission (FTC) to include states such as: California and Pennsylvania. This panel has been specifically asked to address the positive and negative results of state retail electricity restructuring efforts with particular emphasis on:
Competition is coming to the electric industry. The traditional regulatory process has failed. Market forces cannot, nor should not, be restrained. But while real competition is coming, it is not here. Only a very few end-use consumers are actually shopping at this point in time -- usually under artificial arrangements.
Consumers will benefit once real competition is here. The benefits will include significantly lower prices, increased product offerings, improved service, and innovations.
However, in most states there will be a very long transition from the firmly-entrenched monopoly industry to real competition. There will be tremendous opportunity for gaming and market power abuse during the transition. The incumbent monopolists have significant market power. They know how to use it and are doing so. Unfortunately, regulators have not been sufficiently vigorous in dealing with this abuse.
The Federal Trade Commission staff (FTC staff) recently have intervened or submitted comments in approximately two dozen electric-related proceedings over the past four years. ELCON compliments the FTC staff for these actions. We find ourselves agreeing with the FTC staff's positions in nearly every case.
However, much more is needed. We strongly urge the FTC, along with individual state public utility commissions, the state attorneys general, and the Federal Energy Regulatory Commission (FERC), to take much more aggressive actions to protect consumers from discrimination and the exploitation of market power.
The Status of Retail Electric Competition the United States
As of June 1999, 24 states have taken final action or endorsed retail competition in one form or another.(2) Roughly 60% of the total population of the U.S. live in these 24 states. Other states, even states that traditionally have been staunchly opposed to retail competition, are taking actions.(3) We are beginning to see results.1. Lower Prices
Nearly everyone - other than utilities burdened with significant, previously-incurred mistakes (camouflaged as "stranded costs") - recognizes that competition will lower costs - substantially lower costs. We are beginning to see the results.
Some states have mandated across-the-board price reductions, often 10% or more, for consumers -- usually residential consumers. Many marketers, including regulated utility's unregulated affiliates, are offering electric service at lower prices than those offered by the regulated utility. Large consumers and groups of consumers who are able to aggregate loads are negotiating even greater price reductions, although there is a dearth of detailed information on the specific reductions actually taking place. However, stranded cost recovery disguises the potential price reductions achievable under retail competition.
One example highlights the effects of competition on price. For years, a large utility in Pennsylvania refused to negotiate special contracts with its large consumers. With the advent of competition, this utility immediately lost nearly three-fourths of its industrial load to alternative suppliers. This utility's retail supplier now offers price reductions of approximately 20% - an unprecedented amount for this utility and now will negotiate contracts that meet the specific needs of individual large consumers. This result was the direct result of competition.
2. Increased Product Offerings, Customer Service, and Innovation
While competition is impacting prices, other real, tangible results of retail competition involve product offerings.
In the past, monopoly utilities offered one-size-fits-all packages of bundled products and services that, in reality, fit no one. The introduction of competition has had a dramatic impact on product offerings.
With competition, electricity suppliers are actually trying to find out what consumers want, and then meet these needs. For brevity, I offer here only a few examples of the new offerings:
In summary, competition - in essence - allows large electricity consumers to write their own requests for proposals (RFPs) specifying the things that really matter to them and their manufacturing processes. Potential suppliers that agree to meet their needs can make proposals. Those suppliers that do not wish to meet the needs need not bid.
The examples cited above relate to new offerings to large, industrial consumers - the kind of consumers that belong to ELCON. However, the benefits are not limited only to large consumers. Small consumers also are beginning to see positive benefits:
In addition to new products, new services also are being offered. As an example, the whole concept of "green" power is evolving -- and evolving rapidly. Green Mountain Power is now offering three "blends" of electricity to consumers in Pennsylvania. The "Good" blend -- named "Eco Smart" -- is coal and nuclear free, and includes 1% of new renewables. The "Better" blend -- named "Enviro Blend" -- is coal and nuclear free, and includes 50% renewables of which 3% are new. The "Best" blend - named "Nature's Choice" - is 100% renewables of which 5% are new. Perhaps the most telling part of the offer is that none of the "green" sources cost more than power does today from the existing utilities - and both the Eco Smart and Enviro Blend cost less than existing supplies.
Retail competition in electricity already is producing benefits for consumers.
The Fact Is: Retail Electric Competition
While the competition introduced to the electric industry to date clearly has produced positive results, we still have a very long way to go. The fact is we really do not have real competition anywhere in the U.S. today. I cite a few specific examples.
The acid test of real competition is the proportion of consumers who actually switch to alternative suppliers. For a variety of reasons, the number of consumers who have actually switched to alternative suppliers is negligible in 23 of the 24 states. In fact, the only place where significant switching has occurred is in Pennsylvania.
Even in California, which certainly has received tremendous publicity for "opening its markets," switching has been minimal. Theoretically, California gave all 10 million of their electric customers the right to shop for alternative supplies on April 1, 1998. However, more than 15 months later, only 1.3% of all consumers have actually changed suppliers.(4)
The reasons for the lack of participation are now clear. California implemented a mandatory 10% rate reduction, followed by a rate freeze, for all residential and commercial consumers. This immediately reduced the economic incentive to shop. They also established a "competition transition charge" (CTC) to assure the recovery of over $30 billion in stranded costs over only a four-year period. Even worse, the CTC was defined as the difference between the existing rate and the shopping price. It was not a fixed amount, but varied as the shopping price changed. Thus, by definition, consumers could not realize any savings by shopping. Further, since suppliers cannot make any money, the "supply side" of the new market has not developed. Finally, California established a power exchange through which all power must be bought and sold.(5) Combined, these factors made it impossible, by definition, to shop and save. It's no wonder that so few consumers chose to switch suppliers. However, this dilemma should only be transitory. Once the rate freeze and CTC have been eliminated, we expect a more robust market to emerge. Even then, both the supply and demand sides of the market will need time to adjust to this new paradigm shift.
Other states that have committed to move to competition either have not yet actually opened up their markets or have established barriers that preclude shopping.
Pennsylvania is the one exception. Pennsylvania disallowed significant portions of the utilities' claims for stranded costs, and then spread the recovery of the remainder over an eight year period. This created a situation where consumers clearly could save significant amounts by shopping. The results were dramatic. Nearly one quarter of all eligible consumers switched suppliers in just the first six months of the program.(6)
While Pennsylvania is a "success" story because so many customers have switched suppliers, it is still an artificial market. As long as "sunk" costs are forced on consumers, the full potential benefits will not be realized. In fact, we will not see the development of innovative products and services until we have real competition in the electric industry. Lessons form the telephone industry highlight this point.
Prior to competition, you could have any kind of telephone you wanted -- as long as it was black, had a rotary dial, and sat on a horizontal surface. Of course you had to rent the instrument from the monopolist -- privately-owned devices, we were told, would cause reliability problems. Monopoly utilities thought it was a great innovation to offer pastel-colored princess phones -- admittedly at exorbitant rental charges. Since then, competition has produced a veritable smorgasbord of products and services both to meet the existing needs of customers as well as to create new wants and desires. Monopolists would never have been this creative.
What services and technologies do consumers want and what might they expect to find in a competitive electricity market? At the outset, I recognize that fifteen years ago no one could have accurately predicted the many products and services now offered in the telecom industry. However, after the fact, we recognize that competition brought about a truly amazing array of products and services that have made our lives so much better -- cell phones, call waiting, call forwarding, caller ID, fax machines, pagers, teleconferencing, the Internet including e-mail, "plug and play" technologies, and buy / rent or lease programs -- to mention only a few. Soon, electricity suppliers will begin to offer products and services in ways now hard to imagine. The economic incentive for such innovations is greater than in the telecom industry because the power industry is much bigger.
In addition to basic commodity service, we will begin to see the development of more effective energy management tools, the introduction of risk management, more innovative forms of asset financing, and the application of Information Technologies to billing and metering. These seem like amazing technological advances to those of us who remember party lines and rotary-dial telephones, but then not at all amazing if compared to other industries subjected to healthy doses of competition.There will be a similar technological revolution in the new electricity supply industry once competition stimulates innovation.
What Have We Learned from the Experiences of the States?
While real competition has not yet been achieved, the trials and tribulations experienced in the states has been instructive. It is now quite clear that the transition to real competition will not be either quick or easy. The FTC must take an active role to help protect consumers both during the transition as well as in the competitive end-state.
The introduction of real competition has been delayed by several barriers. A few examples of some of the more obvious include:
1. Collection of stranded costs
Customers will not shop when they cannot save money. Customers cannot save money as long as utilities are guaranteed recovery of large amounts of money to pay for their previous investment mistakes.
The incumbent utilities have been very successful in demanding recovery of all, or at least most, of the "stranded costs" - actually, the costs of prior mistakes. Without a guarantee of such recovery, utilities have been quite successful in delaying the introduction of competition.
As examples, Public Service of New Hampshire delayed competition for several years through court suits. Utilities in Texas and Ohio would not agree to state legislation until the issue was resolved to their liking. Utilities in California assured the collection of their stranded costs through a substantial CTC that guaranteed no savings to shoppers. While it is true that the stranded cost issue is temporary, temporary can be a very long time.
The FTC to date has not taken a position on whether stranded cost recovery is desirable. Rather, the FTC has addressed the competitive impacts of stranded cost recovery methods. However it is now apparent, from the actual experience in retail competition to date, that stranded cost recovery, in and of itself, is the antithesis of competition - regardless of the recovery method.
Several states have instituted the practice of securitization - allowing utilities to refinance their debt on high-cost assets collected from consumers. Securitization benefits incumbent utilities with high-cost, inefficient assets at the expense of potential competitors with more efficient generating facilities - both new entrants and efficient utilities.
Incumbents benefit from securitization by receiving large amounts of cash at the onset of competition based on estimates of stranded costs. "True-ups" are impossible, even if the estimates later are found to be excessive. The incumbents can then use this cash to their advantage and to the detriment of their potential competitors. To emphasize this point, the president of one California utility candidly stated when announcing his company's intention to seek acquisitions: "We are going to have a lot of free cash from stranded-asset recovery ... in the billion dollar range."(7)
3. Mandatory Rate Reductions
Several states have required mandatory rate reductions. Often the reduction is in the 10% range. Mandated reductions reduce the potential for savings through shopping and thus serve as disincentives to new market entrants.
4. Low "Shopping Credits" or "Back-out Rates"
Consumers usually are only given the opportunity to shop for lower cost generation. They continue to be held captive to the incumbent utility for all other costs including transmission, distribution, ancillary services, metering and billing, administrative, etc.
Potential competitors not only must buy power for resale to their customers, but they also must incur substantial costs such as: call centers, back office operations, administrative operations, and perhaps even metering and billing. Utilities also incur these costs, but often they are not appropriately included in the shopping credits or back-out rates. Potential competitors are substantially disadvantaged to the extent that shopping credits are limited only to generation costs.
5. Access to Customer Data and Information
The incumbent utility has data and information on many aspects of every customer in their traditional service territory. These data include names and addresses, as well as load profiles, billing histories, and even credit information. Potential competitors may find this data unavailable to them - or available only at exorbitant prices.
6. Access to Transmission
Alternative energy suppliers usually have to obtain transportation from their competitors. Transmission owners are particularly effective in finding ways to limit the availability of transmission to their own uses to the detriment of potential competitors.
As an example, most transmission owners liberally calculate "capacity benefit margins" to their benefit. Transmission owners assert that they must set aside enough transmission capacity to assure that they are able to meet the needs of their native load customers. By definition, this places other users of the transmission system at a disadvantage.
FERC has not made such anticompetitive behavior unprofitable or so undesirable that it has been eliminated.(8) Rather, FERC's punishments for anticompetitive behavior has been little more than a slap on the wrist.
7. Mandatory Power Exchanges
California law requires the establishment of a mandatory power exchange through which the utilities must both sell and buy all of their needs. There are a multitude of practical and conceptual problems with the California PX, not to mention that it is exorbitantly expensive -- with the costs again borne by consumers. Suffice it to say that a single, mandatory power exchange, and even worse one limited to a single state, restricts the options available to the citizens of that state. The result is less competition - not more.
8. Residual Market Power
States have a very difficult time dealing with market power. To their credit, several state regulators recognized the potential market power problems facing them. Some went beyond the actions taken by most other states in encouraging -- in fact, nearly requiring -- the sale of many generating assets. Others are trying hard to require transmission owners to join large, independent regional transmission organizations (RTOs). Although noble, these actions simply are not enough to mitigate market power.
But other states have not been nearly as vigilant. In fact, some have allowed, with FERC approval, the creation of "sliver" ISOs and single state ISOs. Such ISOs result in the Balkanization of the bulk power markets. As the FTC staff have recognized, only large ISOs (now RTOs) can allow the development of broad markets, eliminate rate pancaking, and mitigate market power.
Today, incumbent utilities posses tremendous vertical and horizontal market power. Further, these incumbent utilities are preserving, if not increasing, this power with tactics such as: creating and maintaining transmission bottlenecks, leveraging their monopoly status in potentially-competitive markets, and merging and forming partnerships in ways that reduce competition. Since vertical disintegration of the electric industry is happening only on a very limited scale, the industry will continue in this hybrid state for some time with antitrust laws, limited as they are, expected to fill regulatory gaps.
What Should the FTC Do to Encourage Real Competition?
The FTC faces a great opportunity to protect consumers, avoid discrimination, and further competition as the electric industry transitions to competition. Without the FTC's help, monopolies may well prevail.
At the outset, we recognize that the FTC staff have been very active in filing comments regarding the restructuring of the electric industry. Specifically, the Staff of the FTC have filed comments in more than two dozen federal and state proceedings. These comments have covered a wide range of issues of critical importance to consumers. ELCON compliments the FTC staff both for the number of the comments and for the positions advocated. In fact, ELCON finds itself agreeing with nearly all of the positions taken by the Staff of the FTC in each of these comments. The only notable exception involves "locational marginal pricing."(9)
We also recognize the significant resource limitations faced by the FTC. Both consumers and consumer protection agencies will never have the resources at their disposal that producers always have.
In spite of the resource limitations, we strongly urge increased involvement by the FTC as the electric industry becomes more competitive. This industry represents more than $200 billion in revenues annually. The potential for market abuse, unfair trade practices, and consumer exploitation is enormous.
Specifically, we recommend the following areas of activity:
1. Continue to Monitor Market Power and Offer Constructive Means by Which it Is Mitigated
The FTC staff first raised market power concerns in the electric industry in its 1995 comments to FERC in the proceeding that eventually resulted in Orders 888 and 889. The FTC staff pointed out that there are both significant horizontal and vertical market power problems within the industry today. The FTC staff stated that behavioral constraints do not remove incentives to discriminate and violations are difficult to detect. The FTC staff have stated that structural remedies, including divestiture, are significantly more effective than behavioral remedies.(10) It said that functional unbundling, as recommended by FERC, would not be sufficient; operational unbundling would be far better. The FTC staff have repeated these points several times in filings at the state level as well as in its comments to FERC on Regional Transmission Organizations just last month.
Over the past four years, the FTC staff have (among other things): highlighted four competition "warning signs" regarding ISO (and later RTO) formation and operations including too small, no plan for generation restructuring, not sufficiently independent, and failure to deal with transmission congestion; called for more open markets that would allow the entry of new generation (including distributed generation) and transmission; raised significant utility/affiliate concerns; and raised concerns that certain stranded cost recovery mechanisms could have anticompetitive consequences.(11)
ELCON believes that the market power issue singularly is the most important challenge to competition today. The ELCON position on market power is set forth in a publication that is attached to these comments for reference.(12)
We compliment the FTC staff for its vision and foresight and urge you to continue advocating these important positions. Even though FERC seems to not yet recognized these market power concerns, several states have gone beyond behavioral requirements and have imposed bold structural remedies. The FTC staff's comments certainly have helped influence these positive actions.
Specifically, we urge the FTC, in addition to its continuing market power activities, to: (1) take a strong position opposing stranded cost recovery mechanisms that have anticompetitive consequences;(13) (2) increase its involvement in merger proceedings which can have very significant market power implications,(14) and (3) support the March 25, 1998 petition by ELCON and a group of power marketers requesting a FERC rulemaking to complete the orderly transition of today's power industry to a fully competitive market.(15) Each of these areas would greatly benefit from FTC's experiences and expertise.
2. Continue to Oppose Transcos-as-RTOs
The FTC staff filed comments in Mississippi and with FERC raising significant concerns with the proposed Entergy Transco.(16) In the FERC filing, the FTC staff stated:
The FTC staff warned that the Transco's management would know that its owners (Entergy and others) would benefit from certain of the Transco's practices that favor Entergy's generation assets, such as understating available transmission capacity to independent generation sources." Detecting and documenting discriminatory practices by a Transco could be difficult "because such transactions are very sensitive to timing and nuance." The FTC staff's "experience in enforcing the antitrust laws and in monitoring deregulation and restructuring of regulated industries strongly supports a preference for operational separate or divestiture in unbundling services." Potential market entrants "are likely to perceive a continued risk of discrimination in transmission services based on past experience in the industry" and therefore shy away from actually entering the market. These perceived risks do not exist under an ISO structure.
We compliment the FTC staff both for taking specific action and for the content of the comments. Support appears to be strong for the creation of transcos and inappropriately designed RTOs (as well as ISOs). More aggressive FTC intervention is essential for consumer protection.
3. Challenge Incumbency Advantages that are Allowed by State PUCs
Some states have recognized that tremendous advantages come with incumbency and have tried to deal with these advantages. However, other states either have not recognized the problems or chosen not to deal with them. Examples of the problems include: preferential treatment of the incumbent utility's affiliates, inappropriate unbundling of competitive and regulated services, shopping credits that are too small, and default service that perpetuates the incumbent utility's monopoly.
The FTC staff have filed comments on several occasions relating to relationships between incumbent utilities and their affiliates.(17) The FTC staff noted that there is a fundamental trade-off between preventing discriminatory behavior by the parent utility and preserving economies of vertical integration with its affiliates.(18) The FTC staff recommended that a "market-like" institution be added to govern transactions between parent utilities and their affiliates. Such an institution would limit contracts between any utility and its affiliate to those won through an objective bidding process in which a third party evaluates the bids.
We compliment the FTC staff for these comments. However, we strongly urge the FTC to broaden its concerns to include other potential advantages of incumbency.
4. Investigate Utility Actions to "Refunctionalize" Transmission Assets
Several electric utilities are in the process of "refunctionalizing" a portion of their transmission assets. Refunctionalization refers to a process by which facilities (and their costs) are relabeled (and/or rebooked) as another category of assets. In this case, some transmission-owning utilities are relabeling what are now FERC-jurisdictional transmission assets into state-jurisdictional distribution assets.
Refunctionalization presents an opportunity for transmission owners to charge vastly different rates (and to offer delivery services on vastly different terms and conditions) to similarly-situated retail and wholesale customers (both generators and consumers). Although the rationale for these differences is often cloaked in terms of "transmission" versus "distribution" and retail-versus-wholesale jurisdiction, the differences cannot be reconciled with FERC's requirement that retail and wholesale transmission users be afforded comparable treatment.(19)
The refunctionalization issue is indicative of the types of actions being taken by utilities today that can have significant anticompetitive effects for the future. We encourage the FTC to carefully follow the issue and take appropriate actions.
5. Begin to Scrutinize NERC Activities
The North American Electric Reliability Council (NERC) is an industry group formed by electric utilities after the Northeast blackout in 1965. NERC's stated objective is to promote the reliability of the interstate high-voltage electric transmission grids that serve North America. NERC attempts to work with all segments of the electric industry to develop and encourage compliance with rules for the reliable planning and operation of these grids. NERC cannot require compliance since it has no legal authorities. NERC's owners are the ten Regional Reliability Councils (RRCs), which are themselves dominated by incumbent utilities.
NERC is trying to transform itself from a voluntary to a mandatory compliance organization. This requires legislation. Legislative proposals have been introduced in Congress, but not yet enacted.
As the FTC is aware, NERC today has not yet implemented an independent board. Their quasi-regulatory authority is being exercised as an entity that does not meet independence criteria. The potential for abuse is substantial.
In spite of the fact that NERC has no legal authority and is not independent, FERC has been giving significant, albeit informal, deference to NERC decisions. This lack of careful regulatory scrutiny poses significant potential problems for consumers since NERC, defacto, is now developing the "rules of the road" for the future operation of the transmission system.
ELCON recommends that the FTC begin to carefully scrutinize NERC activities. Suggestions for such scrutiny include: (1) challenge the "regulatory gaps" created by FERC's deference to NERC; (2) evaluate NERC's governance, particularly the dominance by the RRCs within NERC; and (3) strongly oppose NERC's approval of "security coordinators" that are far from independent (in fact, many security coordinators are employees of utilities). This last point is especially troublesome since utilities can control access to transmission through security coordinators that they control.
6. Continue Antitrust Enforcement
There is a big difference between the transition and the competitive end-state. We anticipate continued regulatory oversight (albeit often inadequate oversight) throughout the transition. The need for antitrust enforcement will increase throughout the transition and be substantial in the competitive end-state.
ELCON believes that antitrust enforcement should increase commensurate with the pace of deregulation. Thus, as regulatory safeguards are relaxed in the electric industry, the new deregulated business functions become subject to the same antitrust scrutiny faced by other competitive industries. However, we emphasize that antitrust is only an after-the-fact measure. Therefore, it is not a substitute for the establishment of a truly competitive market structure at the outset.
The FTC should be prepared to use its skills and legal responsibilities to take antitrust actions whenever necessary and appropriate both in the transition and in the competitive end-state.
7. Help Design and Focus "Market Monitoring" Criteria
A final recommendation is for the FTC to advise FERC on how to design and focus new market monitoring activities. In the FERC's proposed rulemaking on RTOs, FERC is requiring RTOs to monitor markets for transmission services, ancillary services, and bulk power to identify design flaws and market power and to propose remedial actions. ELCON believes that the FTC's expertise on competition and markets should be applied to this effort, and we encourage the Commission to share that expertise with FERC.
The end-state of real competition will provide consumers lower prices, increased product offerings, increased customer service, and innovation. Unfortunately, it will take a long transition to realize these desirable objectives. Individual state actions have extended the transition significantly. These actions include: requirements for the collection of full stranded costs, securitization, mandatory rate reductions, low "shopping credits" or "back-out rates," discriminatory access to customer data and information, discriminatory access to transmission, the implementation of mandatory power exchanges, and inadequate mitigation of market power.
The FTC can take significant steps to protect consumers, avoid discrimination, and further competition both in the transition and in the competitive end-state. In the transition, ELCON believes that the FTC should take aggressive actions in six areas: (1) Continue to monitor market power and offer constructive means by which it is mitigated; (2) Continue to oppose transcos-as-RTOs; (3) Challenge incumbency advantages that are allowed by state PUCs; (4) Investigate present actions to refunctionalize transmission costs; (5) Begin to scrutinize NERC activities; (6) Continue antitrust enforcement; and (7) Help FERC Design and Focus that agency's "market monitoring" criteria.
ELCON believes that regulatory safeguards can be relaxed relaxed in a competitive electric industry. The new deregulated business functions would then become subject to the same antitrust scrutiny faced by other competitive industries. However, we emphasize that antitrust is only an after-the-fact measure. Therefore, it is not a substitute for the establishment of a truly competitive market structure. We need the FTC's help both in moving through the transition and in the competitive end-state.
ELCON appreciates the opportunity to work with the FTC throughout the transition to a truly competitive electric market. Thank you for the opportunity to appear before you today.
1. ELCON is a national association of industrial consumers of electricity. Organized in 1976, ELCON advocates federal and state policies that assure an adequate, reliable, and efficient electricity supply at competitive prices. ELCON today has 35 members with major facilities in most of the fifty states. These companies represent more than 5 percent of all of the electricity consumed in the United States.
2. The states that have taken final action include: AZ, AR, CA, CT, DE, IL, ME, MD, MA, MI, MT, NV, NH, NJ, NM, NY, OH, OK, OR, PA, RI, TX, and VA. VT has "endorsed" restructuring. Source: "Retail Wheeling & Restructuring Report, Edison Electric Institute, Washington, D.C., June 1999.
3. For example, North Carolina has recently established a" Study Commission" to consider retail competition following Virginia's implementation.
4. "Retail Wheeling & Restructuring Report." Op.Cit., page 14.
5. Regulated utilities are required to bid all of their generation into the pool and purchase all of the power needed to meet their consumers needs from the pool. While technically, power from independent power producers could bypass the pool, the dominance by the utilities made outside-the-pool transactions insignificant.
6. "Retail Wheeling and Restructuring Report," Op. Cit., page 98. Specifically, as of June 1999, 447,590 end-use customers were being served by alternative suppliers. This is approximately 22% of the total. The breakdown of this total by customer class is as follows: 356,865 residential; 86,473 commercial; and 4,252 industrial.
7. "ENOVA, Pacific Enterprises Unveil New Joint Venture," California Energy Markets, March 14, 1997, page 10.
8. Examples include: (1) Washington Water Power Company giving preferential treatment to its affiliate Avista Energy which deprived Avista's customer of the benefit of choosing among all potential suppliers [83 FERC P 61,097 & 61,282 (1998)]; (2) Wisconsin Public Service's actions refusing requests for transmission service raised serious complaints about the functional separation of the utility from its affiliate [83 FERC P 61,198 (1998) and 84 FERC P 61,120 (1998)]; (3) Wisconsin Power & Light provided unduly preferential treatment to its merchant function including available transmission capacity (ATC) where none existed [83 FERC P 61,860]; (4) Illinois Power allocated transmission in favor of its own bulk power marketing arm [83 FERC P 61,264 & 83 FERC P 61,299 (1998)]; (5) Aquila Power has formally complained that Entergy has refused transmission for lower cost power to protect its own higher cost generation [FERC Docket No. EL98-36-000, filed June 23, 1998)]; and (6) in another formal complaint filing, it is alleged that a transmission provider denied transmission service and then improperly provided it to its merchant group [Arizona Public Service Company v. Idaho Power Company, FERC Docket No. EL99-44-000 (filed March 3, 1999)]. FERC has not ordered significant penalties in any of these cases.
9. The theory of LMP is great. In fact, ELCON supports the pricing of transmission services based on locational differences in incremental costs across congested transmission paths. Unfortunately, the practical application of the particular procedures now called "LMP" dooms them to failure. Today, the term "LMP" is associated with attempts to price transmission by calculating the differences in prices across a very large number of "nodes." The implementation of this particular methodology, often called "nodal pricing," raises serious concerns including: (1) LMP gives only after-the-fact prices. Consumers cannot be expected to react to price signals that are not even divulged until the next day. (2) The implementation of LMP is very costly. In fact, the cost of just the computer program for the New York ISO's LMP application is $25 million to date. (3) LMP is static, not flexible. It does not change with the development of markets. (4) LMP creates "walls" between regions. While the New England, New York and PJM each have their own versions of LMP, they are all different. Thus the Northeast is Balkanized rather than one integrated region. The establishment of "walls", rightfully, is a significant concern to the FTC staff. [See the FTC staff Comment to the FERC on RTOs, Docket No. RM-99-2-000, August 16, 1999, page 19] ELCON supports locational marginal prices based on a limited number of "zones" which are defined by known congestions rather than a large number of theoretical "nodes." Zoning pricing provides before-the-fact prices, is simple and economical to implement, is flexible and friendly to changes as markets develop, and integrates, rather than Balkanizes, geographical regions.
10. The FTC staff may wish to add to its advocacy reference to research that demonstrates that divestiture may increase the credit standing of the divesting companies. See for example: "Asset Divestiture: Exit from Generating Business Seen as a Benefit to Credit Quality," Julie Doetsch, Jeffrey S. Davidson, and Susan Abbott, Moody's Investors Service Global Credit Research, New York, March 1999.
11. The similarity of the FTC staff and ELCON positions on RTOs are obvious from a comparison of the written comments filed by each group in the recent FERC RTO Notice of Proposed Rulemaking (FERC Docket Number RM99-2-000). A copy of the ELCON's comments in that Docket is attached for reference.
12. "Eliminating Market Power in the Transition to Competition," Profiles on electricity Issues, Number 21, Electricity Consumers Resource Council (ELCON), Washington, D.C., July 1999.
13. Although many states already have made final rulings on the stranded cost issue, it is still of significant importance in several states. Specifically, the legislatures in both North Carolina and Michigan are each now in the process of determining the amount of stranded cost recovery. Incumbent utilities in both states are strongly urging not only that all "positive" stranded costs associated with inefficient assets be recovered through a legislative mandate, but that none of these "positive" stranded costs be "netted" against "negative" stranded costs associated with efficient assets. Also, to the extent stranded costs are assigned as a "wires" fee, these fees can act to discriminate against low-cost utility suppliers.
14. Mergers involving regulated utilities with captive consumers are in a completely different category from mergers of competitive firms without captive consumers. While one may argue that the market will discipline the owners of competitive firms that merge and fail, it is up to regulators to protect the captive consumers from the economic shortfalls of failed mergers involving regulated utilities. Unfortunately, regulators have not been vigilant in disallowing both the costs of mergers and the premiums paid for acquired firms in failed mergers. Failed mergers are not uncommon. In fact, an executive of Andersen consulting recently stated that: "A study of 43 energy utility mergers over a 10 year period found the deals were profitable for shareholders less than half the time. Only 12 of the 33 acquiring utilities continued to outperform the industry in terms of both revenue and operating profit." [Comments of Sam Miller, Andersen Consulting, "A Fresh Look at Mergers & Acquisitions: The Good, the Bad, and the Ugly," at an Executive Conference of International Utilities, March 8, 1999, Slide 10 of his presentation.]
15. "Petition for a Rulemaking on electric Power Industry Structure and Commercial Practices and Motion to Clarify or Reconsider Open-Access Commercial Practices," FERC Docket No. RM95-8-000 and RM98-5-000 (Proposed Rulemaking on Electric Industry Structure Incentives of Market Participants and Improved Open-Access Commercial Practices), March 25, 1998. The objective of the petition is to have FERC "complete the orderly transition of today's power industry to a fully competitive one in which transmission operators have an incentive to make their services equally available to all users and to maximize their reliability and efficient use of the grid." The petition was supported by: Altra Energy Technologies, Inc.; Automatic Power Exchange, Inc.; CNG Power Services; Coalition for a Competitive Electric Market; Destec Energy, Inc.; Eclipse Energy, Inc.; ELCON; Electric Clearinghouse, Inc.; Engage Energy US, L.P.; Enron Power Marketing, Inc.; Koch Energy Trading, Inc.; Shamrock Energy Corporation; Sithe Energies, Inc.; Sonat Power Marketing L.P.; Vitol Gas & Electric. LLC; and Williams Energy Company.
16. Mississippi Public Service Commission Docket No. 96-UA-389 (August 28, 1998) and FERC Docket No.: EL 99-57-000 (May 27, 1999).
17. See for example: Louisiana Public Service Commission Docket Number U-21453 (October 30, 1998); Massachusetts Department of Telecommunications and Energy Docket Number DTE 97-96 (October 8, 1998); and Texas Public Utilities Commission Project Number 17549 (June 19, 1998).
18. We question the significance of "economies of vertical integration." This is a term often used by incumbent, vertically-integrated utilities, but unsupported by evidence. We urge the FTC to balance any economies of vertical integration, if any, with the economies associated with the elimination of preferential utility/affiliate treatment associated with divestiture.
19. For an excellent discussion of this issue see an unpublished paper: "Refunctionalization of Transmission Assets Under FERC Order 888; Impact on Market Power, Whitfield Russell Associates, Washington, D.C., June 1999.