The failure of electricity deregulation

May 6, 2007
Marjorie Kelly and Richard Rosen

When economic orthodoxy trumps the public good and violates due process along the way, we're in deep trouble.

That is precisely what has happened with the nation's misguided experiment in electricity deregulation, which has today left consumers in many states struggling to pay bills as much as 100 percent higher than in recent years.

If we trace the long road of electricity deregulation to its source, we find the main culprit is the Federal Energy Regulatory Commission (FERC). For nearly two decades, this little- known executive agency has been steadily and stealthily undermining the consumer- friendly electricity regulatory framework built during the New Deal.

The problem traces to the era of President Bush I in the late 1980s, when the FERC for the first time allowed a utility company to charge market prices for wholesale power. Avoiding the sunlight of public rule-making, the commission over the years relied upon case-by-case decisions as it gradually shifted much of its regulatory authority from the settled practice of cost-of-service regulation toward a new, market-based framework.

In the process, state utility commissions lost power. The executive branch of the federal government gained power. The public lost out. And the whole process was illegal, according to the attorneys general of Colorado, Rhode Island, New Mexico and Utah, who recently argued their path-breaking case before a federal appeals court in Washington.

Enraptured with market fundamentalism (spread by Enron lobbying), more than a dozen states followed FERC's actions by further deregulating electricity in the 1990s. This massive experiment is now more than a decade old, and the results can be summed up in a word: disaster. As a March Tellus Institute study shows, consumers in deregulated states in 2006 paid 55 percent more for electric power than those in regulated states, leaving some residents to choose between staying warm or paying for medicines and food.

Thanks to an unusually wise state decision- making process led by the state Office of Consumer Counsel, Colorado decided to remain a regulated state. As a result, consumers have been relatively protected. Through mid-year 2006, average electricity rates in Colorado were 7.7 cents per kilowatt hour (kWh), almost identical to the average for all regulated states. By contrast, consumers in deregulated states paid significantly more, or 12.8 cents kWh.

Increased volatility has hit some deregulated states hard, as in the California power crisis of 2000-01, when the cost of power quadrupled from $7 billion to $28 billion in a single year. As one analyst wrote in the Electricity Journal, the cause was a runaway wholesale market for electricity - the very type of market FERC supported.

"The last time we relied on the market to set electricity prices, it was the Great Depression," and the chaos led to the Federal Power Act of 1935, says Lynn Hargis, a former FERC staffer.

It is at our peril that we forget the lessons of the Depression, that certain kinds of markets, left to their own devices, can create havoc. Yet what is at work here is not only misguided ideology but outright illegality. In the case heard by the federal appeals court for the D.C. Circuit, four states argued that in its switch to market- based pricing, the FERC violated the Federal Power Act, which requires the agency to see that electricity prices are "just and reasonable."

Colorado was the lead plaintiff in the case, and argued that the FERC "has no standard independent of the 'market'" to determine if rates are in fact just and reasonable. It also said the FERC allowed utilities to increase rates without filing the proposed increases in advance, "thereby effectively eliminating many of the statute's consumer protections."

In short, the FERC has been acting illegally. Operating out of a near-religious faith in markets, the commission stripped authority from state utility commissions, which for decades had successfully overseen electricity rates. The commission instead handed electricity price-setting over to markets, subverting congressional authority and due process.

Though this remains a largely unknown issue, it is an important one for the nation, for it relates to a broader attack on the New Deal. And it is part of the larger attempt to have markets take over critical public services like water, prisons, education and electricity.

The slow-motion disaster of electricity deregulation can serve as a vital wake-up call. What we must remember is that public services like electricity are not commodities but public goods, necessities of life essential to the well-being of all - and thus must be subject to public oversight, not left to markets.

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