Public Power, Industrial and Residential Consumer Groups Demand FERC Review of Organized Spot Markets

A longtime proponent of competitive markets, the American Public Power Association (APPA) is concerned that organized markets allowed by FERC to set wholesale rates privately with little or no oversight are not functioning to yield the “just and reasonable rates” the Federal Power Act requires to protect consumers. Because APPA members are publicly owned utilities, APPA has a heightened concern about excessive wholesale rates being passed through to their members retail customers and has undertaken a reform initiative.

On December 17, 2007, APPA and forty other organizations, including NASUCA, PULP, Public Citizen, other utility consumer advocates, and groups representing large industrial customers joined in a motion to FERC in a proceeding involving all the organized spot markets to scrutinize whether those markets are properly designed, and whether the market rates they establish are just and reasonable.

FERC had sought public comment on just four organized spot market issues:

  • the role of demand response
  • long-term power contracting
  • market monitoring, and
  • responsiveness of RTOs and ISOs

The motion supported the limited FERC initiative, but argued that the limited initiatives are inadequate to address systemic failure of the spot markets to yield reasonable rates, making

  • Electricity consumers of all stripes recognize that the problems in the organized markets run much deeper than the current investigation is probing
  • FERC needs to broaden the scope of its proposed investigation to address the core issue of whether the private spot markets are producing unjust and unreasonable wholesale power prices
  • Certain large utilities in RTO regions are earning supra-competitive profits far in excess of returns on investments in other enterprises having corresponding risks
  • Rates consumers pay in the functionally deregulated regions where the private spot markets are setting wholesale rates are consistently higher than rates in traditionally regulated areas and are increasing faster
  • Price increases in prices in organized spot market areas are only partially due to increases in fuel prices
  • Other non-cost-of-service related factors, including the exercise of market power, also play a significant role in higher rates of organized spot markets
  • High prices and high rates of return have not attracted new investment and supply in the regions with private spot markets

The pleading asserts that FERC’s reliance on privately set rates in organized markets is based on presumed conditions that are “at variance with reality.” These unwarranted assumptions include

  • the absence of significant market power
  • the existence of free entry to and exit from the market by suppliers in response to “price signals”
  • the existence of an optimized resource mix to assure inframarginal revenues earned by generators are just and reasonable
  • the absence of impediments to long-term contracting, and
  • price-responsive demand, short-term substitution alternatives, and demand elasticity

The motion to FERC concludes

If the Commission’s investigation reveals unjust or unreasonable rates, contracts, or practices, it must take action to address them. Chairman Kelliher has pointed out that, in such circumstances, declining or failing to act simply is not an option that is lawfully available to the Commission. He has stated, quite correctly, that “[t]he legal duty of the Commission to prevent unjust and unreasonable rates and undue discrimination or preference in the sale of wholesale power or interstate transmission by jurisdictional sellers is absolute; the Commission does not have the discretion to ignore them.” The Undersigned Parties therefore urge the Commission to investigate this issue, to fulfill its statutory obligation.

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