Markets Wired

Commission filing of comment with FERC – The FTC has approved the filing of a comment with the Federal Energy Regulatory Commission (FERC) concerning proposals aimed at strengthening competition in organized electric power markets to increase economic efficiency, improve electric system reliability, and enhance consumer welfare. The comment can be found on the FTC’s Web site and as a link to this press release. The FTC is responding to FERC’s proposals – contained in a notice of proposed rulemaking (NOPR) – to provide consumers with incentives to reduce power use when electricity is scarce and expensive at the wholesale level. FERC’s NOPR amended aspects of an earlier advance notice of proposed rulemaking (ANOPR), on which the FTC also commented in September 2007.

According to the FTC’s new comment, a major long-term objective of the FERC proposals is to replace reliance on traditional cost-based rate regulations (that distort consumption and production incentives) with reliance on conventional price signals and vigorous competition to guide resource allocation in wholesale electric power markets. According to the comment, the FTC “encourage[s] this development as part of the ongoing effort to improve consumer welfare and economic efficiency through vigorous competition in the electric power sector more generally.” In its earlier comment on FERC’s ANOPR, the FTC observed, “Although we commend FERC for its proposals to remove regulatory obstacles to vigorous competition and efficient resource allocation in electricity markets and for the specific changes proposed in the ANOPR, we also encourage FERC to improve the proposals.” The new FTC comment states that the revisions contained in FERC’s NOPR “constitute improvements over several of the proposals contained in the ANOPR . . . [that] would benefit from further modifications.”

Specifically, the comment encourages FERC to facilitate improvements in pricing and direct load control – collectively known as “demand response.” Traditional retail electric prices do not change when extreme weather or equipment failures create scarcity that increases wholesale prices. Fixed retail prices mean that consumers pay the same price to run their air conditioners and dryers during ordinary periods and in scarcity periods – despite the fact that wholesale prices may differ by a factor of 50 between the two situations. The disconnect between wholesale and retail pricing also increases opportunities for generators to exercise market power. The comment concludes that “[w]e believe that a focus on removal of regulatory obstacles to efficient real-time price signals and demand response at the federal and state levels can be an important step toward appropriate, efficient reliance on conventional price mechanisms to handle scarcity and guide investment.” The absence of such pricing “or other mechanisms to moderate demand during periods of scarcity is one of the most serious flaws in organized electricity markets,” the comment states.

The comment also notes that there appears to be merit to FERC’s proposals about providing information to reduce search costs for retail energy sellers that seek long-term supply contracts with generators and ensuring the independence of market monitors. The comment suggests that FERC expand the opportunities for marketers to get data and analysis from market monitors for law enforcement investigations, and that FERC consider expanding its proposal to allow incentive-based approaches to ensure that Regional Transmission Organizations and Independent System Operators are responsive to consumers.

The Commission vote approving the filing of the comment was 4-0. It was submitted to FERC on April 18, 2008. (FTC File No. V070014; the staff contact is John Seesel, Associate General Counsel for Energy, Office of the General Counsel, 202-326-2702; see related press release dated September 18, 2007.)

Copies of the documents mentioned in this release are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. Call toll-free: 1-877-FTC-HELP.