Preventing Electricity Market Abuses

  “During 1998, electricity markets on the West Coast and in the Midwest experienced repeated episodes when prices increased at least 10-fold and as much as 300-fold. Hundreds of millions of dollars changed hands in a matter of days. Bankruptcies of over a quarter of a billion dollars resulted…In spite of these unsettling events, by mid-1999 restructuring had been enacted in states in which more than half the electricity in the U.S. is consumed.”

  That’s the beginning of a report by the Consumer Federation of America and Consumers Union, called Electricity Restructuring and the Price Spikes of 1998-A need for more vigorous efforts to protect consumers. The report draws lessons from the chaos of last year when a nationwide heat wave sent wholesale electricity prices soaring.

  The United States is in the early stages of an experiment in restructuring the electric utility industry. Several years ago wholesale electric utility markets were deregulated nationwide. Kentucky is one of many states that are studying whether to deregulate retail electric sales, or restructure their industries in other ways. Many other states have already restructured their electric utilities.

  The Consumer Federation-Consumers Union report concludes that last year’s shortages and price hikes are due to the effects of this early restructuring, and that consumers need to be protected from the worst effects of the trend toward deregulation.

  “The market problems of 1998 indicate that much more vigorous consumer protection is necessary, if the restructured electricity market is to benefit all consumers,” says the report. Referring to the price increases and other market turmoil, the report continues, “These are not accidents or aberrations; they are exactly the behaviors one would expect to occur when rational economic actors take advantage of market imperfections and institutional weaknesses.”

  Last year’s disruptions are among the reasons why electric cooperatives in Kentucky have been urging a go-slow approach to utility deregulation. The co-ops strongly support the special state task force study now under way, which seeks to answer questions about whether restructuring would benefit Kentucky. The final report of the Kentucky Special Task Force on Electricity Restructuring is due out by the end of this year.

  The Consumer Federation-Consumers Union report says that among the problems that came to light as a result of last year’s tumult are:

 – Lack of coordination and cooperation among utilities;

 – Inadequate transmission capacity;

 – Lack of incentives to keep enough electricity available;

 – Outdated systems for allowing consumers to use less electricity as prices rise;

 – A lack of information that would allow buyers to make sound decisions;

 – Concentrated, local markets that allow large generators to drive up prices by withholding supplies;

 – Bogus financial transactions.

 – To guard against those kinds of problems in the future, the consumer report recommends:

Start with good, competitive policies.

  Before restructuring, policy makers must make sure (1) there is enough electricity to meet demand, (2) that the transmission system can handle competition and increased use, (3) that there are penalties for failing to keep electricity flowing, and (4) that consumers have simple, effective ways of controlling their electricity use to minimize their contribution to electricity shortages.

Structure the market properly.

  (1) Make sure enough competitors are allowed in order to prevent abuse of market power, (2) monitor the effects of mergers, electricity supplies, and pricing practices, and (3) develop rules to manage the trading and selling of electricity.

Develop market manipulation safeguards.

  Provide heavy penalties, including banishment from being a trader or broker, for market manipulation and profiteering.

Implement steps to prevent price abuses.

  Put in place protection against sudden, huge price hikes through price ceilings, legal reviews of prices above certain levels, or other protections.

The complete report can be downloaded onto your computer from the Internet, at
www.consumerfed.org/spike.pdf
.