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Perspective

Enron's fall finds FERC toying with cost-based rates. But let's temper the nostalgia.
Fortnightly Magazine - February 1 2002
  • the same period and increased 86 percent after adjusting for inflation.
  • Consumer Protests. Consumers responded to these "rate shocks" by exerting pressure on regulatory bodies to investigate the prudence of management decisions to build generating plants, especially when construction resulted in cost overruns, excess capacity, or both.

However, on Nov. 20, FERC issued 6 in which it acted on triennial market power updates for three generation companies and announced a new generation market power screen, , and a companion . The impending investigation is to determine whether existing "market-based rate tariffs ... of public utilities that sell electric energy and ancillary services at wholesale" and "all new market-based rate tariffs" are "just and reasonable." According to the commission, application of the just and reasonable standard "will protect customers from excessive rates." The commission's order also established a refund condition, which will have a chilling effect on the way Wall Street and others view the power marketing industry.

Without engaging in a Clintonesque argument about what is meant by "excessive," a return to a "just and reasonable" standard surely will insulate consumers from price swings, both high and low-but at a cost. The past has taught that just and reasonable rates are ineffective when supplies are short, a disincentive to investment, and an impediment that often prevents companies from being nimble enough to meet changing market conditions. In this regard, Alfred Kahn has concluded:

"Regulation, whether justified in terms of protecting consumers against monopoly or protecting competitors from what are perceived to be unfair handicaps, is itself a major obstacle to economic progress." 7

There is no question that Enron's massive downfall and the energy woes of California warrant both governmental oversight and intervention to prevent abuses. But the objectives of regulation should be stable energy markets that promote efficiencies, abundant supplies, and innovations in service and products. Wholesale imposition of just and reasonable rates may not result in these benefits. As a consequence, the FERC should go slowly before deciding who wears the crown.

William A. Mogel is a partner in the law firm Squire, Sanders & Dempsey, in Washington, D.C. He is the editor-in-chief of the Energy Law Journal, and may be reached at wmogel@ssd.com.

  1. Section 206 of the Federal Power Act, 16 U.S.C. _824e.
  2. , 97 FERC ¶61,219, and .
  3. Samuel Bodily and Robert Burner, Manager's Journal, (Nov. 19, 2001).
  4. See , p. 9 (Dec. 10, 01).
  5. 61 Fed. Reg. 21543-44 (footnotes omitted) (May 10, 1996).
  6. FERC subsequently announced that it would delay implementation of the new market power test until after a technical conference., p. 7 (Dec. 24, 2001).
  7. Alfred Kahn, Unleash the Broadband Economy, , p. A16 (Dec. 13, 2001).

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