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News Analysis

Pennsylvania loses faith in FERC, looks for help from the Justice department.
Fortnightly Magazine - August 2002

EnergyPlus. PPL's capacity marketing group, Champagne adds, had an objective to buy low and sell high.

"Far from being manipulation, this is the essence of valid market behavior," Champagne says. The capacity credit market fundamentals, he adds, not actions by PPL, made capacity tight in early 2001.

The company says that it saw right away during the fall of 2000 that prices likely would rise, and set out to make money by buying capacity for early 2001, as others were selling at prices PPL saw as relatively low.

"Nothing prevented any other market participant from acquiring capacity in the same manner as PPL acquired it," says Champagne. "The reason PPL ended up being the only firm with a long position in capacity at the start of 2001 was its success in forecasting the unusual market conditions that came to exist in early 2001." ()

In referring the case to federal agencies, the PUC raises the possibility of antitrust law violations. It seeks a standard condition in every market-based tariff forbidding anti-competitive behavior.

Of course, FERC itself has proposed going much further, with its idea of forcing all power wholesalers with market-pricing authority to agree in advance to a refund obligation that would waive notice requirements otherwise mandated by the Federal Power Act. () That proposal has met with fierce opposition.

Nationwide: A Dangerous Interlude

Severin Borenstein, director of the University of California Energy Institute and a noted specialist in the economics of power markets, still believes that consumers will benefit from a standard market model for the electric utility industry. Yet he acknowledges that both state and federal regulators remain ill-equipped to monitor the new power market trading that comes with RTOs and the SMD.

In a report issued in June, the U.S. General Accounting Office in effect ratified Borenstein's opinion. The GAO warns that FERC was relying on market forces to protect consumers, but had no effective program to monitor the actions of buyers and sellers, let alone prevent or punish market abuse. "Price spikes," the report notes, "have fueled debate about the wisdom of restructuring."

In fact, the GAO offered solutions that mirrored many of the ideas recommended by state regulators in Pennsylvania. The problem, the report says, is that a still-evolving market structure makes it easy for electric industry companies to engage in anti-competitive behavior, but leaves FERC laboring under outdated legislation, without authority to levy the type of penalties necessary to deter anti-competitive behavior. A deterrent approach is especially important, the GAO says, because even with greater authority, FERC likely would be unable to review all market transaction in enough detail to identify behavior that harms consumers.

Consider, for example, sections 205 and 206 of the Federal Power Act. Those sections give authority to FERC to answer complaints and prescribe refunds if rates are unfair. But FERC cannot order refunds except for future conduct beginning 60 days or more after the complaint is filed, or after FERC itself issues notice of its own rate investigation. This limitation, the GAO report says, leaves no remedy for unfair rates imposed