GERRY NORLANDER, Pulp Network, November 25, 2008
President-elect Obama has named Dr. Susan Tierney and Rose McKinney-James to his transition team for the U.S. Department of Energy (DOE) and the Federal Energy Regulatory Commission (FERC), which is organizationally within DOE.
Both appointees, former state utility commissioners of Massachusetts and Nevada, respectively, have a record of supporting electricity industry deregulation, or, as it is euphemistically named, “restructuring.”
Thirty five states did not restructure, no state has restructured since 2000, and several states halted plans to adopt it when they saw its results in states like California and New York.
The “restructuring” model strips the power generation function away from state-regulated utilities under the premise that the generation function can be deregulated if it is structured to be competitive. An implicit assumption of restructuring, which we reject, is that if the market price of a utility service is “competitive” it will then necessarily satisfy the legal requirement of being “just and reasonable.”
This regulatory fad peaked in the last decade of the last century when it was lavishly promoted by Enron’s Ken Lay, embraced by some state regulators, accepted by both the Clinton and Bush administrations, and pushed by FERC. FERC’s regime now lacks consumer support and confidence.
To bring about functionally deregulated wholesale electricity markets without statutory authorization, FERC administratively morphed the Federal Power Act system of filed rate regulation into one of unfiled, unreviewable, and unrefundable wholesale market rates. The FERC system is now built upon “organized” spot markets for wholesale electricity such as those run by the NYISO and other Regional Transmission Organizations (RTOs), where energy is sold by sellers with “market-based rates.”
The FERC system has its greatest impact in restructured states that allowed utilities to sell off power plants whose output had been priced based on the cost of production, requiring most electricity to be bought at wholesale “market-based rates” eventually passed through to retail customers.
Mathematical game theory, economics lab simulations, and experience demonstrate that the wholesale electricity spot markets that are at the heart of restructuring can be gamed and manipulated to drive prices well above competitive levels beyond the capacity or will of FERC to correct.
Even for those who would conflate the notions of competitiveness and reasonableness, the generation function is increasingly dominated by fewer large companies as the industry consolidates, undercutting the notion that many sellers will someday make electricity a buyer’s market and preclude the need for rate regulation.
According to Duke Power CEO James Rogers, in light of the recent financial market developments,
“I think within 18 months you’ll see either consolidation or acquisition of all of [the major independent power producers].”
“The case for consolidation in our industry is more compelling today than it’s been in my 20-year career as CEO because of what’s going on in capital markets, because of the economy we’re in and no growth….”
Although most consumer groups are disappointed by the results of restructuring, major utility holding companies formed as a result of restructuring and the repeal of PUHCA, investment banking institutions, energy producers and wholesale traders, deregulated retail sells and the energy derivatives industry still push hard for preservation and expansion of the restructuring model.
Proponents of deregulation such as EPSA and the NYISO occasionally announce reports or studies purporting to show advantages of deregulation. Typically, these reports and studies have loopy methodologies, fail to address how the ISO/RTO markets actually affect consumer prices, and fail to pass any reasonable test of academic rigor. Stated John Kwoka, Northeastern University, in his findings, there is no “reliable and convincing evidence that consumers are better off as a result of the restructuring of the U.S. electric power industry.”
The Obama FERC Transition Team
Dr. Susan Tierney
Dr. Tierney, a consultant with the Analysis Group, has also been mentioned in the trade press as a possible candidate for FERC Chairman. With Cornell degrees in regional planning, she has a long, extensive and varied background in energy issues, including work for the Department of Energy in the Clinton administration. Her biography indicates that in recent years a significant part of her consulting work has been on behalf of electric utilities and industry stakeholders in defense of electric industry deregulation or “restructuring.”
According to Obama’s Change.gov web site, another transition team member, apparently overseeing the FERC appointments, is Rose McKinney-James:
Rose McKinney-James is the Managing Principal of Energy Works Consulting. Previously she served as the President and CEO of the Corporation for Solar Technology and Renewable Resources (CSTRR) and Chair of the Nevada Renewable Energy Task Force. Past positions also include Commissioner with the Nevada Public Service Commission, Director of the Nevada Department of Business and Industry, Chief of Staff for the City of Las Vegas and Project Manager for the Nevada Economic Development Corporation. McKinney-James serves on the Board of Directors of MGM-Mirage, Employers Insurance Group, Toyota Financial Savings Bank, the Energy Foundation, the American Council for an Energy Efficient Economy (ACEEE), and the Nature Conservancy. She is the Board Chair for Nevada Partners.
According to Politico,
Rose McKinney-James single-handedly will lead the review on Federal Regulation and Oversight of Energy. She has a strong background in renewable energy and is currently the managing principal of Energy Works Consulting. She previously served as president and CEO of the Corporation for Solar Technology and Renewable Resources.
James was formerly a Nevada utility regulator. After the Western states experienced the results of market manipulation, she, along with numerous former state utility commissioners from restructured states, signed onto a 2003 Declaration of Consumer Benefits from Wholesale Power Markets, a statement indicating support for the restructuring model. Since then, however, James appears not to have been actively involved in the continued promotion of restructuring and she reportedly has a keen interest in renewable energy.
We would certainly be more hopeful of change in the interests of consumers if the DOE/FERC transition team more reflected the judgment of most states not to restructure, and better realized the experience of consumers in the states that did. Nevertheless, it cannot be assumed that Obama transition team members will recommend candidates for key positions who would continue the relentless restructuring efforts of past administrations without reflection upon the results to date and without heeding consumer concerns.
Perhaps it is a hopeful sign of change that the latest rumored candidate for a FERC position is John H. Norris, Chairman of the Iowa Utilities Board. Iowa, a state that once considered but did not adopt restructuring.
Update, December 4, 2008
The Longview Washington Daily News, in a story about the controversial Bradwood LNG terminal project for the Columbia River, states:
Obama also could reshape FERC itself.
Terms of the four FERC commissioners who voted in favor of the Bradwood project will expire during Obama’s first term, starting in 2009, Tamara Young-Allen, a spokeswoman for the agency, said in an e-mail. The other three commissioners’ terms expire in 2010, 2011 and 2012. (Commissioners serve five-year terms.)
Obama can also appoint a new FERC chairman. That would shift the current chairman, Joseph Kelliher, into a regular commissioner seat. It’s unclear whether Kelliher would finish out his term, which lasts through 2012, if he is removed from the chairman’s position.
When asked about his plans, Young-Allen noted, Kelliher has said, “When I have something to announce, I will tell you.”
VandenHeuvel, of Riverkeeper, speculated that Obama will appoint Jon Wellinghoff as the new chairman. Wellinghoff is a Nevada Democrat who was the only FERC member to oppose the Bradwood terminal in the September vote.