FYI.   Commentary that calls George W. Bush to task for not getting more 
competition into the electricity markets.

Jim



----- Forwarded by James D Steffes/NA/Enron on 02/06/2001 08:06 AM -----

	"PennFuture" <pennfuture@pennfuture.org>
	02/05/2001 03:33 PM
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		 Subject: PennFuture's E-cubed - Breaking Out of the Box


PennFuture's E-cubed is a commentary biweekly email publication  concerning 
the
current themes and trends in the energy market.


February 5, 2001
Vol. 3, No. 3

Breaking Out of the  Box

Two weeks after his inauguration, President Bush's  electricity policy is 
already
emerging from the crucible of California and is  characterized by obedience to
free market ideology and a federalism that  confines the federal government 
to a
limited, backseat role.

We are  told that California's crisis is an isolated event, the result  of
California's unique mistakes. In this view, the federal government  neither
contributed to the crisis nor has a major role to play in solving it.  
Wholesale
market caps at any level are declared to be an inappropriate  intrusion into 
free
markets that can only make things worse. Moreover, the  appointment of Curt
Hebert as the new Chairman of the Federal Energy  Regulatory Commission (FERC)
signals that FERC will not assert itself to  ensure that wholesale electricity
markets are genuinely competitive and that  the principles of open access and
comparability are more than legal fictions.  Finally, environmental 
regulation is
fingered as a primary obstacle to  adequate supplies and reasonable prices.

This emerging policy begins with  a misdiagnosis. In fact, the mess in 
California
and the West has roots in  huge policy mistakes made by both the state and
federal governments. One such  federal mistake was a 1995 FERC decision that
blocked a competitive  solicitation for 1400 megawatts of new generation in
California. Skyrocketing  retail electric prices in more and more states due 
to
wholesale market  failure will soon make clear to all that the nation's 
electricity
problems  start in Washington DC with failed wholesale market policies. The 
hot
seat  will then shift from Governor Gray Davis to federal officials and it 
will  become
apparent that strict obedience to free market ideology or a limited  role for
federal authority will not?cure?past mistakes in electric  policy.

President Bush inherits an America where wholesale electricity  markets are
isolated and dysfunctional - ticking time bombs planted beneath  his 
Presidency.
The fuses on these bombs were lit with the passage of the  Energy Policy Act
(EPACT) in 1992, which deregulated the price of generation  in the wholesale
electric market but left FERC with the job of creating a  genuinely 
competitive
wholesale market which would restrain prices through  competitive pressures.

But neither FERC nor Congress has ensured the free  movement of electricity in
interstate commerce or workably competitive  markets since the passage of 
EPACT.
Market power abuses are rife, and most  parts of the country don't even have 
the
benefit of an independent system  operator to ensure nondiscrimination and 
open
access to the transmission  grids. Even so, FERC will not compel formation of 
or
utility membership in  independent system operators.

Worse yet, in the face of opposition from  states and several powerful 
utilities,
Congress has fiddled its thumbs on  national restructuring legislation for 
five
years and has not required a  transition to retail competition in every 
state. By
failing to open retail  markets, Congress has ensured that wholesale 
electricity
markets cannot be  effectively disciplined by demand changes or long-term 
retail
contracts.  Meanwhile, states behave as if they are electric islands immune 
from
the  results of failed federal stewardship of wholesale markets. Foolishly,  
they
have become a principal stumbling block to optimally sized regional  power
markets and encourage FERC timidity by banging the drums of states'  rights on
Capitol Hill.

To this day, with 58,000 megawatts under its  control, PJM is the largest
wholesale market or free-trade zone for  electricity in the country and it
amounts to no more than 6 percent of the  nation's electric industry. The
remaining 94 percent of the industry are  divided into hundreds of wholesale
markets with unique rules for pricing and  operation.

So nine years after EPACT, the bombs have begun to go off,  first in 
California,
where disastrous state policies mixed with federal  mistakes have created a
spectacular explosion, then in Washington and Idaho,  two states that have not
passed retail restructuring laws, where retail rates  are going up as much as 
84
percent and 29 percent respectively. And it's only  a matter of time before 
these
electricity time bombs explode in other  states.

The reality is that both the federal government's actions and  inaction have 
made
problems worse in California and elsewhere. Denying that  fact thwarts any
efforts to fix the problem, as does attacking environmental  protection or
endlessly repeating free market and states' rights  ideology.

Hopefully it's not heresy but it must be said:  Strong federal action and wise
intervention are required if  wholesale markets are to be stabilized and  made
competitive.

First, the federal government must  organize the country into 10 or 12 
regional
wholesale electric markets, each  administered by an Independent System 
Operator
that has the legal duty and  necessary authority to ensure that each market is
reliable and genuinely  competitive. Each ISO must have clear responsibility 
to
identify and prevent  market power abuses in order to protect public 
confidence
in electricity  markets and prevent more autopsies like that now being done on
California's  effort to deregulate.

Second, and absolutely crucial for the formation of  competitive electricity
markets, the federal government should require that  every state equip its 
retail
customers with time-of-use metering and  appliance control devices (thermostat
resetting and others) which increase  the price elasticity of demand.

Third, electric markets cannot be  competitive if either the wholesale or 
retail
market remain closed. All  customers should be allowed to choose electricity
suppliers by a certain,  specific date.

Fourth, fuel diversity and clean energy have a clear value  in these markets -
federal restructuring legislation should promote fuel  diversity as well as
address a host of major environmental problems by  establishing reasonable
renewable energy requirements.

Fifth, the  federal government must face up to the fact that in periods of 
peak
demand or  system emergency conditions, suppliers currently have almost total
pricing  power and that high wholesale price caps are an immediate necessity. 
At
such  times, the price curve looks like a "J," with prices unlimited by  
demand
changes climbing straight up. The three wholesale markets that are  
administered
by viable independent system operators - PJM, New York, and New  England - all
operate with a $1,000 per megawatt-hour price cap. They use  caps not because
they aren't committed to making competition work, but  because demand is not
currently responsive to price and because these  emerging markets are 
vulnerable
to strategic bidding that could destroy  public support for more competition.

The sternest test of leadership for  a modern politician is to face down his
friends and the greatest act of  friendship is to save a friend from himself. 
The
President could lessen the  need for caps by telling some of his friends in 
the
energy industry that they  are behaving like a Marxist caricature of 
businessmen
who only need to be  given enough rope in order to hang themselves. Some
wholesale energy  suppliers - by persisting in wholesale markets that cannot
limit prices by  competition or demand response to charge $1,000, $2,000, 
$3,000
or more per  megawatt-hour, prices that greatly exceed any cost or profit
requirement -  have triggered a public reaction that could eventually crush 
them.
For  example, in California, the recently passed emergency state  statute
"suspends" retail direct access and many communities are  understandably
beginning the process of forming municipal  utilities.

The President must remind wholesale energy suppliers of the  need for 
restraint
while America's dysfunctional wholesale electricity  markets are repaired.

Americans deserve true, functional, clean and  affordable competitive electric
markets. Because energy bills often consume  at least 10 percent of an average
family's income, and up to 50 percent of a  poor household's take-home pay, 
most
Americans have little tolerance for high  energy costs. And, as Jimmy Carter
discovered, the families that carry lunch  buckets hold the people in 
government
responsible for energy shortages and  price spikes.

President Bush himself seems to sense that energy threatens  his Presidency -
electricity alone could be its downfall. Perhaps his talent  for political
survival will yet cause the President to change course on  electric policy and
break out of the confined ideological box which he  appears on the verge of
entering.

The fate of his presidency, and our  energy future, may hang in the balance.


E-cubed is available for reprint in newspapers and other publications.  
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 - Vol3No3_2501.doc