Consumer Federation of America: "As Practiced" Wholesale Electricity Restructuring Has Cost Customers $10 Billion Annually

A report from the Consumer Federation of America (CFA) and the American Public Power Association (APPA) found, "a possible $12 billion excess payment from consumers to generating companies that do not face genuine market competition" for 2011 as a result of wholesale electric restructuring, as practiced in the RTOs.

Link to APPA/CFA study

"The greatest beneficiaries of restructuring have been not consumers, as was promised, or innovative companies that were expected to emerge, but the 'usual suspects' – owners of previously regulated, largely depreciated generating units," the report says.

"Unfortunately, a healthy discussion about how to best regulate the wholesale electricity markets to both protect consumers, encourage innovation and entry of new participants has been clouded by a debate over rhetoric. Despite the evidence to the contrary, supporters of these RTO-operated markets continue to assert that the markets are 'competitive,' without presenting any evidence that they deserve this definition. It is difficult to imagine moving beyond this debate, however, when the financial stakes are so high for the large merchant generation owners and when the regulators of the wholesale market appear inclined to defer to their interests," the report says.

In particular, the report faults a reliance on locational price signals which the report concludes have not worked as intended. "The theory behind locational pricing is to provide price signals indicating where new transmission and generation is most needed. But in reality, new resources have not developed to respond to higher prices in these markets. Instead of inducing new resource development, the higher prices provide a financial incentive for incumbent generation owners to keep supplies constrained, or at least to ensure that prices bid by new market entrants remain high," the report says.

"The financial benefits of constrained supplies can be seen in the candid presentations by merchant generation owners to the financial community wherein the potential closure of coal plants is touted as a benefit to their earnings," the report notes.

"Studies have found that the closure of coal plants is in fact beneficial for those generators who continue operating because the constrained supply drives up prices in the wholesale market," the report says.

Furthermore, the report notes that new entry of capacity has been, "bitterly resisted by the [existing] generators," noting that in PJM, NYISO, and ISO-NE, "merchant generators have won rule changes that impose minimum price offers on new generation to prevent needed new supply from lowering market prices."

"Analyses conducted by APPA of the financial performance of the largest generation owners within PJM demonstrate higher earnings than ... what would be expected under workable competition," the report says.

"The detrimental impact of these markets has been partially obscured by declines in electricity prices over the past few years. Such price drops are primarily the result of reduced electricity consumption and sharp declines in the price of natural gas, both of which are external to RTO operations," the report says.