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Groups Express Opposition to FERC’s SMD

CONSUMERS UNION
CONSUMER FEDERATTION OF AMERICA

April 2, 2004
The Honorable Joe Barton
Chairman
Energy and Commerce Committee
2125 Rayburn House Office Building
Washington, DC 20515
Dear Mr. Chairman:
We are writing to express our continued opposition to the Federal Energy Regulatory Commission (FERC)’s Standard Market Design proposal (SMD), and to urge you to take steps to put the breaks on this ill-conceived, anti-consumer proposal should your committee return to work on comprehensive energy legislation this year.
The SMD is not in the public interest. Forcing all regions of the country to rely on single price auctions in spot markets, and basing transmission services on a pricing principle that charges “whatever the market will bear,” with no relationship to actual costs, will not result in just and reasonable rates or promote efficient service. Unique and severe economic characteristics still dominate electricity service. Supply dislocations, market manipulations, transmission bottlenecks and non-market factors (like weather and drought) open the door to activities which result in huge price increases, and the SMD will only exacerbate this problem.
This was demonstrated all too clearly in the Western electricity crisis that roiled the market in 2000 and 2001. The market manipulation that occurred there has cost consumers tens of billions of dollars. Years later we are still trying to unravel all that went wrong, and criminal prosecutions continue. The circumstances that arose in the West then are easily duplicated anywhere that energy companies are permitted to set rates based on what the market will bear without consideration for actual costs. Consumer demand of electricity is inelastic – consumers can’t cut back or find substitutes for their use of this essential commodity – and so consumers will pay just about anything in the short term. This is especially true of small businesses, whose very existence may depend on keeping the lights on no matter what the cost.
Under these circumstances, abandonment of cost-based ratemaking creates numerous and substantial opportunities to impose unjust and unreasonable rates. FERC’s proposal contains no assurances that the rate demanded by producers will bear any relationship to the cost of production. And under the single price auction, which is the only type of market SMD would permit, the price paid for all but the last unit offered is likely to exceed the cost of production.
The Federal Power Act explicitly requires that every rate or charge for transmission or electricity subject to FERC jurisdiction be just and reasonable. Under SMD, there is no guarantee that this requirement will be met, and indeed there is every reason to believe that it will not. For this reason alone, the SMD should be abandoned. Unfortunately, there are additional problems – the lack of a clear evidentiary record on undue discrimination, a plethora of less radical alternatives for the creation of independent transmission organizations, the need to better ensure that market power not be exercised – that call into serious question what FERC is proposing.
In their recent letter to you, some large industrial users and independent power suppliers assert that FERC’s proposed actions would benefit consumers. Nothing could be further from the truth. We understand that some large industrial users may believe that this proposal would be to their benefit. But as structured, FERC’s SMD proposal would hurt residential consumers, as well as small business consumers, who do not have the purchasing power of large volume users. Since the proposal must take into consideration the needs and concerns of the smaller volume consumer, as well as those of large corporations, the SMD fails to meet the real needs of the vast majority of electricity consumers, and should be rejected.
If the Energy and Commerce Committee should return to energy legislation once again this session, we hope you will carefully consider the historical way in which electricity markets have worked under single price auctions with market-based rates, and how the Standard Market Design would negatively impact consumers.
Sincerely,
Adam J. Goldberg
Policy Analyst
Consumers Union
Mark N. Cooper
Director of Research
Consumer Federation of America
cc: Members, Energy and Commerce Committee
Members, Energy and Natural Resources Committee

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