Lobbyists: Congress must approve choice to prevent price spikes

11/16/1998
The Energy Report
(c) Copyright 1998 Pasha Publications, Inc. All Rights Reserved.

Changes in industry practices and public policy could have lightened last summer's Midwest price spikes, according to a report released last week by an umbrella group of pro-restructuring lobbyists.

The report concludes that the 106th Congress should act on restructuring immediately upon its return to Washington in January.

"Electricity markets are currently in transition from regulated monopoly to competition, and some practices mandated or sanctioned by regulation made the spikes much more severe," said the report released by Americans for Affordable Electricity (AAE).

The report, Electricity Passes the Market Test: Price Spikes in the Summer of 1998, demonstrates that heightened federal action is needed to "protect consumers and power producers against future price spikes," according to Electric Power Supply Assn. (EPSA) Executive Director Lynne Church.

"Bulk power prices spiked in part because regulation of the retail market insulates customers from price signals that tell them when it is time to conserve," the report said. "In effect, regulated rates force all customers to buy a very expensive insurance policy against price spikes."

Retail competition should be encouraged so customers "will use less power in times of low supply or high demand," according to the study.

The report further concludes that: policies that restrict market participants' ability to hedge, transfer and otherwise cope with risk should be avoided; efficient prices should be freed to allocate transmission and generation capacity to whoever values them most highly; and diverse contracting options should be permitted, instead of mandating standardized, centralized exchange institutions.

A report issued by the Energy Dept.'s Task Force on Electric System Reliability also argues that a prolonged transition to competition increases the risk of potential price spikes.

"Our existing system for buying and selling electricity is stuck somewhere between a regulated regime and full competition," AAE Chair John Motley said. "Only Congress can propel us forward into fully competitive markets."

The analysis, funded by the EPSA, the Electricity Consumers Resource Council (ELCON) and Enron - all proponents of full competition - was conducted by Jerry Ellig, senior research fellow at George Mason University's Mercatus Center, and Robert Michaels, professor of economics at California State University at Fullerton.