April 12, 2001
Mr. David M. Walker
Comptroller General of the United States
U.S. General Accounting Office
441 G Street, N.W.
Washington, D.C. 20548
Dear Mr. Walker:
We have been watching with dismay as the state
of California suffers sporadic rolling blackouts with impacts on
electricity supplies and prices throughout the western United
States, a situation that may get worse this summer when the
demand for electricity increases. We understand that there are
many factors that have contributed to the current situation, and
few short term options to create more electricity for this
market.
At the same time we are extremely troubled that
California’s Independent System Operator (ISO) recently
asserted that suppliers of electricity in California have
allegedly been charging many times more than what it actually
costs to generate the electricity, an overcharge amounting to
$6.8 billion according to the operator. Some experts believe
that these high prices reflect a non-functioning market that
has, in turn, exacerbated the state’s electricity shortage.
With the possibility of electricity deregulation
occurring soon in additional states such as Missouri, we are
concerned whether there is adequate federal oversight to guard
against potential abuse of market power by suppliers. Without
such oversight, the nation may not progress towards achieving
what many see as the promise of deregulation: lower consumer
prices, greater reliability, increased choice, and more
efficient generation.
Deregulation legislation being considered in
Missouri would transfer the oversight authority from the
Missouri Public Service Commission (PSC), which works closely
with the utilities to provide direction if there are capacity or
reliability concerns and sets appropriate customer rates, to the
Federal Energy Regulatory Commission (FERC). Under federal law,
FERC has the responsibility to
ensure
just and reasonable prices for interstate wholesale
transmission, but there is mounting evidence that FERC may not
have fulfilled this role in the California situation. FERC
Commissioner William Massey recently said: "Ensuring just
and reasonable prices in wholesale markets requires that we
clearly define market power, and aggressively intervene when the
markets are not producing reasonable prices. The commission’s
actions to date have been insufficient." (March 20, 2001
testimony to the House Energy
Committee’s Subcommittee on Energy and Air
quality).
We are requesting that the General Accounting
Office (GAO) assess whether FERC is properly exercising its role
to enforce reasonable electricity rates. Specifically, we ask
GAO to answer the following questions:
1) Has FERC fulfilled its mandate to ensure just
and reasonable rates? Is FERC adequately monitoring and
appropriately regulating based on its statutes power supply,
demand, and pricing in California? In other Western states? In
the Central Midwest and in the Northeast?
2) Has FERC devoted sufficient resources to
carry out its oversight obligations in a timely and effective
manner? And does FERC have the necessary resources to carry out
its future oversight role?
3) Does FERC need additional authority to carry
out its mission of ensuring just and reasonable prices given
that widespread partial deregulation is now occurring in so many
states?
4) As we understand the situation from some
experts, the number of transactions in electricity that occur in
the deregulated wholesale market place is voluminous. This
situation may increase the difficulties of guarding against
market abuse. Is there a role for another agency or independent
organization to exercise an oversight role with respect to these
transactions? If so, what would be an appropriate oversight
role?
5) We have been advised by some experts that
greater transparency of prices relating to the buying and
selling of electricity in a deregulated market would help guard
against market abuses. We understand the need to keep prices
confidential for a period of time to ensure against collusion.
After this appropriate period of time has passed, would greater
transparency be beneficial?
We are also concerned about recent allegations
by the California Public Utility Commission (CPUC) that market
power has been abused in the transmission of natural gas, which
has in turn contributed to the spiraling cost of electricity
generation in the state. The CPUC maintains that the price of
natural gas transmitted by the El Paso pipeline has been
manipulated so that prices in California over the last year have
been up to five times the national average. Because an
increasing number of states, including California, rely heavily
on natural gas fired power plants, any manipulation of that
commodity can have severe consequences. Additionally, because
such a large percent of our future nationwide generation
capacity will use natural gas, we are concerned that these types
of alleged market abuses will have even more profound effects.
Therefore, we ask GAO to answer the following questions:
1) Has FERC fully met its responsibilities to
adequately regulate interstate pipelines? If not, what areas
require improvement?
2) Is there a continuing role for FERC to play
in ensuring equal access to the limited amount of space in our
current natural gas pipelines? Should this role be enhanced or
clarified, and if so, how?
3) Is there the possibility of this same type of
alleged abuse in other parts of the country, aside from
California, where the natural gas pipeline capacity is similarly
limited? Please provide any details.
We appreciate all the good work that GAO does
and we look forward to hearing from you soon. If you have any
questions about this request please contact Ted Timbers with
Senator Lieberman (4-7199) or Sandy Fried with Senator Carnahan
(4-4930).
Sincerely,
_______________
Joseph I. Lieberman
___________
Jean Carnahan