Is deregulation of electricity illegal?

March 27, 2007|By Marjorie Kelly and Richard Rosen

When economic orthodoxy trumps the public good and violates due process along the way, we're in deep trouble. That is precisely what has happened with the nation's misguided experiment in electricity deregulation, which led to the furor in Maryland and other states over electricity prices spiraling out of control, leaving consumers struggling to pay bills 50 percent to 100 percent higher than in recent years.

If we trace the long road of electricity deregulation to its source, we find the main culprit is the Federal Energy Regulatory Commission (FERC). For nearly two decades, this little-known executive agency has been stealthily undermining the consumer-friendly electricity regulatory framework built during the New Deal.

The problem dates to the era of President George H. W. Bush in the late 1980s, when FERC first allowed a utility company to charge market prices for wholesale power. Avoiding the sunlight of public rule-making, FERC over the years relied upon case-by-case decisions as it gradually shifted much regulatory authority from the settled practice of cost-of-service regulation toward a new market-based framework.

In the process, state utility commissions lost power. The executive branch of the federal government gained power. The public lost out. And the whole process was illegal, according to the attorneys general of Rhode Island, New Mexico, Colorado and Utah, who this month argued their path-breaking case before a federal appeals court in Washington.

Enraptured with market fundamentalism - spread by Enron Corp. lobbying - more than a dozen states, including Maryland, took further steps toward deregulated electricity in the 1990s. This massive experiment is now more than a decade old, and the results can be summed up in a word: disaster. As a recent Tellus Institute study shows, consumers in deregulated states in 2006 paid 55 percent more for electric power than those in regulated states - leaving some residents to choose between staying warm and paying for medicine and food. Further increases have yet to show up in many states, including Maryland, Connecticut and Delaware, where price caps and phase-ins have delayed the problem. Some states now are struggling to undo the mess of deregulation.

"The last time we relied on the market to set electricity prices, it was the Great Depression," and the chaos that followed led to the Federal Power Act of 1935, says Lynn Hargis, a former FERC staffer who is now an energy attorney with Public Citizen.

It is at our peril that we forget the lessons of the Depression: that certain kinds of markets, left to their own devices, can create havoc. Yet what is at work here is not just misguided ideology. In the case heard this month by the federal appeals court for the D.C. Circuit, the four states - represented by Ms. Hargis - argued that in its switch to market-based pricing, FERC violated the Federal Power Act, which requires the agency to see that electricity prices are "just and reasonable."

In short, FERC has been acting illegally. Operating out of a near-religious faith in markets, the commission stripped authority from state utility commissions, which for decades had successfully overseen electricity rates. FERC instead handed electricity price-setting over to markets. And it did so in a way that subverted congressional authority and due process. With their case, the four states aim to return wholesale electricity rate-setting to a cost-of-service basis, thereby restoring vital consumer protections.

This issue relates to a broader stealth attack on the New Deal. And it is part of a larger attempt to have markets take over critical public services such as water, prisons, education and electricity.

The slow-motion disaster of electricity deregulation - and FERC's illegal actions permitting it - can serve as a vital wake-up call. We must remember that public services such as electricity are not commodities but public goods, necessities of life essential to the well-being of all, and thus must be subject to public oversight - not left to markets.

Marjorie Kelly, for 20 years editor of Business Ethics magazine, is senior associate at the Tellus Institute. Her e-mail is Richard Rosen, for 30 years a consultant to public utility commissions, is a senior fellow at Tellus. His e-mail is

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