Lieberman/Carnahan call for investigation into federal energy regulation

WASHINGTON – Senators Joe Lieberman, D-Conn., and Jean Carnahan, D-Mo., have asked the General Accounting Office (GAO) to inquire into whether the Federal Energy Regulatory Commission (FERC) is carrying out its responsibilities to ensure that wholesale electricity sales throughout the country are reasonable and that interstate natural gas pipelines are fulfilling their obligations to customers. “Under federal law, FERC has the responsibility to ensure just and reasonable prices for interstate wholesale transmission,” the Senators said in a letter to GAO, “but there is mounting evidence that FERC may not have fulfilled this role in the California situation.” Following is text of the letter:

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).


Joseph I. Lieberman

Jean Carnahan