FTC Staff Issues Reporton Electric Power Regulatory Reform

A new staff report issued today by the Federal Trade Commission examines which features of various state retail electricity programs appear to have resulted in consumer benefits and which have not. The staff report also highlights certain jurisdictional limitations on the states' authority to design successful retail competition plans and discusses whether there is a need for federal legislative or regulatory action in this regard. The report, "Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition," updates a July 2000 FTC Staff Report and responds to a request to update that report made by the Chairman of the Energy and Commerce Committee of the United States House of Representatives, W. J. "Billy" Tauzin, and the Chairman of the Subcommittee on Energy and Air Quality, Joe Barton.

In its report, FTC staff identify several overall points about how restructuring has proceeded at the state level so far:

• The states that have moved toward competition in electricity generation and retail marketing are in a transition period, during which retail price regulation will continue as some elements of competition are introduced. No state has completed the transition period.
• Most policy choices that confront states during this transition period involve tradeoffs, with each option presenting potential costs and benefits.
• Given that states are in a transition phase that represents a hybrid of regulation and competition, many of the expected benefits of competition have not yet emerged.
• Nothing that has happened so far, however, indicates that competition -- once the transition period is completed -- will not produce additional benefits to electricity customers. Competition provides stronger incentives for the efficient deployment of capital for generation investments and for suppliers to offer innovative services and products to consumers.

Among the main conclusions of the report and the reasoning underlying these conclusions are the following:

• Competitive Wholesale Markets Are Important To Achieving Effective Competition In Retail Markets.

• For all of the expected benefits of retail competition to be realized, it is imperative that wholesale markets be competitive. Effective wholesale and retail competition will mutually reinforce each other, thus combining to bring benefits to retail customers. And as wholesale and retail markets become regional, governing policies and jurisdictional approaches also must move in that direction for wholesale and retail competition to be successful.

• Policies Are Needed In Retail and Wholesale Markets That Will Increase Demand-Side Responsiveness.

So far, neither retail nor wholesale markets for electricity generation encourage effective demand-side responses. Generally, retail customers do not have price information and time-sensitive rates that reflect the changing price of obtaining electricity at various times of the day and over the course of the year. Increasing the price sensitivity of demand also will help to constrain existing or potential market power in generation. This is true because a price increase will be less profitable for generators if it is passed through and retail buyers respond by reducing their consumption by a significant amount. In conjunction with variable pricing for generation services, retail suppliers should be permitted to offer competitive metering and billing services to their customers. Such competition would encourage the development of innovative new services (e.g., real-time pricing).

• Policies that Set the Price of Standard Offer Service for Non-Choosing Customers Have A Substantial Effect on the Entry of New Retail Suppliers.
• Effective retail competition, and the subsequent consumer benefits of retail competition, are much more likely with actual entry. State policies that eliminate barriers to entry to allow for the long-run, efficient entry of entities to compete with the incumbent will assist the development of retail electricity markets.  

• Most states have required the existing distribution utility to continue to offer service ("standard offer service") at fixed, regulated rates to customers that do not choose a new supplier or whose supplier exits the market. Often the duration of this service is coterminous with the time period during which the state allows the utility to recover its stranded costs (those generation-related costs that are uneconomic in a competitive environment).  

• States should design standard offer service policies that provide entrants with sufficient incentives to offer service and do not, unintentionally, create a barrier to entry. Ensuring that standard offer service providers can pass on changes in fuel costs and wholesale electricity prices will aid this goal. Initial rate reductions for standard offer service, which are not based on cost reductions, tend to distort entry decisions and reduce incentives for retail customers to search for alternative suppliers.

• State Consumer Protection Policies Can Affect Both Consumers and the Likelihood of New Entry to Increase Competition.

• Consumers' choices will be made most efficiently if consumers are exposed to accurate, timely and comparable information about retail suppliers of electricity. Enforcement of truth-in-advertising laws will help ensure that suppliers make truthful, nondeceptive, and substantiated advertising claims in the new retail marketplace. Standardized labeling of retail electricity products and services may be beneficial to consumers and competing electricity suppliers, as long as it allows suppliers to provide additional information as they begin to offer innovative services and products to consumers.

• Consumer education programs that provide general information to increase consumer awareness about retail competition, as well as "nuts and bolts" information to allow consumers to shop effectively and select their supplier, will help to ensure that consumers have the information they need to participate effectively in competitive retail electricity markets.

The Commission vote authorizing release of the staff report was 5-0. This report represents the views of the staff of the Federal Trade Commission. It does not necessarily represent the views of the Federal Trade Commission or any individual Commissioner.

Copies of the report, "Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition," are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC File No: V010003)