Energy Markets: Results of FERC Outage Study and Other Market Power Studies

The importance of the role of the Federal Energy Regulatory Commission (FERC) is illustrated by the situation in California. Wholesale electricity prices in California rose sharply in May 2000 and have remained high. California also saw disruptions in service this winter and spring. GAO reviewed FERC's outage study and two other studies that examined possible exercise of market power in California's electricity industry. GAO found that FERC's study was not thorough enough to support its conclusion that audited generators were not physically withholding electricity to influence prices. FERC's study largely focused on determining whether or not the outages were caused by actual physical problems, such as leaks in cooling tubes that required maintenance or repairs. Two other studies GAO examined found evidence that electricity generators exercised market power to boost electricity prices in California. These studies sought broader evidence of the exercise of market power in the entire market by comparing wholesale electricity prices to the estimated costs of producing electricity. In doing so, they found that prices were higher than would be expected if the generators were acting competitively. None of the studies was thorough enough to determine the precise extent to which market power versus other factors has caused high electricity prices in California since May 2000. A thorough study of market power would combine the market-wide approach of the other two studies with a quantification of the extent to which outages, or other supply disruptions, were caused by factors other than generators' attempts to drive up prices. Such factors may include the operating and maintenance history of existing power plants, constraints on the number of hours certain plants can be run, and financial problems of utilities, which led to suspension of payments to some generators. This testimony summarized a June report (GAO-01-857).