FTC Comment Before the Arizona Corporation Commission Concerning Retail Competition in Electricity

BEFORE THE
ARIZONA CORPORATION COMMISSION
Workshop on Retail Electric Competition) 	Docket No. E-00000A-02-0051
Comment of the
Federal Trade Commission
January 26, 2009
The Federal Trade Commission (“FTC”) appreciates the opportunity to submit
this comment to the Arizona Corporation Commission (“ACC”) in connection with the
ACC’s consideration of whether retail competition in electricity is in the public interest
(including an evaluation of the potential risks and benefits of retail competition). The
FTC wishes in particular to bring two relevant documents to the attention of the ACC: the
2007 interagency Report to Congress on Competition in Wholesale and Retail Markets
for Electric Energy and the FTC’s December 2008 comment on dynamic pricing to the
Pennsylvania Public Utility Commission (“PA PUC”).1
1 The FTC is an independent agency of the United States Government responsible for maintaining
competition and safeguarding the interests of consumers, both through enforcement of the antitrust and
consumer protection laws and through competition policy research and advocacy. The FTC often analyzes
regulatory or legislative proposals that may affect competition or allocative efficiency in the electric power
industry. The FTC also reviews proposed mergers that involve electric and natural gas utility companies.
In the course of this work, as well as in antitrust and consumer protection research, investigation, and
litigation, the FTC applies established legal and economic principles and recent developments in economic
theory and empirical analysis.
The energy sector, including electric power, has been an important focus of the FTC’s antitrust
enforcement and competition advocacy. See, e.g., Deborah Platt Majoras, Chairman, Federal Trade
Commission, Opening Remarks at the FTC Conference on Energy Markets in the 21 st Century:
Competition Policy in Perspective (Apr. 10, 2007), available at
http://www.ftc.gov/speeches/majoras/070410energyconferenceremarks.pdf. FTC merger cases involving
electric power markets have included DTE Energy/MCN Energy (2001) (consent order), available at
http://www.ftc.gov/os/2001/05/dtemcndo.pdf; and PacifiCorp/Peabody Holding (1998) (consent
agreement), available at http://www.ftc.gov/os/1998/02/9710091.agr.htm. (The FTC subsequently
withdrew the PacifiCorp settlement when the seller accepted an alternative acquisition offer that did not
pose a threat to competition.)
The FTC’s competition advocacy program has produced two staff reports on electric power
industry restructuring issues at the wholesale and retail levels. FTC Staff Report, Competition and
Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition
(Sept. 2001), available at http://www.ftc.gov/reports/elec/electricityreport.pdf; FTC Staff Report,
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform (July 2000),
available at http://www.ftc.gov/be/v000009.htm (compiling previous comments that the FTC staff
provided to various state and federal agencies). The FTC staff also contributed to the work of the Electric
Energy Market Competition Task Force, which issued the aforementioned Report to Congress in the spring
of 2007 (available at http://www.ferc.gov/legal/fed-sta/ene-pol-act/epact-final-rpt.pdf). In addition, the
FTC has held public conferences on energy topics, the most recent of which was the above-referenced
Energy Markets in the 21 st Century on April 10-12, 2007 (conference materials available at
http://www.ftc.gov/bcp/workshops/energymarkets/index.shtml). Other programs have included the FTC’s
public workshop on Market Power and Consumer Protection Issues Involved with Encouraging
Competition in the U.S. Electric Industry, held on September 13-14, 1999 (workshop materials available at

The Electric Energy Market Competition Task Force’s Report to Congress
described retail competition’s mixed track record. Based on the nuanced picture that it
presented concerning retail choice programs’ current performance, the Report made
specific recommendations to states that choose to proceed with retail competition. The
Report observed that when “provider of last resort” (“POLR”) rates reflect wholesale
costs, efficient consumer choice between the regulated utility and entrants is more likely.
Similarly, the FTC’s comment to the PA PUC on dynamic pricing described how rates
that reflect wholesale costs (through the use of real-time or dynamic pricing) empower
ratepayers to solve system problems – for example, by reducing consumption in response
to higher prices during scarcity conditions – and allow them to save money by shifting
usage to periods when electricity costs are lower.
Background on the Report to Congress and the Comment to the PA PUC
Report to Congress. The Energy Policy Act of 2005 required a task force
(comprising representatives of the FTC, the Department of Justice, FERC, the
Department of Energy, and the Department of Agriculture) to report on competition in
wholesale and retail electricity markets. In April 2007, the Electric Energy Market
Competition Task Force issued its Report to Congress – a document that reflected the
Task Force’s receipt of substantial public comment.2 Chapter 4 of that report described
the state of retail electric competition in the United States and offered “observations on
what appears to work well . . . in retail customer choice programs.”3 Appendix D to the
report described in detail the programs (and their results) adopted by seven states situated
in organized wholesale electric markets. We hope that these case studies will inform the
ACC’s deliberations.
http://www.ftc.gov/bcp/elecworks/index.shtm); and the Department of Justice and FTC Electricity
Workshop, held on April 23, 1996.
The FTC and its staff have filed numerous competition advocacy comments with the Federal
Energy Regulatory Commission (“FERC”) and the states concerning electricity restructuring initiatives.
See, e.g., Fed. Trade Comm’n, Comment Before the Federal Energy Regulatory Commission on Wholesale
Competition in Regions with Organized Electric Markets (Apr. 17, 2008), available at
http://www.ftc.gov/be/v070014b.pdf. Moreover, the FTC staff participates in preparing United States
Government filings before international competition organizations regarding energy policy matters, and the
FTC and the Department of Justice also participate as United States delegates in a number of international
organizations (such as the Organisation for Economic Co-operation and Development). As part of the
latter process, the FTC staff contributes to the United States’ “country reports” on competition topics. See,
e.g., United States Department of Justice and Fed. Trade Comm’n, “Note by the US Department of Justice
and US Federal Trade Commission,” OECD Roundtable on Energy Security and Competition Policy (Feb.
21-22, 2007), available at http://www.ftc.gov/os/2007/02/WD200725OilGasUnited%20States.pdf. When
requested by the Department of State, the FTC staff also contributes to comments by the United States on
proposed regulatory reforms in other nations.
2 Electric Energy Market Competition Task Force, Report to Congress, supra note 1.
3 Id. at 103; see generally id. at 84-108 for the relevant discussion.
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Certain conditions in Arizona differ from those that faced the seven states
analyzed in the Task Force Report. Unlike those states, Arizona is not a part of an
organized wholesale power market, and utilities in Arizona control a much larger
proportion of in-state generation than is the case in the retail choice states that the Task
Force studied. Accordingly, before it reopens retail competition, the ACC may wish to
ascertain whether retail entrants can access competitive generation sources that will be
available at prices reflecting real-time costs.
Dynamic Pricing Comment to PA PUC. The FTC’s December 2008 comment
to the PA PUC described the merits of retail prices that reflect real-time fluctuations in
the wholesale cost of generating the marginal unit of power.4 The FTC also urged the PA
PUC to consider approaches – such as improved pricing and demand response programs
– that “involve customers in addressing the power systems’ most pressing problems.”5
Policy Implications
The 2007 Task Force Report and the FTC’s 2008 dynamic pricing comment to the
PA PUC both emphasized the importance of having retail prices better reflect the
wholesale cost of power than is now the case. The Task Force Report stated that the
price charged for POLR service “must closely approximate a competitive market price if
it is to provide economically efficient incentives for consumption and supply decisions
and thereby maximize welfare. This price will vary over time as supply and demand
change. . . . When POLR prices are below competitive levels, even efficient alternative
suppliers cannot profit by entering or continuing to serve retail customers.”6 Many states
capped incumbent utility prices below the cost of buying and delivering power from the
wholesale market, which made it unattractive for competitive power suppliers to offer
power to retail customers served by incumbents whose retail rates are capped below cost.
The FTC’s recent dynamic pricing comment to the PA PUC observed that
customers make wasteful choices when, for example, they can buy power to run their
clothes dryers at 10 cents per kilowatt-hour during daytime periods of extreme scarcity –
when those kilowatt-hours of energy may cost the utility $1 each7 – particularly when, as
is generally the case, the utility is able to obtain a kilowatt-hour of energy at night for
much less than $1 (and, indeed, less than 10 cents). The comment thus encourages
“dynamic pricing,” which is a collection of approaches – including real-time pricing and
4 Reply Comment of the Federal Trade Commission submitted in “Energy Efficiency and Conservation
Program and EDC Plans: Reply to Comments on the Staff’s Implementation Plan for the EE&C Program of
November 26, 2008” (Dec. 17, 2008), available at http://www.ftc.gov/os/2008/12/V090001papuc.pdf.
5 Id. at 2.
6 Electric Energy Market Competition Task Force, Report to Congress, supra note 1, at 104-05.
7 The relevant costs should include the construction and maintenance of peaking generators that are used
only during scarcity periods. During the handful of hours when demand hits its peak level for the year or
the decade, the scarcity cost of building and maintaining the electric system capacity needed to handle only
that peak demand far exceeds fuel costs and other variable costs.
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critical peak pricing – that allow retail prices to change on short notice in response to
fluctuations in wholesale prices. Scholars and regulators have found that having
customers pay the real-time price of power can provide significant benefits, including
reducing the cost of providing electricity by 5 to 10 percent;8 reducing customers’ bills;
undermining generators’ efforts to exercise market power; avoiding or postponing the
need to add generation, transmission, or distribution facilities; and increasing system
reliability.
Both the Task Force Report and the comment to the PA PUC also suggested that
real-time pricing that adjusts retail prices at least hourly – based on temporal fluctuations
in generating and other costs – can send the most accurate price signals to guide
customers’ decisions about when (and in what quantities) to consume power, as well as
about whether a competitive entrant offers a better product. Both the report and the
comment, however, acknowledged that the complexity and volatility of real-time prices
may make them unattractive to some customers. Both documents also offered practical
commentary about how to capture many of real-time pricing’s advantages in rates that are
simpler or that reduce utility bill volatility.9
Rate designers confront tradeoffs between offering accurate – yet complex and
volatile – prices that allow customers to achieve the greatest savings and offering simpler,
less volatile dynamic rates that offer smaller potential economic efficiency gains. These
tradeoffs, together with the diversity of customer needs, create opportunities for
competitive retail firms to profit by creating innovative, customer-friendly, dynamic retail
pricing. If a retail firm develops a dynamic pricing or demand response program that
reduces costs, it can profit by splitting those savings with customers. Competitive
retailers have the flexibility – and potentially have incentives – to solve challenges to the
implementation of dynamic pricing.10 Various types of firms – ranging from traditional
investor-owned utilities to companies that specialize in retail demand response – have
brought dynamic pricing to customers, so experience suggests that retail customer choice
is just one of several viable ways to deploy dynamic pricing.11
8 See Severin Borenstein, “The Long-Run Efficiency of Real-Time Electricity Pricing,” 26:3 Energy J. 93
(2005); see also Severin Borenstein and Stephen Holland, “On the Efficiency of Competitive Electricity
Markets with Time-invariant Retail Prices,” 36:3 RAND J. Econ. 469 (2005).
9 For more discussion of the level of bill volatility that real-time prices create and the effectiveness of
simple risk management strategies that maintain the right incentives, see Severin Borenstein, Center for the
Study of Energy Markets, Univ. of Cal. Energy Inst., Working Paper #155, “Customer Risk from Real-
Time Retail Electricity Pricing: Bill Volatility and Hedgability” (2006) (also published at 28:2 Energy J.
111 (2007)).
10 Our dynamic pricing comment to the PA PUC described these implementation challenges in detail.
11 Although Chapter 2 of the Task Force Report provided references that discuss the degree to which retail
entrants have delivered innovative dynamic pricing, we will not currently dwell on that topic or on policy
interventions meant to enable entrants to do so.
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Conclusion
If the ACC decides that the benefits of retail competition in electricity outweigh
the costs,12 the Electric Energy Market Competition Task Force’s Report to Congress
includes recommendations about how to increase the likelihood that retail competition
will work well. In any event, regardless of what the ACC decides about the eventual role
of retail competition in Arizona, we encourage the ACC to examine dynamic pricing as a
means to address a wide variety of electric system problems.
12 The retail competition policy issues for small customers are significantly different from those for large
customers. Commentators have observed that large and medium-sized commercial and industrial
customers benefit from firms’ provision of total energy management services, including not only energy
sales but also efficiency consulting, risk management, unified billing across dozens of facilities, and
opportunities to profit by reducing use when wholesale power is scarce and expensive. For further
discussion of the case for retail competition for small customers, see Paul L. Joskow, “Why Do We Need
Electricity Retailers? or Can You Get It Cheaper Retail?” (MIT Working Paper, rev’d Feb. 13, 2000),
available at http://econ-www.mit.edu/files/1127. Joskow – an MIT economist and a leading expert on
electricity economics – argued that relatively low switching rates, and the limited ways in which retail
firms can add value, counsel against offering competition (at least for small customers). In “Why We Need
Electricity Retailers: A Reply to Joskow on Wholesale Spot Price Pass-through” (Aug. 22, 2000), available
at http://www.econ.cam.ac.uk/dae/repec/cam/pdf/WP0008.PDF, Stephen C. Littlechild – a Fellow of the
Judge Business School at the University of Cambridge and formerly Britain’s Director General of
Electricity Supply – claimed that the market (and not the regulator) should set the right price. See also
Catherine Waddams Price, “Spoilt for Choice? The Costs and Benefits of Opening UK Residential Energy
Markets” (Feb. 2004), available at http://www.ucei.berkeley.edu/PDF/csemwp123.pdf. In this study – one
of several that Price has done concerning British residential switching choices – the author found that
residential customers often switched to the wrong retail suppliers, given their demand patterns.