Can law manage competitive energy markets?

Cornell Law Review

Volumn 93, Issue 4, 2008, Pages 765-817

  Spence, David B ^a,b  

^a HARVARD LAW SCHOOL   (United States)

^b UNIVERSITY OF TEXAS AT AUSTIN   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 45749120773     PISSN: 00108847     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (297)

1. This trend is popularly known as "deregulation." See, e.g., Jim Yardley, Texas Learns in California How Not to Deregulate, N.Y. TIMES, Jan. 10, 2001, at A12.
2. However, many scholars prefer the term "restructuring," since a great deal of regulation remains. See, e.g., David B. Spence, The Politics of Electricity Restructuring: Theory vs. Practice, 40 WAKE FOREST L. REV. 417 (2005).
3. For a general discussion of this trend, see COMPETITION IN REGULATED INDUSTRIES (Dieter Helm & Tim Jenkinson eds., 1998).
4. See infra Part II.A.
5. See infra notes 68-76 and accompanying text.
6. See infra Part II.C.1.
7. See infra Part II.C.2.
8. See infra notes 143-47 and accompanying text.
9. Economists use the term "Pareto efficient" to refer to a distribution of resources for which no different distribution can make someone better off without making someone else worse off. See HAL R. VARIAN, INTERMEDIATE MICROECONOMICS: A MODERN APPROACH 15 (7th ed. 2006). Thus, a Pareto improvement is a change that makes at least one person better off without making anyone worse off. See id.
10. Economists use the term "Kaldor-Hicks efficient" to refer to a distribution that maximizes social net benefits. See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 13-14 (7th ed. 2007). Thus, a Kaldor-Hicks improvement is a change that increases social net benefits but does not necessarily make everyone better off. See id. at 14.
11. See James McManus, Natural Gas, in 2 ENERGY LAW AND TRANSACTIONS ch. 50, § 50.04 [1] [a] [i]-[ii] (David J. Muchow & William A. Mogel eds., 2003);
12. Jeffrey W. Meyers & Robert M. Lamkin, Electricity, in 2 ENERGY LAW AND TRANSACTIONS, supra, ch. 52, § 52.02.
13. See, e.g., VARIAN, supra note 8, at 429-30. This captured consumer surplus is termed "producer surplus." See id. at 431-32. Monopoly pricing will also reduce the total value of the producer surplus and the consumer surplus in a market. See id. at 432-33. This lost value is called the "deadweight loss." Id.
14. See McManus, supra note 10, § 50.04 [1][a][i]-[ii]; Meyers & Lamkin, supra note 10, § 52.03.
15. See, e.g., Gerald D. Prager, Pemex at the Crossroads: A National Oil Industry in Crisis, 15 HOUS. J. INT'L L. 115, 139 (1992) (explaining that, as of 1992, Guatemala was Latin America's only oil-producing nation without a state-owned oil company).
16. See Arek Krasnodebski & Tomasz Janas, Energy Transactions in the European Economic Community, in 6 ENERGY LAW AND TRANSACTIONS, supra note 10, ch. 163, 163-1 to -2. Examples include the predecessors to firms like France's Electricite de France (EDF), Italy's Enel and Eni, Germany's E.On, Spain's Endesa, and Britain's National Power (NP) and PowerGen (PG).
17. For example, Mexico's Comisión Federal de Electricidad, see John P. Mathis et al., Electric Power and Natural Gas Legislation in Mexico and the New Regulatory Framework, in 6 ENERGY LAW AND TRANSACTIONS, supra note 10, ch. 165, §§ 165.01-.02,
18. and Brazil's Eletrobras, see James v. Derrick, Jr. & Robert H. Walls, JR., Natural Gas and Electric Markets in South America, in 6 ENERGY LAW AND TRANSACTIONS, supra note 10, ch. 164, § 164.03[3] (noting, however, that privatization has begun), and most of Latin America relies on state-owned firms to provide gas and electric service. See id. § 164.01[1].
19. In the late nineteenth and early twentieth centuries, public demand for electric power grew, and electric systems arose in major American metropolitan areas. Some were publicly owned, others privately owned. Some used central station technology, delivering power over a grid; others employed smaller, geographically distributed generators. See Meyers & Lamkin, supra note 10, § 52.01. The fight over public versus private ownership is chronicled in ROBERT A. CARO, THE POWER BROKER: ROBERT MOSES AND THE FALL OF NEW YORK (1975).
20. See also Patrick McGuire & Mark Granovetter, Business and Bias in Public Policy Formation: The National Civic Federation and Social Construction of Electric Utility Regulation, 1905-1907 (Aug. 1998) (unpublished manuscript, on file with author). That fight eventually produced the system we have today, dominated by state-chartered, vertically integrated, investor-owned utilities providing monopoly electric service within their designated service areas, using their own central-station technology and distribution grid.
21. See PAUL L. JOSKOW & RICHARD SCHMALENSEE, MARKETS FOR POWER: AN ANALYSIS OF ELECTRIC UTILITY DEREGULATION 11-13 (1983).
22. Fifteen percent of American consumers of electric power receive their service from publicly owned entities, such as municipal power agencies like the Los Angeles Department of Water and Power or federal power agencies like the Tennessee Valley Authority. Another nine percent belong to rural electric cooperatives. Investor-owned utilities serve the remainder. See U.S. ENERGY INFO. ADMIN., ELECTRIC POWER INDUSTRY OVERVIEW, available at http://www.eia.doe. gov/cneaf/electricity/page/prim2/toc2.html (last visited Mar. 8, 2008).
23. See JOSKOW & SCHMALENSEE, supra note 16, at 13 (describing the franchising process).
24. In nondemocratic societies, a Machiavellian equivalent may have been at work. Rulers whose legitimacy does not come from elections might depend on the provision of a sound economy to ensure social stability and their own legitimacy. Certainly, the provision of cheap and reliable energy services is an integral part of that mission.
25. See Meyers & Lamkin, supra note 10, § 52.02.
26. The standard way of describing the ratemaking process is to say that in rate cases, utility commissions typically make rate decisions using the following equation: R = Br + O, where R represents the company's total revenue requirements, B represents the rate base, r represents the permissible rate of return on investment, and O represents permissible operating expenses. See SIDNEY A. SHAPIRO & JOSEPH P. TOMAIN, REGULATORY LAW AND POLICY: CASES AND MATERIALS 109 (3d ed. 2003). Assets that are used for and useful to the company's task of supplying electric service are includable within the rate base, and the company is guaranteed a fair rate of return on these assets. See id. at 110. Most states treat any prudently made investment in such assets as properly includable in the rate base. See id. at 111.
27. These obligations include the duty to provide reliable service to all qualified customers, rules against discrimination in the provision of the service, and more. See, e.g., 66 PA. CONS. STAT. ANN. §§ 1501-1502 (West 2000 & Supp. 2007).
28. The jurisdictional line between the FERC and state commissions does not perfectly track the line between wholesale and retail transactions, but prior to unbundling, the FERC did not exercise jurisdiction over prices of retail energy transactions. See New York v. FERC, 535 U.S. 1, 5-7 (2002).
29. Traditionally, American regulators have used the term "transmission" to describe the movement of electricity over the high voltage network, and "distribution" to describe the movement of electricity over lower voltage lines closer to the end users. See Meyers & Lamkin, supra note 10, § 52.01. Similarly, regulators use the term "transportation" to describe the movement of gas through high-pressure pipes, and "distribution" to describe movement through smaller pipes closer to end users. See Jonathan D. Schneider et al., Natural Gas Transportation, in 4 ENERGY LAW AND TRANSACTIONS: CUMULATIVE SUPPLEMENT ch. 83, § 83.01 (David J. Muchow & William A. Mogel eds., 2004). Consistent with recent practice at both the FERC and the European Commission, when discussing general issues associated with the movement of energy through a delivery network, I will use the term "transmission."
30. See New York v. FERC, 533 U.S. at 5. There were many specific exceptions to this general truth in different places. For example, in the United States, gas producers were unaffiliated with gas pipelines, at least until recently. See McManus, supra note 10, § 50.03[1] [a]. In Germany, retailers of electricity were not affiliated with the generators and transmission owners. See Thomas von Danwitz, Regulation and Liberalization of the European Electricity Market - A German View, 27 ENERGY L.J. 423, 427-28 (2006) (describing the three-tiered German system). Nevertheless, it is fair to say that prior to restructuring, a large degree of vertical integration was commonplace in many parts of the world.
31. See Meyers & Lamkin, supra note 10, § 52.01 [6] [[b] [ii] (discussing the more common practice of cooperation through pooling).
32. See Richard D. Cudahy, Whither Deregulation: A Look at the Portents, 58 N.Y.U. ANN. SURV. AM. L. 155, 172 (2001).
33. Gas networks have very little associated storage capacity, see William F. Bailey et al., State Regulation of Oil and Gas Production, in 1 ENERGY LAW AND TRANSACTIONS: CUMULATIVE SUPPLEMENT, supra note 24, ch. 5, § 5.01 [2],
34. and electric networks have essentially none, see Reinier H.J.H. Lock & Marlene L. Stein, Electricity Transmission, in 4 ENERGY LAW AND TRANSACTIONS: CUMULATIVE SUPPLEMENT, supra note 24, ch. 81, § 81.02[1]. That means that at any given moment, the amount of energy being added to the system by producers necessarily equals the amount of energy being removed by users. Constant pressure moves gas throughout the network; without sufficient pressure, customers cannot take gas from the system.
35. See INST. OF GAS TECH., NATURAL GAS IN NONTECHNICAL LANGUAGE 43 (Rebecca L. Busby ed., 1999) (describing the system of high-pressure natural gas pipelines). Similarly, electrons move through the electric grid following the path of least resistance. See id. These essential facts create the need for balancing services and management of the network to ensure reliability of service. See id. The network managers must ensure that as demand fluctuates, additional energy is ready to come on- and off-line at very short notice and that pathways are not too congested, among other things. See id.
36. See SIDNEY A. SHAPIRO & JOSEPH P. TOMAIN, REGULATORY LAW AND POLICY: CASES AND MATERIALS 20-21 (3d ed. 2003) (describing a move away from regulation in general and noting the effect on natural gas and electricity industries).
37. State-owned firms sometimes provided service for free or for a nominal charge. This was true not only in former Soviet block countries but in some democracies as well. India, for example, subsidized residential prices and provided free electricity to farms. HUBERT H. REINEBERG, India's Electricity Sector in Transition: Can Its Giant Goals Be Met?, 19 ELECTRICITY J. 77 (2006) (describing artificially low electricity rates historically in India). Mexican history is similar.
38. See Rafael Friedmann & Claudia Sheinbaum, Mexican Electric End-Use Efficiency: Experiences to Date, 23 ANN. REV. ENERGY ENV'T 225 (1998) (describing Mexican subsidies historically). Even if state-owned firms charged for service, they were not necessarily operated as profit-maximizing businesses, and their revenues may have gone into the national treasury and been used for purposes other than those of the firm.
39. See supra notes 20-22 and accompanying text (discussing how public utilities could charge rates to receive compensation for good investments).
40. See Antonio Estache & David Martimort, Politics, Transaction Costs, and the Design of Regulatory Institutions 1 n.2 (World Bank Pol. Research, Working Paper No. 2073, 1999), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=620512 (describing transaction costs in regulation as an asymmetric information problem).
41. See id.
42. For a good discussion of these efficiency issues, see Stephen Breyer, Analyzing Regulatory Failure: Mismatches, Less Restrictive Alternatives, and Reform, 92 HARV. L. REV. 547, 551, 609 (1979) (providing a basic framework for analyzing regulation and concluding that the energy market is a good candidate for "less restrictive alternatives" to regulation).
43. See Ronald Chen & Jon Hanson, The Illusion of Law: The Legitimating Schemas of Modern Policy and Corporate Law, 103 MICH. L. REV. 1, 10-11 (2004) (noting that Margaret Thatcher thought that "[g]overnment was doing too much" and that Ronald Reagan shared her ideological views);
44. see also Daniel Yergin, The Revolution of 1979, WALL ST. J., May 3, 1999, at A22 (describing the joint message of Margaret Thatcher and Deng Xiaoping as an economic revolution embracing markets over communism).
45. See, e.g., Memorandum from the Elec. Power Supply Ass'n on the Benefits of Competition 4-5, available at http://www.epsa.org/forms/ uploadFiles/347900000011.filename.Competitive_Benefits_Memo_-_121003.pdf (last visited Mar. 8, 2008) (citing several examples of price reductions after increased competition in power suppliers).
46. See William W. Hogan, Professor of Public Policy and Administration, John F. Kennedy School of Government, Harvard University, Making Markets in Power, Lecture at the Royal Society for the Encouragement of Arts, Manufactures & Commerce 4-5 (Feb. 21, 2000), available at http://ksghome.harvard.edu/~whogan/rsa0200.pdf.
47. Gas shortages in the 1970s and market distortions borne (in part) of poor regulation prompted the FERC to restructure gas markets first. See generally Richard J. Pierce, Jr., Reconstituting the Natural Gas Industry from Wellhead to Burnertip, 9 ENERGY L.J. 1 (1988) (summarizing the disastrous experiment with regulating producer sales and the road to deregulation of such sales). In 1985, the FERC issued Order 436, compelling any pipeline providing voluntary third-party transmission services to do so on a nondiscriminatory, open-access basis.
48. See Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 436, 50 Fed. Reg. 42,408 (Oct. 18, 1985) (to be codified at 18 C.F.R. pts. 2, 157, 250, 284, 375, and 381). Seven years later, the FERC ordered full unbundling of transmission and energy sales by all pipelines in Order 636, freeing pipeline customers - mostly local distribution utilities, electric generators, and large industrial users - to purchase their gas from the least-cost seller, using the pipeline only for transmission services.
49. See Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol; Order Denyin Rehearing and Clarifying Order Nos. 636 and 636-A, Order No. 636-B, 57 Fed. Reg. 57,911 (Dec. 8, 1992) [hereinafter FERC Order No. 636-B] (to be codified at 18 C.F.R. pt. 284).
50. See generally Pierce, supra note 38 (discussing the distinction between "common carriers" and "public utilities" in regulatory law). It was not until Order 636 that pipelines were saddled with the obligation to provide nondiscriminatory transmission service to the public. See FERC Order No. 636-B, supra note 38.
51. The pressure to unbundle transmission from sales in the electricity industry had been building in the United States since passage of the Public Utility Regulatory Policies Act of 1978 (PURPA), one of the statutory responses to the energy crises of the 1970s. Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617, § 2, 92 Stat. 3117, 3119 (codified as amended in scattered sections of 7, 15, 16, and 30 U.S.C.). PURPA seeks to promote the development of renewable and efficient generation technologies by offering nonutility entrepreneurs financial incentives to build generation plants using such technologies. See id. The statute required electric utilities to purchase power from these plants, called "qualifying facilities" or "QFs," at favorable rates. See id. By the 1990s, Congress and the FERC were growing more comfortable with the notion that production and wholesale sales of electricity could be a competitive business. For example, in 1992, Congress expanded the class of nonutility generators to include "exempt wholesale generators" (EWGs); EWGs did not need to meet the size and fuel specifications of QFs but could sell power wholesale without having to comply with the extensive requirements applicable to investor-owned utilities under the Federal Power Act. See Energy Policy Act of 1992, Pub. L. No. 102-486, § 711, 106 Stat. 2776, 2905-10 (codified as amended in scattered sections of 15 U.S.C.).
52. While the Energy Policy Act of 1992 and prior FERC actions had already mandated that utilities supply third parties with transmission services under certain circumstances (called "wheeling"), wholesale electricity restructuring began in earnest with FERC's Orders 888 and 889, issued in 1996. See Energy Policy Act of 1992; § 721, 106 Stat, at 2915; Open Access Same-Time Information System (Formerly Real-Time Information Networks) and Standards of Conduct, Order No. 889, 61 Fed. Reg. 21,737 (May 10, 1996) [hereinafter FERC Order No. 889] (to be codified at 18 C.F.R. pt. 37);
53. Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities, Order No. 888, 61 Fed. Reg. 21,540 (May 10, 1996) [hereinafter FERC Order No. 888] (to be codified at 18 C.F.R. pt. 37); FERC Order No. 636-B, supra note 38. Order 888 required transmission line owners to file so-called "open-access tariffs" offering nondiscriminatory transmission services and to "functionally unbundle []" transmission from electricity sales. See FERC Order No. 888, supra. Order 889 mandated transparency in transmission services by requiring all takers of transmission services (including affiliates of the transmission owner) to take such services using an open-access posting system. See FERC Order No. 889, supra.
54. See FERC Order No. 888, supra note 41. Full legal separation was not required though some firms chose that route. See id. at 21,552.
55. See id. This action was prompted by the concern that fragmented ownership of the transmission grid would hinder the development and smooth operation of electricity markets, as each of many owners demanded a separate rate from customers for the transmission of electricity along each segment of the grid (so-called "pancaking" of rates). Order 888 encouraged transmission owners to transfer operational control over their transmission lines to independent system operators (ISOs) who would manage the grid independently from the interests of any particular transmission system stakeholder. See id. Order 888 prompted the formation of ISOs in New York, the Middle Atlantic region (so-called "PJM," or Pennsylvania-New Jersey-Maryland ISO), New England, and a few other places. See id. at 21,593-94. In an attempt to further encourage and broaden the geographic scope of this trend, the FERC issued Order 2000, encouraging the formation of so-called Regional Transmission Organizations (RTOs). See Regional Transmission Organizations, Order No. 2000, 65 Fed. Reg. 810 (Jan. 6, 2000) [hereinafter FERC Order No. 2000] (to be codified at 18 C.F.R. pt. 35). See generally FERC, RTO/ISO, http://www.ferc.gov/industries/electric/indus-act/ rto.asp (last visited Feb. 1, 2008) (describing the existing RTOs and providing a map with links to regional-specific information).
56. See ENERGY INFO. ADMIN., U.S. NATURAL GAS MARKETS: RECENT TRENDS AND PROSPECTS FOR THE FUTURE 1, 16, 20 (2001);
57. Stephen P. Sherwin, Deregulation of Electricity in New York: A Continuing Odyssey 1996-2001, 12 ALB. L.J. SCI. & TECH. 263, 273, 278-80 (2001).
58. See ENERGY INFO. ADMIN., supra note 44, at 20; Sherwin, supra note 44, at 273, 278-80; Mark Hand, Retail Choice Rides Again: A Mixed Market in the Lone Star State, PUB. UTIL. FORT., July 15, 2002 (Magazine), at 16;
59. David Sibley & Steven Wolens, Plans for Texas' Deregulation Are Looking Bright, SAN ANTONIO EXPRESS-NEWS, Dec. 29, 2000, at 5C; Yardley, supra note 1.
60. For a summary of state efforts to restructure retail gas markets, see ENERGY INFO. ADMIN., NATURAL GAS RESIDENTIAL CHOICE PROGRAMS (2007), available at http://www.eia.doe.gov/oil_gas/natural_gas/restructure/restructure.html (classifying the restructuring efforts of states according to active unbundling, inactive or limited unbundling, unbundling in the implementation phase, partial unbundling, no unbundling, and discontinued unbundling programs).
61. See VA. STATE CORP. COMM'N, 2005 PERFORMANCE REVIEW OF ELECTRIC POWER MARKETS: UPDATE AND PERSPECTIVE 34 (2005), http://www.scc.virginia.gov/caseinfo/reports/2005_rose.pdf (reporting that sixteen states and the District of Columbia allow retail access to electricity markets). See infra notes 238-242 and accompanying text for a description of postrestructuring developments in American states.
62. Gas markets are well developed and mature, with trading organized around "hubs." Organized electricity markets tend to exist where states have restructured markets around an ISO or RTO. For a good summary of the major American gas and electric trading hubs, see FERC OFFICE OF MKT. OVERSIGHT AND INVESTIGATIONS, 2004 STATE OF THE MARKETS REPORT 7-8 (2005), available at http://www.ferc.gov/market-oversight/st-mkt-ovr/som-rpt-2004.pdf.
63. See Stilpon Nestor & Ladan Mahboobi, Privatisation Trends, FIN. MARKET TRENDS No. 72, Feb. 1999, at 131-32, available at http://www.oecd.org/dataoecd/57/27/1897869.pdf; see also JOSKOW & SCHMALENSEE, supra note 16 (providing background on the electric-power industry and its deregulation).
64. See Single European Act, art. 13, 1986 O.J. (L 169) 7 (EC). Member states of the European Union (EU) signed the Single European Act in 1986, committing the EU to the formation of a single market in goods and services by 1992. The Act modified the foundational laws of the EU, which were embodied in a series of treaties beginning with the 1957 Treaty of Rome. See Single European Act, 1986 O.J. (L 169) (providing a concise summary of the EU's foundational laws and of the Single European Act).
65. At the European level, the European Commission's Directorate of Energy and Transport has been the primary actor pushing restructuring, primarily through "directives" which do not have the force of law. Rather, they direct national governments to enact domestic legislation implementing the directive. The consequences for failure to implement the directive are specified by the treaties that form the basic law of the European Union. In most cases, the European Commission initiates proceedings against the noncompliant member state that could eventually culminate in litigation before the European Court of Justice. See Charles W. Smitherman III, Growing Pains: European Union Enlargement and the Restructuring of the European Commission Under the Treaty of Nice, 15 FLA. J. INT'L L. 243, 249-54 (2002) (describing this enforcement process);
66. see also European Comm'n, Report from the Commission to the Council: Explaining Europe's Enlargement, COM (2002) 281 final (June 5, 2002) (analyzing the challenges and benefits of the enlargement of the European Union).
67. Council Directive 98/30, art. 13, 1998 O.J. (L 204) 6-7 (EC) (laying the groundwork for later restructuring by mandating that integrated firms keep separate accounts for transmission and energy sales).
68. Council Directive 2003/55, 2003 O.J. (L 176) 57 (EC).
69. Council Directive 2003/54, arts. 10, 15, 2003 O.J. (L 176) 37, 45, 46 (EC) (specifically declining to mandate full legal or "ownership" unbundling).
70. Id. art. 10, at 52-53.
71. The European Commission uses this term, which is frequently abbreviated "TSO," to refer to independent operators of delivery networks. In the American system, they are called either ISOs or RTOs. These organizations provide a variety of network management functions and their management decisions are made without regard to the wishes of the delivery system owners.
72. ELEXON, http://www.elexon.co.uk (last visited Feb. 2, 2008).
73. Nord Pool, http://www.nordpool.com (last visited Feb. 2, 2008).
74. Powernext, http://www.powernext.fr (last visited Feb. 2, 2008).
75. Belpex, http://www.belpex.be (last visited Feb. 2, 2008).
76. See European Comm'n, Directorate Gen. for Competition, Report on Energy Sector Inquiry, at 331-35, SEC (2006) 1724 (Jan. 10, 2007), available at http://ec.europa.eu/comm/competition/sectors/energy/inquiry/ full_report_part4.pdf (providing a detailed, current discussion of existing European energy markets).
77. "PJM" stands for "Pennsylvania-New Jersey-Maryland" and refers to the market administered by the PJM independent system operator and regional transmission organization, the borders of which extend well beyond those three states. For a map of the PJM's market, see PJM, Territory Served, http://www.pjm.com/documents/maps/pjm-zones.pdf (last visited Mar. 24, 2008).
78. See, e.g., Bruce Biewald et al., Synapse Energy Econ., Inc., Elec. Prices in PJM: A Comparison of Wholesale Power Costs in the PJM Mkt. to Indexed Generation Serv. Costs (June 3, 2004) (on file with The PJM Interconnection, L.L.C.);
79. Scott M. Harvey et al., Analysis of the Impact of Coordinated Electricity Markets on Consumer Electricity Charges (Nov. 20, 2006) (unpublished manuscript, on file with LECG), available at http://www.ksg.harvard.edu/ hepg/Papers/LECG_Analysis_112006pdf.pdf (finding benefits in both the PJM and New York State markets);
80. Ronald J. Sutherland, Ctr. for the Advancement of Energy Mkts., Estimating the Effects of Restructuring Elec. Mkts.: An Application to the PJM Region (Sept. 2003), available at http://www.caem.org/website/pdf/PJM.pdf (estimating significant savings across customers classes within the so-called PJM market in the middle Atlantic region of the United States);
81. see also ENERGY INFO. ADMIN., NATURAL GAS MARKETER PRICES AND SALES TO RESIDENTIAL AND COMMERCIAL CUSTOMERS: 2002-2005 (2007), available at http://www.eia.doe.gov/pub/oil_gas/ natural_gas/feature_articles/2007/marketerprices/marketerprices.pdf (concluding that customers in New York, Pennsylvania, New Jersey, and Maryland who purchased gas from competitive suppliers paid less than those who purchased gas from regulated utilities);
82. Kira R. Fabrizio, Nancy L. Rose & Catherine D. Wolfram, Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on U.S. Electric Generation Efficiency, 97 AM. ECON. REV. 1250 (2007) (finding that investor-owned electric generating plants in states that restructured their wholesale electricity markets experienced greater efficiency gains, in the form of cost reductions, than plants that were insulated from competition).
83. See infra notes 86-90 and accompanying text.
84. See infra notes 91-98 and accompanying text.
85. Tom Tiernan & Bob Matyi, While Switching Is Up in Texas and Illinois, Market Conditions Weaken in Most Areas, PLATTS POWER MKTS. WK., Feb. 26, 2007, at 1.
86. Comm'n of the European Cmtys., Communication from the Commission to the Council and the European Parliament: Prospects for the Internal Gas and Electricity Market, at 4, COM (2006) 841 final (Oct. 1, 2007).
87. See ENERGY INFO. ADMIN., SHORT-TERM ENERGY OUTLOOK 15 tbl.6c (2007), available at http://www.eia.doe.gov/pub/forecasting/steo/oldsteos/mar07. pdf (showing that New Englanders paid more than $16 per thousand cubic feet (mcf) of gas while some residents of the central part of the country paid less than $11).
88. Id. at 19 tbl.8c (demonstrating that New Englanders paid more than 16 cents per kilowatt-hour (kwh) while those in other regions sometimes paid less than 8 cents).
89. Id. In looking at Table 8c, note that rates in both the middle Atlantic and New England regions (where virtually every state restructured its energy markets) are much higher than those in the east south-central region, where none did.
90. See European Comm'n, Directorate Gen. of Energy and Transp., Quarterly Review of European Electricity and Gas Prices, Issue 8 at 3, 4 (Sept. 2006), available at http://ec.europa.eu/energy/electricity/ publications/doc/review/2006_09_qr08.pdf (showing prices ranging from €100 per megawatt-hour (mwh) for residential users and €60/mwh for industrial users in central Europe, as compared to prices of €140 and €100/mwh, respectively, in Italy). Variation in gas prices was driven by prices at the few supply points through which most of Europe's gas is imported (mainly from Russia). Id. at 5.
91. The majority of new electric generation in both the United States and Europe is natural gas fired, and in many markets, the "marginal plant" - the plant serving the last unit of demand and thereby clearing the market - burns natural gas. Thus, unforeseen and significant increases in natural gas prices can wreak havoc with short-term electricity markets.
92. The Commission says that electricity prices have, "on average across all users, remained relatively constant in real terms," despite fuel cost increases and that this "clearly demonstrates the effect of increasing efficiency in electricity supply." Comm'n of the Eurorpean Cmtys, supra note 67, at 4.
93. Id. at 5. Specifically, the Commission blames incomplete implementation by member states of the 2003 directives. Id. at 6. In European Union parlance, the process of implementing Commission directives at the member-state level is called "transposition." When a member state fails to transpose a Commission directive fully, the Commission may initiate "infringement" proceedings, multi-stage processes that begin with a Commission investigation and may culminate in litigation against the offending member state before the European Court of Justice. See Treaty Establishing the European Community (consolidated version), Dec. 29, 2006, arts 226-28, 2006 O.J. (C 321) E/37, E/144-45. The Commission has "launched 34 infringement procedures against 20 Member States for violation and non transposition of the existing Directives." Comm'n of the European Cmtys, supra note 67, at 6;
94. see also Memorandum from the European Comm'n on EU Energy Mkts. (Dec. 12, 2006), available at http://europa.eu/rapid/pressReleasesAction. do?reference=MEMO/06/481&format=PDF&aged=l&language= EN&guiLanguage=en (citing Austria, Belgium, the Czech Republic, Germany, Estonia, Spain, France, Greece, Ireland, Italy, Lithuania, Latvia, Poland, Sweden, Slovakia, and the United Kingdom as recipients of "reasoned opinions" for various failures to transpose the 2003 energy directives).
95. See London Econ., Structure and Performance of Six European Wholesale Elec. Mkts. in 2003, 2004 and 2005, Part IV (Feb. 26, 2007), available at http://ec.europa.eu/comm/competition/sectors/energy/inquiry/ electricity_final_part4.pdf (presenting a study of electricity prices in six EU countries, conducted by consultancy London Economics, which found that variation in market concentration explained a large portion of the variation in retail price: that is, the lack of competition in sales drove prices higher). For a fuller discussion of this issue, see infra Part III.B.
96. For a more complete discussion of this analysis, see infra Part III.C.
97. See FED. ENERGY REGULATORY COMM'N, THE WESTERN ENERGY CRISIS, THE ENRON BANKRUPTCY, AND FERCS RESPONSE, available at http://www.ferc.gov/industries/electric/indus-act/wec/chron/ chronology.pdf (chronicling the "major Commission actions during and following the Western energy crisis and Enron's collapse").
98. Id. at 1.
99. See Michael W. Lynch & Adrian Moore, Power Tripped, REASON, June 2001, at 32.
100. In petitions to the FERC after the crisis, buyers on California's wholesale market claimed to have been overcharged by more than $9 billion. The FERC ultimately decided that the figure was a little less than half that. FED. ENERGY REGULATORY COMM'N, THE COMMISSION'S RESPONSE TO THE CALIFORNIA ELECTRICITY CRISIS AND TIMELINE FOR DISTRIBUTION OF REFUNDS 3 (2005), available at http://www.ferc.gov/ legal/staff-reports/commresponse.pdf.
101. The extended period during which California retailers were forced to buy power at prices in excess of retail sales prices drove Pacific Gas and Electric Company, one of the three major incumbent utilities in California, into bankruptcy. See Leslie Berkman, Bankruptcy by Utilities a Walk into the Unknown, PRESS ENTERPRISE (Riverside, CA), Jan. 18, 2001, at A1 (discussing the "uncertainties . . . about how the state's power system would continue to operate if Southern California Edison Company and Pacific Gas and Electric enter[ed] bankruptcy proceedings");
102. Nancy Vogel & Nancy Rivera Brooks, Rolling Blackouts Push Energy Crisis from Threat to Reality, L.A. TIMES, Jan. 18, 2001, at A1 (describing the January 17 California blackouts as "the most visible result of the months-long energy crisis that has pushed the state's two largest utilities ... to the brink of bankruptcy"). One of the other incumbents, Southern California Edison Company, saw its credit rating fall from "A++ to D."
103. Katharine Fraser, Electric Power: Wall Streeters See Cloudy Picture for Power Market Restructuring, INSIDE FERC (PLATTS) , June 18, 2001, at 7;
104. see also Dave Lindorff, Judging the Judges, INVESTMENT DEALERS' DIG., Aug. 13, 2001, at 32, 35-36
105. FED. ENERGY REGULATORY COMM'N, FINAL REPORT ON PRICE MANIPULATION IN WESTERN MARKETS: FACT-FINDING INVESTIGATION OF POTENTIAL MANIPULATION OF ELECTRIC AND NATURAL GAS PRICES ES-I (PA02-2-00) (2003).
106. Largest Fines, Penalties and Refunds Ordered by Federal and State Authorities Against Corporations for Manipulation of the West Coast Energy Market & Natural Gas Price Index Manipulation, PUB. CITIZEN, available at http://www.citizen.org/documents/ camarketfines.pdf (last visited Mar. 24, 2008).
107. Purchases through the short-term (spot) market provided the majority of daily energy loads for the California market of 2000. The California market cleared by matching buyers' willingness to pay bids with sellers' willingness to accept bids, allowing every seller to charge the market-clearing price. Because generation was in short supply, sellers could rest assured that their capacity would be needed to serve load, meaning that sellers would likely accept their bid. Because of the cap on retail prices, demand remained high and this condition persisted. Sellers exacerbated the problem by scheduling a variety of fraudulent transactions, such as making capacity available to serve imaginary loads or relieving congestion and thus earned themselves money through arbitrage, making capacity available to serve imaginary loads, or relieving congestion. See FED. ENERGY REGULATORY COMM'N, supra note 82, at VI-26 to VI-30 (providing a summary of the various ways market participants gamed the system).
108. Even before the restructuring of wholesale energy markets, the FERC deregulated third-party wholesale sales of gas because pipelines were largely unaffiliated with producers/sellers and the producer/seller market was decentralized and competitive. After a disastrous experiment in regulating rates charged to pipelines by gas producers, Congress eventually permitted FERC to withdraw from the regulation of such sales. See Pierce, supra note 38, at 11.
109. The FERC's history of assessing and monitoring market power is described in a recent proposal to change the test it uses for identifying the presence of market power: Over the years, the Commission developed a four-prong analysis used to assess whether a seller should be granted market-based rate authority: (1) Whether the seller and its affiliates lack, or have adequately mitigated, market power in generation; (2) whether the seller and its affiliates lack, or have adequately mitigated, market power in transmission; (3) whether the seller or its affiliates can erect other barriers to entry; and (4) whether there is evidence involving the seller or its affiliates that relates to affiliate abuse or reciprocal dealing. Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Utilities, 71 Fed. Reg. 33,102, 33,102 (June 7, 2006) (to be codified at 18 C.F.R. pt. 35); cf. Dartmouth Power Assocs. Ltd. P'ship, 53 F.E.R.C. 61,117 (1990) (describing an individual order granting market-based rate setting to a wholesale electricity seller prior to FERC Order 888).
110. FERC Order No. 888, supra note 41, at 21,553 (May 10, 1996) ("In reviewing applications to sell at market-based rates, whether from new (unbuilt) capacity or existing capacity, we require that the seller (and each of its affiliates) must not have, or must have mitigated, market power in generation and transmission and not control other barriers to entry. In order to demonstrate the requisite absence or mitigation of transmission market power, a transmission-owning public utility seeking to sell at market-based rates must have on file with the Commission an open access transmission tariff for the provision of comparable service.").
111. The Commission's current ex ante test for market power in electric generation uses two "market power screens": (i) a so-called "pivotal supplier analysis," based on uncommitted capacity at the time of the market's annual peak demand; and (ii) a "market share analysis" of uncommitted capacity applied on a seasonal basis. The screens are not dispositive in determining the presence of market power, but satisfying both screens creates a rebuttable presumption of the absence of market power. For a thorough description of how these screens work, see Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Utilities, 71 Fed. Reg. at 33,105.
112. In 1998, electricity prices spiked in Midwest markets prompting concern about the possible role played by the exercise of market power. See Robert J. Michaels & Jerry Eilig, Electricity: Price Spikes by Design?, 22 REGULATION 20, 20 (1999). Even outside the context of crises, the FERC routinely responds to expressions of concern about the presence of market power in energy markets. See Sw. Power Pool, Inc., 118 F.E.R.C. 61,120 (2007) (rejecting proposed tariff revisions by the Southwest Power Pool in part because of concerns about the susceptibility of the tariff to the exercise of market power by electric generators); Long Island Power Auth., 118 F.E.R.C. 61,109 (2007) (denying challenge to New York ISO tariff because of concerns that generators could exercise market power if the challenge were granted); Exelon Corp. Pub. Serv. Enter. Group, Inc., 113 F.E.R.C. 61,299 (2005) (denying challenge to merger because concerns over the ability to exercise market power were unwarranted); PPL Mont., L.L.C., 112 F.E.R.C. 61,237 (2005) (instituting a Section 206 proceeding to investigate whether the applicant was capable of exercising market power).
113. Carl Mortished, Ofgem Moves to Stop Generators Abusing Power, TIMES (London), Dec. 24, 1999, at 22.
114. See, for example, Nord Pool's conclusion that a major electricity seller had withheld generation to exert market power over sales prices in the Nord Pool market. Press Release, Nord Pool, Investigation of Elspot Bidding in Week 18 (July 6, 2000), http://www.nordpool.com/information/participant_information/ finnish/2000/2000-029.html.
115. Article 82 of the European Community Treaty prohibits abuse of a dominant market position. Treaty Establishing the European Community (consolidated version), Dec. 29, 2006, 2006 O.J. (C 321) E/37, E74.
116. Council Directive 2003/55, supra note 53, art. 5, at 57 (concerning common rules for the internal market in natural gas and repealing Council Directive 98/30, supra note 52, art. 25, para. 8, at 1).
117. European Comm'n, supra note 61, at 7. The report explains further that the problem in electricity markets is sufficiently serious that "even during off-peak hours markets remain highly concentrated and that concentration levels, even in the less concentrated markets, reach significant levels at peak hours." Id.
118. See id. at 4, 31.
119. Id. at 12.
120. See Memorandum, European Comm'n, Competition: Comm'n Has Carried Out Inspections in EU Gas Sector in Five Member States, MEMO/06/205 (May 17, 2006) (describing unannounced inspections of energy firms in member states of Germany, Italy, France, Belgium, and Austria);
121. see also Memorandum, European Comm'n, Competition: Comm'n Confirms Inspections in the Energy Sector, MEMO/06/220 (May 30, 2006) (describing follow-up inspections carried out in Germany);
122. Memorandum, European Comm'n, Competition: Comm'n Has Carried Out Inspections in the German Electricity Sector, MEMO/06/483 (Dec. 12, 2006) (describing series of inspections conducted in Germany unrelated to inspections carried out in May 2006).
123. See supra notes 88-89 and accompanying text.
124. See Pierce, supra note 38, at 48-49, for a description of how this situation came to be. In response to gas shortages in the late 1970s, Congress passed the Natural Gas Policy Act, which allowed a phased deregulation of producer-to-pipeline sales. See id. at 11. Desperate for energy, pipelines signed long-term "take or pay" bundled service contracts with producers at prices that soon far exceeded short-term market prices when the supply side of the market responded (in apparently unforeseen ways). See id. at 11, 40.
125. FERC Order No. 436 effectively rescinded the energy sales portion of those bundled service contracts, freeing wholesale buyers and sellers to contract directly with one another. Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 436, 50 Fed. Reg. 42,408 (Oct. 18, 1985) (to be codified at 18 C.F.R. pts. 52, 157, 250, 284, 375, and 381); see Pierce, supra note 38, at 24-25. Many of those new energy sales contracts were for much shorter terms. See Pierce, supra note 38, at 24-25.
126. Federal Power Act section 201(b)(1) states: The provisions of this subchapter shall apply to . . . the sale of electric energy at wholesale in interstate commerce . . . . The Commission shall have jurisdiction over all facilities for such transmission or sale of electric energy, but shall not have jurisdiction . . . over facilities used for the generation of electric energy . . . . 16 U.S.C. § 824(b)(1) (2000).
127. See supra notes 85-89 and accompanying text. FERC also prohibits power sales at market-based rates between a franchised public utility (whose purchases will be recoverable through retail rates) and an affiliate. See Aquila, Inc., 101 F.E.R.C. 61,331, 62,373 (2002).
128. See Powerroots, L.L.C., 117 F.E.R.C. 61,007 (2006) (revoking market-based rate authority of seller); see also Illumina Energy Solutions, Inc., 118 F.E.R.C. 61,171 (2007) (same).
129. Some states, including Massachusetts, Maine, and California, required incumbent utilities to spin off specified percentages of their electric generation to avoid market power problems and recover maximum stranded costs. See ME. REV. STAT. ANN. tit. 35-A, § 3204 (1988 & Supp. 2006); ENERGY INFO. ADMIN., THE CHANGING STRUCTURE OF THE ELECTRIC POWER INDUSTRY 1999: MERGERS AND OTHER CORPORATE COMBINATIONS ch. 6 (1999), available at http://www.eia.doe.gov/cneaf/electricity/corp_str/chapter6. html;
130. FRED BOSSELMAN ET AL ., ENERGY ECONOMICS AND THE ENVIRONMENT 953-54 (2d ed. 2006). Other states, such as Texas, provided various financial incentives for firms to divest, such as enhanced rights to recover costs "stranded" by restructuring. See BOSSELMAN ET AL., supra, at 953. For a good summary of these arrangements prior to 1999 and a description of the amount of generation divested up to that date, see ENERGY INFO. ADMIN., supra, at ch. 6. See BOSSELMAN ET AL., supra, at 953-54, for a description of the Texas and Massachusetts restructuring plans.
131. See Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Utilities, 71 Fed. Reg. 33,102, 33,109 (June 7, 2006) ("[I]f a seller has control over certain capacity such that the seller can affect the ability of the capacity to reach the relevant market, then that capacity should be attributed to the seller when performing the generation market power screens.").
132. For a discussion of how these various regulatory entities try to encourage the development of new production capacity, see infra Part III.C.2.
133. European Comm'n, supra note 61, at 8 (emphasis added).
134. See id. at 9.
135. See id.
136. See id. at 207. Member states defend this kind of support in the gas industry by contending that because so much of Europe's gas is purchased from a few non-European firms, it is important for the buyers of that gas to be strong market players so as to keep import prices low.
137. See id. at 8.
138. This support takes various forms, from subsidies to reluctance to enforce the antitrust portions of the 2003 directives against national champion firms. During the European Commission's sector inquiry, commenters complained about the adverse effects of such "political benevolence" on competition. See id. at 207.
139. Consistent with restructuring rules everywhere, assume further that it provides transmission services on an open-access, nondiscriminatory basis, perhaps through an ISO of which EnergyCo is but one member. See supra note 41 and accompanying text.
140. Articles 9 and 10 of the Commission's 2003 Directives, see supra note 53, mandate functional unbundling of transmission from energy sales and specify that transmission services be offered on a nondiscriminatory basis. The FERC based the legal authority for its Order 888 on its power, granted in Federal Power Act sections 205 and 206, to remedy "any rate, charge, or classification, demanded . . . by any public utility . . . [that] is unjust, unreasonable, unduly discriminatory or preferential." 16 U.S.C. § 824e(a) (Supp. V 2005). Order 888 required unbundling precisely because network owners were discriminating against unaffiliated users of the network. See FERC Order No. 888, supra note 41, at 21,551 (to be codified at 18 C.F.R. pts. 35, 385). The FERC based its Order 636 on analogous provisions of the Natural Gas Act. See FERC Order No. 636-B, 57 Fed. Reg. 57,911, 57,912 (Apr. 8, 1992) (to be codified at 18 C.F.R. pt. 284).
141. See FERC Order No. 2000, supra note 43 at 810, 816 (Dec. 20, 1999) (to be codified at 18 C.F.R. pt. 35) (lamenting the slow progress of forming ISOs in the United States and speculating as to reasons for the "difficulty in forming a voluntary, multi-state ISO"); European Comm'n, supra note 61, at 10 (explaining reasons for limited choice among gas and electricity customers).
142. See Neelie Kroes, European Comm'r for Competition Policy, Speech at Fordham Corporate Law Institute's Annual Seminar 2007: Improving Competition in European Energy Markets Through Effective Unbundling 3 (Sept. 27, 2007), available at http://europa.eu/rapid/pressReleasesAction.do?reference= SPEECH/07/574&format=PDF&aged=l& language=EN&guiLanguage=EN ("[T]here is real discrimination by network companies in favour of their affiliated supply companies in terms of access to their pipes and cables . . . .").
143. When a network user has contracted for firm rights to transmission capacity but does not use those rights, secondary markets would permit the user to sell those rights. Those markets can develop only with the (voluntary or forced) cooperation of the transmission owner. If the transmission owner's sales affiliate would benefit from the lack of availability of secondary markets (because scarce transmission capacity would keep energy sales competitors out of the market), such cooperation may not be forthcoming.
144. See, e.g., Nat'l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831 (D.C. Cir. 2006) (reviewing and overturning portions of the FERC's revised standards governing relationships between pipelines and their marketing affiliates); Amoco Prod. Co., 82 F.E.R.C. 61,038 (1998) (pipeline company showed favoritism to its market affiliate by allowing them extra firm capacity); Transcon. Gas Pipe Line Corp., 55 F.E.R.C. 61,318 (1991) (loaning of gas from one company to another resulted in varying prices for similarly situated consumers).
145. See, e.g., Cal. Dep't of Water Res. v. FERC, 489 F.3d 1029 (9th Cir. 2007) (electric company required to allow anyone to transmit power over its lines but could charge tariffs to cover the cost).
146. See Open Access Same-Time Information System and Standards of Conduct, Order No. 889, 61 Fed. Reg. 21,737, 21,737 (Apr. 24, 1996) (to be codified at 18 C.F.R. pt. 37) (requiring the establishment of an "Open Access Same-time Information System," or "OASIS," for selling electric transmission services);
147. Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 636-B, 57 Fed. Reg. 57,911, 57,911 (Apr. 8, 1992) (to be codified at 18 C.F.R. pt. 284) (requiring pipelines to establish public, nondiscriminatory tariffs governing gas transportation services and "electronic bulletin boards" for selling and scheduling gas transportation services in real time). These systems forced transparency in the process of selling access to networks and made discrimination in favor of affiliates more difficult. Furthermore, Orders 636, 888, and 889 have been implemented in ways that have promoted the development of secondary capacity markets.
148. See generally U.S. GEN. ACCOUNTING OFFICE, REPORT TO CONGRESSIONAL REQUESTERS: CONCERTED ACTIONS NEEDED BY FERC TO CONFRONT CHALLENGES THAT IMPEDE EFFECTIVE OVERSIGHT, GAO-02-656, at 20-24 (2002), available at http://www.gao.gov/new.items/d02656.pdf ("Order 636 . . . allowed shippers to release to other shippers unneeded pipeline transportation capacity . . . leading to the creation of a secondary capacity market designed to compete with the primary pipeline market."). Despite their relative efficiency, the FERC proposed changes in pipeline rules in November 2007 designed to increase the efficiency of secondary markets.
149. See Promotion of a More Efficient Capacity Release Market, 72 Fed. Reg. 65,916 (Nov. 26, 2007) (to be codified at 18 C.F.R. pt. 284).
150. See, e.g., Nat'l Fuel Gas Supply Corp., 468 F.3d at 835-40 (summarizing the FERC's efforts to overcome resistance to unbundling).
151. The FERC believed the problem of discrimination to be sufficiently persistent that it issued its Order 890 earlier this year, which further circumscribes the discretion of electric transmission line owners so as to minimize opportunities for discrimination. See Preventing Undue Discrimination and Preference in Transmission Service, Order No. 890, 72 Fed. Reg. 12,266, 12,266 (Feb. 16, 2007) (to be codified at 18 C.F.R. pts. 35 & 37).
152. See European Comm'n, supra note 61, at 10 ("[B]alancing charges, clearing costs and penalty charges are not transparent and often contain unjustified penalty charges, favouring incumbents. Effective unbundling is necessary to create a level playing field in the balancing markets and to reduce barriers to entry.").
153. On the gas side, one TSO granted its sales affiliate rebates on transmission charges not granted to unaffiliated users of the system so as to give the affiliate a competitive advantage. See id. at 58. On the electric side, some TSOs procure needed generation to balance loads by paying their affiliates for excessive reserve capacity, possibly at above market rates. See id. at 10.
154. See, e.g., European Fed'n of Energy Traders, EFET Response to Francois Lamoureux, DG TREN, on Questions About Progress in EU Gas Liberalisation and the State of the Mkts. 2 (June 30, 2005), available at http://ec.europa.eu/energy/electricity/report_2005/doc/market_operators/ 08a_efet_gas.pdf ("In general, and particularly in the presence of long-term capacity ownership, secondary markets are currently not very well developed or facilitated.").
155. European Comm'n, supra note 61, at 7. The problem is apparently most acute in the gas industry: Allegations have been made in a number of shippers' replies to the questionnaires that network operators offer preferential treatment to their supply companies and that this leads to discrimination to their competitors' detriment, which maintains or even increases market entry barriers. This concerns a number of different aspects of network access and occurs in various Member States. Id. at 60.
156. In early 2007, the member states of the European Union ruled out the creation of a European energy regulator with direct authority to enforce the 2003 directives. However, in July 2007, the European Parliament called for enhanced "'cooperation between national regulators at EU level, through an EU entity, as a way to promote a more European approach to regulation on cross-border issues.'" EUR. PARL. DOC. (COD/2007/0198) (2007), available at http://www.europarl.europa.eu/oeil/ resume.jsp?id=5533292amp;event Id=1008501&backToCaller=NO&language=en (citation omitted).
157. See European Comm'n, supra note 61, at 12 ("The Commission is forcefully pursuing infringements of Community competition law (antitrust) in the sector wherever the Community interest so requires . . . .").
158. The courts have created these partial exemptions. Courts defer to the FERC's primary jurisdiction over wholesale energy transactions and to state utility commissions' pervasive regulatory jurisdiction over retail energy transactions under the "regulated industries exception" to antitrust rules. Reasoning that the terms of competition are regulated by the FERC, antitrust regulators and courts do not bring antitrust enforcement actions relating to activities regulated by the FERC. This is an offshoot of the "state action" exemption - one that exempts private actions from antitrust enforcement if a state has evidenced the intent to displace competition with regulation in that context. See Cal. Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 102 (1980). The Midcal court established a two-pronged test for determining when the doctrine applies. "First, the challenged restraint must be 'one clearly articulated and affirmatively expressed as state policy'; second, the policy must be 'actively supervised' by the State itself." Id. at 105 (quoting City of Lafayette v. La. Power & Light Co., 435 U.S. 389, 410 (1978)). Prior to restructuring, both prongs of the test were easy to satisfy in connection with sales of gas and electricity. See, e.g., N. Star Steel Co. v. MidAmerican Energy Holdings Co., 184 F.3d 732, 738 (8th Cir. 1999) (finding that Iowa's regulation of electric utility sales clearly satisfies the Midcal test); TEC Cogeneration Inc. v. Fla. Power & Light Co., 76 F.3d 1560 (11th Cir. 1996), modified, 86 F.3d 1028, 1029 (11th Cir. 1996) (per curiam) (finding that Florida's regulation of electric utilities satisfies the Midcal test). But cf. Otter Tail Power Co. v. United States, 410 U.S. 366 (1973) (explaining that antitrust law applies to anticompetitive behavior where the Federal Power Commission lacks the authority to order a remedy). The so-called "filed rate doctrine" further supports the notion that antitrust enforcers will leave the regulation of wholesale competition in the American energy sector to the FERC. Historically, courts have used the doctrine, which insulates rates charged pursuant to a FERC-approved tariff (filed rates) from collateral attack, to reject claims that such rates violate antitrust laws. See, e.g., Miss. Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354, 375 (1988) (the reasonableness of FERC-approved rates may only be challenged before the FERC or a court reviewing a FERC order). It appears that the "filed rate doctrine" survives restructuring and can apply to FERC-approved "market based" rates. See Pub. Util. Dist. No. 1 v. IDACORP Inc., 379 F.3d 641 (9th Cir. 2004) (applying the "filed rate doctrine" to reject a challenge to market-based wholesale electric rates under the Federal Power Act). This does not mean that the FERC is free to permit, or turn a blind eye to, anticompetitive behavior. To the contrary, the FERC's obligations under the Natural Gas Act and the Federal Power Act to protect the public interest and assure just and reasonable rates require it to protect consumers against anticompetitive behavior and monopoly power. See, e.g., Fed. Power Comm'n v. Conway Corp., 426 U.S. 271 (1976) (requiring the Federal Power Commission to consider the potentially anticompetitive effects of rates that effect a price squeeze on certain classes of customers).
159. The European Union's competition laws are found in Articles 81 and 82 of the European Commission Treaty. Article 81 prohibits practices that distort competition, including price fixing and other anticompetitive acts; Article 82 prohibits the "abuse of a dominant position" within a market. See Treaty Establishing the European Community (consolidated version), Dec. 29, 2006, 2006 O.J. (C 321) E/37, E/74. A large body of case law further develops the implications of these general prohibitions.
160. See Explanatory Memorandum from the Comm'n of the European Communities on Common Rules for the Internal Mkt. in Elec. 10 COM (2007) draft, available at http://ec.europa.eu/energy/elec tricky/package_2007/doc/ 2007_09_19_explanatory_memorandum_en.pdf.
161. In most states, industrial customers paid a considerably lower per-unit rate for energy than did residential customers, but the rate differential was smaller (by regulatory practice) than what the market would bear. In that sense, then, industrial customers subsidized residential customers. As Judge Richard Cudahy described the deregulatory impulse in the power sector, the "strong push, primarily of large industrial customers (and these were the real force behind deregulation), was for retail competition (competition for end users). To large industrial users, cheaper power was worth fighting for." Cudahy, supra note 27, at 170. In the context of bundled wholesale gas rates, a portion of this subsidy came from FERC's practice of requiring industrial customers taking interruptible gas service to pay rates covering a portion of the pipeline's fixed costs. See United Distribution Cos. v. FERC, 88 F.3d 1105, 1167 (D.C. Cir. 1996). When the FERC unbundled transportation services from gas sales in its Order 636, it ended this practice. See id. at 1129-30. For a succinct description of this change, see, for example, United Distribution Cos., 88 F.3d at 1167-69, which upheld the change.
162. Traditionally, both American and European systems allowed industrial customers to self-generate electric power. Whenever new technologies could provide power less expensively than the monopoly provider, industrial customers could stop taking power from that provider, leaving fewer customers (and fewer sales units) over which to spread the fixed costs of providing power over the network. In the United States, most states permitted municipal governments to form their own utilities and to condemn the former public utility's network facilities in so doing. Where prices are high and other less expensive sources of energy are physically available but not legally available (because of the public utility's monopoly right to provide retail service), industrial customers lobby for the creation of new municipal utilities whose power will come from these new less expensive sources. This process, called "municipalization, " can also leave the public utility's remaining customers to pay the system's fixed costs. For a description of municipalization in American electricity markets, see Suedeen G. Kelly, Municipalization of Electricity: The Allure of Lower Rates for Bright Lights in Big Cities, 37 NAT. RESOURCES J. 43, 44, 48 (1997).
163. See supra notes 51-56 and accompanying text (describing the European Commission's directives restructuring European gas and electric markets).
164. See supra notes 38-39 and accompanying text (describing the FERC's restructuring of gas markets); supra notes 40-44 and accompanying text (describing the FERC's restructuring of electricity markets with congressional help).
165. As noted above, since the 1930s, both the Natural Gas Act and the Federal Power Act have mandated that wholesale rates be just and reasonable. See supra note 129. That mandate has remained unchanged since the FERC began routinely authorizing market-based rates over the last decade.
166. The Thatcher government imposed a deregulatory mandate upon itself, and the Parliament accomplished much of its restructuring work. See Yergin, supra note 35. Likewise, it has been state legislatures that have restructured retail markets in the United States, except in New York. See Sherwin, supra note 44, at 268; Deregulation of Utilities Gains Steam, BALT. SUN, Feb. 3, 1999, at 1C;
167. Janice Francis-Smith, Powering Ahead: Legislature Considers Forming Task Force to Examine Electric Utility Restructuring, THE J. REC. (Okla. City, Okla.), Mar. 12, 2007, at IA;
168. Mark Tatge, Senate Passes Electric Bill Giving Consumers Choices, PLAIN DEALER (Cleveland, Ohio), June 23, 1999, at IA.
169. In the American context, political scientist Richard Fenno distinguishes between the representative's "geographical constituency" and his or her "reelection constituency." RICHARD F. FENNO, JR., HOME STYLE: HOUSE MEMBERS IN THEIR DISTRICTS 8 (1978). Of course, the legislator must attend to the latter to keep her job, and the legislator's relationship with this group is the subject of much political science literature. See id.;
170. see also GARY C. JACOBSON, THE POLITICS OF CONGRESSIONAL ELECTIONS 60-61 (2d ed. 1987) (explaining that the central task of congressional candidates is to decide which parts of a heterogeneous constituency to write off and which to court, and how to reach the latter group). In proportional representation electoral systems common to many European parliamentary democracies, this same calculation is made at the party, rather than individual legislator, level.
171. See R. DOUGLAS ARNOLD, THE LOGIC OF CONGRESSIONAL ACTION 14 (1990);
172. WILLIAM T. BIANCO, TRUST: REPRESENTATIVES AND CONSTITUENTS 14-15 (John E. Jackson & Christopher H. Acher eds., 1994);
173. MORRIS P. FIORINA, RETROSPECTIVE VOTING IN AMERICAN NATIONAL ELECTIONS 10-11 (1981).
174. See ANTHONY DOWNS, AN ECONOMIC THEORY OF DEMOCRACY 207-19, 237 (1957) (noting that busy voters are rationally ignorant about many issues).
175. See ARNOLD, supra note 139, at 60-63 (noting that legislators must constantly attend to the risk that a vote can rouse the "activated public").
176. For a fuller analysis of the interplay between constituent knowledge and preference intensity on legislative choices, see David B. Spence, A Public Choice Progressivism, Continued, 87 CORNELL L. REV. 397, 421-32 (2002).
177. Cf. James Dao, Plan Approved to Let Power Users Pick Suppliers of Their Electricity, N.Y. TIMES, May 17, 1996, at B1 (stating that restructuring in the United States has occurred "mainly at the insistence of large manufacturers").
178. For examples of these expectations in the American debate, see, for example, Michael Davis, Sibley Throws Switch on Deregulation Bill: Co-ops, Municipal Electricity Firms Back Plan, HOUS. CHRON., Jan. 21, 1999, at 1C One Texas legislator promised that competition would bring "not only lower rates but improved service."
179. Bruce Hight, Senate Passes Utility Measure: Legislators Work Out Details of Electric Deregulation Bill, AUSTIN AM.- STATESMAN, Mar. 18, 1999, at A1;
180. see also Michael Davis, Electricity Vote Put Off by Senate: Debates on Other Bills Prompt Move, HOUSTON CHRON., May 27, 1999, at 1C [hereinafter Davis, Electricity Vote Put Off by Senate] (quoting then-Governor George W. Bush saying that the restructuring bill would "reduce rates");
181. Chris Kraul, Radical Changes in Power Industry Pass Legislature, L.A. TIMES, Sept. 1, 1996, at A1 (explaining that the California legislature passed an electricity deregulation bill aimed to secure for Californians the cheapest energy in the country);
182. Dan Morain, Assembly OKs Bill to Deregulate Electricity, L.A. TIMES, Aug. 31, 1996, at A24 (noting that California's electricity deregulation bill faced "surprisingly little opposition" after it passed the state assembly). In New York, Public Service Commission Chairman John F. O'Mara promised that competition would "lower prices." Dao, supra note 143, at B1;
183. see also Julie Carr Smyth, State Breaks Power Monopolies, THE TIMES UNION (Albany, N.Y.), May 17, 1996, at A1 (describing the New York State Public Service Commission's unanimous approval of a plan to deregulate the state's power industry by 1998).
184. Matthew H. Brown & Richard P. Sedano, Nat'l Council on Elec. Policy, A Comprehensive View of U.S. Elec. Restructuring with Policy Options for the Future 2 (June 2003), available at http://www.ncouncil.org/pdfs/restruc. pdf.
185. The COMPETE Coalition, an interest group working to promote competitive energy markets in the United States, commissioned a poll purporting to show widespread public support for competitive electricity markets. See Press Release, COMPETE Coal., Multiple Surveys Show Consumers Support Competitive Elec. Mkts. Choice & "Green" Power (Aug. 6, 2007), available at http://www.competecoalition.com/Polling%20Event%20Release%20FINAL.pdf.
186. See Davis, Electricity Vote Put Off by Senate, supra note 144, at 1C (explaining that after California restructured, small customers were "shunned by electric retailers pursuing more lucrative commercial and industrial customers").
187. In the electricity context, instantaneous demand would be expressed in kilowatts (kw), and demand over time would be expressed in kilowatt-hours (kwh).
188. While this is a hypothetical example using stylized facts, residential load does indeed vary much more dramatically than industrial loads, both daily and seasonally. See JOSKOW & SCHMALENSEE, supra note 16, at 37-38. A predictable industrial process running three shifts (24 hours a day) has nearly constant, flat demand. Households, by contrast, have (i) needs that vary in predictable ways but vary nevertheless, as well as (ii) unpredictable variations in demand based on weather, etc. Thus, for example, a household's average instantaneous demand might be 2 kw, ranging between 1 and 4 kws; an industrial user might have an average instantaneous demand of several megawatts (mw).
189. A 100 percent "capacity factor" represents constant operation over time.
190. See JOSKOW & SCHMALENSEE, supra note 16, at 40 ("A system with widely varying loads will have higher costs than one with a stable load, all else equal.").
191. This hypothetical assumes that these customers' loads vary together so that their demand peaks and valleys coincide. While an exaggeration, this is generally true, since residential load within a market varies primarily with weather conditions and relatively uniform usage patterns.
192. How often these peaking plants will serve this load depends on the shape of these customers' load curves. There are quite possibly only a few hours per year when their collective demand reaches 1500 units of energy.
193. Cf. Brown & Sedano, supra note 145, at 7 (discussing the trend from the 1960s until the 1980s where available technology and economies of scale made building larger power plants "less expensive on a per MegaWatt basis").
194. There are constraints on the kinds of plants that can serve peak loads. Peaking plants have to be small so as to be able to handle finer gradations of changes in demand. Among electricity generation technologies, most coal and
195. See JOSKOW & SCHMALENSEE, supra note 16, at 20, 40.
196. See Davis, Electricity Vote Put Off by Senate, supra note 144.
197. See Brown & Sedano, supra note 145, at 25-26.
198. See JOSKOW & SCHMALENSEE, supra note 16, at 20.
199. As noted supra notes 132-135 and accompanying text, under traditional regulation, industrial rates subsidized residential rates, mitigating the effects of this cost differential.
200. FERC Commissioner Suedeen Kelly described these hidden subsidies this way in 1999: [R]egulators almost universally have tried to keep residential rate increases to a minimum by raising industrial rates a bit more than a politically blind cost analysis would peg them. In economic terms, in today's regulated world, the larger consumers more often than not subsidize the smaller ones. When generation becomes competitive (i.e., when the market sets electricity rates) this will change. Smaller consumers will feel the burden of the shifting costs from the larger consumers to them. Suedeen G. Kelly, The New Electric Powerhouses: Will They Transform Your Life?, 29 ENVTL. L. 285, 300 (1999) (citation omitted).
201. See id.
202. Certainly there have been situations in which formerly protected incumbent monopolies were saddled with inefficient plants. The post-Three Mile Island generation of nuclear plants in the United States were built at exorbitant costs. However, during restructuring, the inefficiency of those investments have not penalized incumbents because regulators have treated inefficient plants as "stranded costs" to be allocated not to the incumbent's shareholders but to ratepayers and taxpayers. Regulators made this choice in the face of arguments that to do otherwise would (i) breach the "regulatory compact" between licensed utilities, under which the government guaranteed the firm a fair return on its investment; and (ii) amount to a "regulatory taking" requiring just compensation under the Fifth Amendment of the U.S. Constitution. For a good discussion of these arguments in connection with restructuring energy markets in the United States, see Susan Rose-Ackerman & Jim Rossi, Disentangling Regulatory Takings, 86 VA. L. REV. 1435 (2000). In any case, stranded cost coverage freed incumbents from the burden of these investments and made their rates more competitive and their customers less attractive targets for new market entrants.
203. This is true of coal-fired power plants and oil refineries in both Europe and the United States, where air pollution regulation exempts older facilities from the most stringent air pollution standards. For a discussion of how the Clean Air Act grandfathers old plants, see David B. Spence, Coal-Fired Power in a Restructured Electricity Market, 15 DUKE ENVTL. L. & POL'Y F. 187 (2005). The European Commission's Large Combustion Plants Directive imposes less stringent emissions limits on pre-1987 plants than post-1987 plants. Directive 2001/80/EC of the European Parliament and of the Council, 2001 O.J. (L 309) 1. In Europe, the standards according to which nuclear plants were licensed varied widely because there were no European standards until recendy, resulting in clear cost-advantages for older plants. Just the opposite is true in the United States, where regulatory scrutiny greatly increased the cost of construction after the Three Mile Island incident in 1978.
204. See U.S NUCLEAR REGULATORY COMM'N, FACT SHEET: THREE MILE ISLAND ACCIDENT 3-4 (2004), available at http://www.nrc.gov/reading-rm/ doc-collections/fact-sheets/3mile-isle.pdf.
205. For a discussion of the use of congestion pricing to address this problem, see infra part III.C.2.
206. Price elasticity of demand is the measure of the amount by which changes in price produce changes in demand. It is usually expressed as a fraction, the numerator of which is the percentage change in demand and the denominator of which is the percentage change in price. HAL R. VARIAN, INTERMEDIATE MICROECONOMICS 276 (5th ed. 1999).
207. For studies estimating the price elasticity of energy demand, see STEVEN H. WADE, ENERGY INFO. ADMIN., PRICE RESPONSIVENESS IN THE AEO2003 NEMS RESIDENTIAL AND COMMERCIAL BUILDINGS SECTOR MODELS, available at http://www.eia.doe.gov/oiaf/analysispaper/ elasticity/.
208. See Power Games, ECONOMIST, Jan. 7, 2006, at 12, 12.
209. See Russia and Belarus. Loveless Brothers, ECONOMIST, Jan. 13, 2007, at 44, 44-45.
210. Specifically, Europe is investigating importation of natural gas from the Middle East through Turkey and development of liquefied natural gas imports. See, e.g., Turkey and Iran: Too Energetic a Friendship, ECONOMIST, Aug. 25, 2007, at 49, 49 (describing the planned pipeline for importing Iranian gas into Europe);
211. see also European Energy Security: A Bear at the Throat, ECONOMIST, Apr. 14, 2007, at 58, 58-60 (detailing a number of possible new sources of gas supply for Europe, including LNG).
212. See, e.g., Turkey and Iran: Too Energetic a Friendship, supra note 169, at 49;
213. see also European Energy Security: A Bear at the Throat, supra note 169, at 58-60.
214. For a summary of these developments, see Pierce, supra note 38.
215. See, e.g., PA. PUB. UTIL. COMM'N, ELECTRIC RESTRUCTURING: THE TRANSITION FROM RATE CAPS TO MARKET- BASED PRICING (2007), available at http://www.puc. state.pa.us/general/consumer_ed/pdf/Rate_Caps.pdf (offering a simple description of Pennsylvania's transitional caps).
216. FERC Commissioner Joseph Kelliher blames the persistence of retail price caps in some states for poorly performing wholesale markets. See FERC's Mission Is Improving Competition, RESTRUCTURING TODAY (Apr. 17, 2007), at 1.
217. See supra note 43.
218. The PJM employs wholesale price caps, albeit very high ones. PJM's price cap, found in its filed tariff, operates as a limit on offer-to-sell prices and is set at $1000/mwh. Craig Glazer, Vice President, PJM Interconnection, L.L.C., PJM Open Access: Transmission Tariff 401 (Oct. 10, 2007) (on file with PJM Interconnection, L.L.C.).
219. The New York ISO cap operates the same way and is set at $100/mwh. William J. Museler, President, N.Y. Indep. Sys. Operator, Inc., Mkt. Admin. & Control Area Tariff, Attachment B, Part III, § 3.5 (Feb. 1, 2005) (on file with the FERC, Docket No. ER99-4235-002, originally issued Dec. 18, 2000).
220. In some American states, retail rates of incumbent utilities were capped until those utilities had recovered all their stranded costs. Such was the case in California, where caps forced Pacific Gas and Electric and Southern California Edison to charge retail prices that were lower than the wholesale prices they paid for power during the electricity crisis of 2000-2001. See Cudahy, supra note 27, at 174-75. San Diego Gas and Electric, which had recovered all of its stranded costs by the winter of 2000-2001, was permitted to pass through its high wholesale power costs to customers. Consequendy, its retail demand dropped with the wholesale price increases while that of Pacific Gas and Electric and Southern California Edison remained high. See Spence, supra note 1, at 436-37 n.69.
221. In Europe, the 2003 Directives authorize member states to impose POLR service. Council Directive 2003/54, supra note 54, art. 3, para. 3, at 42. Both Europe and the United States offer a variety of approaches to the provision of POLR service. For instance, in the Scandinavian Nord Pool market, household customers may choose to take service under a "price cap contract." See, e.g., Nord Pool ASA, The Nordic Power Mkt.: Elec. Exch. Across Nat'l Borders 14 (Apr. 1, 2004), available at http://www.nordpool.com/information/reports/Report-Nordic%20Market.pdf (describing the various options available to "small-scale end-users");
222. see also Jim Rossi, The Common Law "Duty To Serve" and Protection of Consumers in an Age of Competitive Retail Public Utility Restructuring, 51 VAND. L. REV. 1233, 1288-1319 (1998) (noting the difficulty that energy providers face when trying to create competitive markets while honoring the common-law duty to provide energy and how that tensions plays out).
223. See, e.g., Elizabeth Drews, Takings in the Context of Telecommunications and Electric Utility Restructuring in Texas, 7 TEX. TECH ADMIN. L.J. 241, 261-62 (2006) (noting that in Texas, POLR service must be offered at a rate approved by the Texas Public Utility Commission);
224. see also Gaye White, Energy Regulation, 57 SMU L. REV. 923, 943-46 (2004) (describing the interaction between a POLR and a PUC).
225. According to the European Commission: In a number of Member States, regulated retail prices co-exist with free market prices for some or all customers. A majority of Member States regulate prices to households and small businesses, while at least six Member States set a regulated price that is available to all customers. However, the proportion of end-users that have stayed with the regulated tariff varies between Member States. Regulated tariffs will have a negative effect on competition, particularly if they are set too low, so as to make cost-based competitive prices unattractive. European Comm'n, supra note 61, at 109.
226. See, e.g., STATE OF N.Y. PUB. SERV. COMM'N, STATEMENT OF POLICY REGARDING VERTICAL MARKET POWER 2-3 (1998), available at http://www.dps.state.ny.us/ (follow "File Room Document Requests," then follow "Guidance Documents"; the document is located on the following page) (discussing a proposed rule to control the ability of New York's utilities to exercise vertical market power).
227. This is essentially what went wrong with the California market, though the problem was badly exacerbated by the fact that essentially all of California's electricity was purchased through short-term markets in the winter of 2000-2001. Spence, supra note 1, at 425-26 n.34. Retail rate caps left retail sellers like Pacific Gas and Electric and Southern California Edison selling electricity at a loss for extended periods, damaging their credit ratings and sending Pacific Gas and Electric into bankruptcy. Id. at 427-28, 440. If short-term markets are supplemental (i.e., they are additional to bilateral, fixed-price, wholesale energy transactions), the effects of price spikes are somewhat mitigated. Id. at 436 (noting that California had forced wholesale buyers to conduct business solely through spot markets, thus maximizing their exposure to price fluctuations). Nevertheless, in the presence of rate caps and delays associated with developing new energy sources, price spikes on short-term markets can be severe enough to affect providers. Id. at 437 (noting that because the price caps sustained high levels of demand, they afforded opportunities to manipulate the market).
228. The District of Columbia Court of Appeals struggled with this distinction while overturning the FERC's approval of the New York ISO's plans for controlling - "mitigating," in FERC parlance - the exercise of market power in setting market-based rates. Edison Mission Energy, Inc. v. FERC, 394 F.3d 964, 965 (D.C. Cir. 2005). The New York ISO's automated mitigation procedure would compare prices charged with a reference price, or a price we might expect sellers to charge based on the cost of inputs and other market conditions (called the "conduct-impact test"). Id. at 966. The court stated: [T]he presence of workable competition [in the New York market] would suggest that many, perhaps most, of the bids triggering mitigation will be due not to market power but to temporary scarcity. At least this would be so unless the conduct-impact tests somehow differentiated between bid increments due to scarcity and ones due to market power - which the Commission doesn't claim. Id. at 968. For a discussion of the how some regulators and courts have addressed this issue, see infra notes 183-87, 216 and accompanying text.
229. The 2003 Directives include "customer protection" provisions, which authorize member states to "impose . . . public service obligations . . . which may relate to . . . price." Council Directive 2003/54, supra note 54, art. 3, para. 2, 2003 O.J. (L 176) at 42. The preamble to both directives also declares that "household customers . . . enjoy the right to . . . reasonable prices." Id. pmbl. para. 24, at 39.
230. See Atl. Ref. Co. v. Pub. Serv. Comm'n, 360 U.S. 378, 388 (1959) (noting that the purpose of the Natural Gas Act was "to underwrite just and reasonable rates to the consumers of natural gas" (citation omitted)).
231. In such situations, neither American nor European law has yet clarified the line between impermissible abuse of market power and the permissible capture of scarcity rents. For a discussion of this issue in the American context and the question of when market-based rates are "just and reasonable," see Spence, supra note 1, at 429-36.
232. Edison Mission Energy, 394 F.3d at 969 (quoting Md. People's Counsel v. FERC, 761 F.2d 780, 788-89 (D.C. Cir. 1985)).
233. For a description of how over-reliance on spot markets worsened the California energy crisis, see Spence, supra note 1, at 427-29.
234. An energy futures contract is a contract in which one party agrees to provide the other party energy on a future date at a specified price. Futures contracts are traded on commodities exchanges so that the exchange assumes some of the credit risk. Such contracts are cleared daily and settled financially - that is, no physical delivery of energy takes place. For a good description of energy futures contracts, see N.Y. Mercantile Exch., Inc., A Guide to Energy Hedging 6 (Dec. 1999), available at www.nymex.com/media/energyhedge.pdf.
235. Forward contracts are like futures contracts in that they too represent an agreement to deliver and take energy in the future at an agreed-upon price. However, forward contracts are not traded on commodities exchanges and leave the parties with more credit risk. For a good description of forward contracts, see Thomas G. Kelch and Howard J. Weg, Forward Contracts, Bankruptcy Safe Harbors and the Electricity Industry, 51 WAYNE L. REV. 49, 63-79 (2005).
236. An option contract is a contract in which one party purchases the right to make a future purchase or sale at an agreed-upon price. BLACK'S LAW DICTIONARY 1127 (8th ed. 2004). The purchaser of the option pays for it regardless of whether the option is ever exercised. Id.
237. For an account of the use of options in energy markets, see Steven Ferrey, Inverting Choice of Law in the Wired Universe: Thermodynamics, Mass, and Energy, 45 WM. & MARY L. REV. 1839, 1937-38 (2004).
238. Swaps represent a bet on future market prices whereby the contracting parties agree to exchange their interest-payment obligations. BLACK'S LAW DICTIONARY, supra note 190, at 1488.
239. For an explanation of the use of swaps, see Carolyn H. Jackson, Note, Have You Hedged Today? The Inevitable Advent of Consumer Derivatives, 67 FORDHAM L. REV. 3205, 3208-14 (1999).
240. For a good description of European energy derivatives markets, see European Fed'n of Energy Traders, The Past and Future of European Energy Trading (June 22, 2005) (on file with EFET).
241. For a description of the American energy derivatives market in the post-Enron era, see Alexia Brunet & Meredith Shafe, Beyond Enron: Regulation in Energy Derivatives Trading, 27 NW. J. INT'L L. & BUS. 665 (2007), which details the impact of the Enron collapse on, among other things, consumer confidence in deregulated energy derivatives markets and how the energy market environment has been shaped since that time.
242. For an in-depth analysis of risk-adverse behavior, see Seth J. Chandler, Visualizing Adverse Selection: An Economic Approach to the Law of Insurance Underwriting, 8 CONN. INS. L.J. 435 (2002).
243. See supra note 28.
244. See supra notes 108-12 and accompanying text.
245. See supra note 126 and accompanying text.
246. See supra Part II.C.
247. Associated Indus. of Mass. Found., Inc., New England's Locational Installed Capacity (LICAP) Mkt.: A Primer (Apr. 2005), available at http://www.aimnet.org/AM/Template.cfm?Section=home&TEMPLATE=/CM/ ContentDisplay.cfm&CONTENTID=6367. The Midwest ISO also uses capacity auctions.
248. See ICF Int'l, Inc., Indep. Assessment of Midwest ISO Operational Benefits 31 (Feb. 28, 2007), available at http://www.icfi.com/markets/ energy/doc_files/midwest-iso-report.pdf.
249. This process is described well in Electricity Consumers Resource Council v. FERC, 407 F.3d 1232, 1233-35 (D.C. Cir. 2005). For a description of the use of a similar technique for ensuring that sellers provide adequate reserve margins in New England, see Sithe New England Holdings, L.L.C. v. FERC, 308 F.3d 71, 73-74 (1st Cir. 2002) and Central Maine Power Co. v. FERC, 252 F.3d 34, 37-39 (1st Cir. 2001).
250. See Communication from the Commission to the Council and the European Parliament: Inquiry Pursuant to Article 17 of Regulation (EC) No. 1/2003 into the European Gas and Electricity Sectors (Final Report), at 14-15, COM (2006) 851 final (Oct. 1, 2007), available at http://eurlex.europa.eu/ LexUriServ/LexUriServ.do?uri=COM:2006:0851:FIN:EN:PDF ("For electricity, implicit day-ahead auctions or equivalent measures should be promoted as much as possible to ensure that interconnectors are used to their maximum extent.").
251. The PJM approach is based on its so-called "reliability pricing model." In a report released by PJM's market monitoring unit on August 16, 2007, PJM found that its most recent capacity auction did yield competitive prices and that, prior to the auction, generators had the potential to exert market power in all of its regions. See PJM Mkt. Monitoring Unit, Analysis of the 2007-2008 RPM Auction (Aug. 16, 2007), available at http://www.pjm.com/markets/market-monitor/downloads/mmu-reports/ 20070820-analysis-2007-2008-rpm-auction.pdf.
252. In unbundled markets, sellers and buyers whose transactions use a congested portion of the network pay more to use the network through some sort of locational marginal pricing. Locational marginal pricing takes account of the fact that congestion can prevent demand from being served by the least-cost producer of energy if congestion prevents that producer from accessing the network. Price differences for energy on different sides of the constrained portion of the network may be used to calculate (and recover) the economic rents captured by producers who can avoid the constraint. For a good description of how locational marginal pricing works, see Karl Meeusen & R. Scot Potter, The Nat'l Regulatory Research Inst., Comm'r Primer: Locational Marginal Pricing (Nov. 2004) (unpublished manuscript, on file with author). Users of the network willing to cancel or postpone their transactions may avoid those higher prices and, under some systems, may earn money for helping to relieve congestions. With its relatively low price elasticity compared to other loads, residential loads are often unable to avoid those charges.
253. Historically, transmission pricing did not reflect congestion costs. Users of the system were charged either a "postage stamp rate," a flat rate for transmission within a zone, or a "megawatt-mile rate," a rate based on the amount of power transmitted and the distance. Neither approach reflected congestion costs. Now, most networks employ some sort of locational marginal pricing to give users of the network the incentive to avoid congested areas. See supra note 202.
254. See infra notes 226-227.
255. The 2003 directives authorize this with respect to transmission facilities. See Council Directive 2003/55, supra note 53, at 68-70. The FERC has approved this sort of arrangement for new liquefied natural gas (LNG) import terminals to encourage their development. See Hackberry LNG Terminal, L.L.C., 101 F.E.R.C. 61,294 (2002) (prelim. determination).
256. See 16 U.S.C.A. § 824p (West 2007).
257. The FERC has proposed a rule establishing standards for its use. See Regulations for Filing Applications for Permits to Site Interstate Electric Transmission Facilities, 71 Fed. Reg. 69,440, 69,442-45 (Nov. 16, 2006) (codified at 18 C.F.R. pts. 50 & 380).
258. This was an expressly declared purpose of the FERC's Order 2000, which aimed to promote investment in transmission capacity by RTOs, whose larger geographic scope would enable them to see the benefits of investment irrespective of the interests of any local community. FERC Order No. 2000, supra note 43. For its part, the European Commission has promulgated two more recent directives aimed at facilitating the elimination of network bottlenecks at national borders. By increasing capacity at these bottlenecks, the Commission hopes to trigger more cross-border competition. See Council Directive 2005/89, Concerning Measures to Safeguard Security of Electricity Supply and Infrastructure Investment, 2006 O.J. (L 33) 22 (EC);
259. REGULATION 1775/2005, CONDITIONS FOR ACCESS TO THE NATURAL GAS TRANSMISSION NETWORKS, 2005 O.J. (L 289) 1 (EC).
260. See supra notes 68-71 and accompanying text.
261. This is, of course, the logic of Oliver Williamson's and Ronald Coase's work on the theory of the firm. For an analysis of the efficiency of vertical integration in network industries, including energy, see Robert J. Michaels, Vertical Integration and the Restructuring of the U.S. Electricity Industry, POL'Y ANALYSIS, July 13, 2006, at 1, available at http://www.cato.org/pubs/pas/pa572.pdf.
262. The American Public Power Association argues that restructuring has failed and that public power is the answer. See Am. Pub. Power Ass'n, Restructuring at the Crossroads: FERC Elec. Policy Reconsidered 3-4 (Dec. 2004), available at http://www.appanet.org/files/PDFs/ APPAWhitePaperRestructuringatCrossroads1204.pdf. In Europe, this solution would represent a return to the days before privatization.
263. Electricity Markets: California: Hearing Before the Subcomm. on Energy and Air Quality of the H. Comm. on Energy and Com., 107th Cong. 111 (2001) [hereinafter Hearings] (testimony of Sen. David Freeman, L.A. Dep't of Water & Power), available at http://energycommerce.house.gov/ reparchives/107/action/107-6.pdf. One might ask whether this is really a hybrid solution or a prescription for the very kind of political intervention that deters entry by companies like Company D.
264. See supra notes 183-184 and accompanying text.
265. Such an amendment might read as follows: "No rate produced solely by market forces, including scarcity of supply, shall be considered unjust or unreasonable under Sections 205 and 206 of the Act."
266. See supra note 23 and accompanying text.
267. The Supreme Court upheld the FERC's exercise of regulatory jurisdiction over transmission associated with retail sales in states that had unbundled electricity sales from transmission, reasoning that electrons associated with intrastate transactions may nevertheless cross state lines or cause other electrons to cross state lines. See New York v. FERC, 535 U.S. 1, 16-17 (2002). Whether this logic applies as easily to the interstate gas network is debatable.
268. In September 2007, the European Commission proposed the creation of an independent body to coordinate regulation within the EU, but that proposal's prospects remain uncertain. See Commission Proposal for a Regulation of the European Parliament and of the Council Establishing an Agency for the Cooperation of Energy Regulators, COM (2007) 530 final (Sept. 19, 2007).
269. See, e.g., Michelle Quinn et al., Charges May Be Pivotal for Intel, L.A. TIMES, July 28, 2007, at 1 (providing an example of the European Commission's ex post antitrust enforcement).
270. The Council of Ministers is the European Union organ most associated with national governments since it is staffed by the ministers of member states. See DAMIAN CHALMERS ET AL., EUROPEAN UNION LAW 101 (2006). There are several instruments the EU can use to make law - each involving a slighdy different process. See id. at 132-40. Directives, the device most commonly used in the energy field, do not have direct legal effect on citizens and are operative only if national governments implement them. See id. at 133. A regulation, on the other hand, does have direct effect. See id.
271. In practice, designers include not only the European Commission, the FERC, and legislatures, but also transmission system operators to whom regulators and legislatures have delegated market management authority. See supra Part I.
272. See Saul Hansell, Market Place; Group Approves Use of Derivatives, N.Y. TIMES, July 22, 1993, at D1.
273. See supra Part III.C.2.
274. See European Union Hopes to Reach Agreement on E.U. Congestion Management Guidelines in March, GLOBAL POWER REP., Feb. 2, 2006, at 13.
275. See id.; supra Part III.C.2.
276. See supra Part III.C.2.
277. Though states and even local governments generally have the power to veto investment in electric generation units and transmission lines, gas lines are governed by a federal siting process under which most state regulation is preempted. See 15 U.S.C. § 717 (2006); Steven J. Eagle, Securing a Reliable Electricity Grid: A New Era in Transmission Siting Regulation?, 73 TENN. L. REV. 1, 6 (2005).
278. For a comprehensive look at federal regulatory preemption in this field, see Frank R. Lindh, Federal Preemption of State Regulation in the Field of Electricity and Natural Gas: A Supreme Court Chronicle, 10 ENERGY L.J. 277 (1989).
279. Member states retain exclusive regulatory control over the siting of all European energy facilities except nuclear power plants. See Robert K. Temple, Note, Regulation of Nuclear Waste and Reactor Safety Within the Commonweath of Independent States: Toward a Workable Model, 69 CHI.-KENT L. REV. 1071, 1076 (1994).
280. This kind of preemption is not uncommon in the energy industry. For example, hydroelectric licensing under the Federal Power Act centralizes power in the FERC's hands. While FERC considers state and local government interests, the Federal Power Act's hydroelectric licensing provisions preempt most state and local laws. See First Iowa Hydro-Elec. Coop. v. Fed. Power Comm'n, 328 U.S. 152, 167-68 (1946) (discussing the Federal Power Act's jurisdictional boundaries); FED. ENERGY REGULATORY COMM'N, A GUIDE TO THE FERC ELECTRIC TRANSMISSION FACILITIES PERMIT PROCESS 3-5, available at http://www.ferc.gov/for-citizens/citizen-guides/electric/guide-transmission.pdf (last visited Mar. 24, 2008) (explaining how the FERC takes local interests into account). One problem is that only some of the costs associated with transmission siting are typically compensated. For example, landowners on whose land the line is sited are compensated for their losses.
281. See Regulations for Filing Applications for Permits to Site Interstate Electric Transmission Facilities, 71 Fed. Reg. 69,440, 69,442-45 (Nov. 16, 2006) (codified at 18 C.F.R. pts. 50 & 380) (discussing how FERC will compensate landowners whose land is condemned for siting lines in so-called national interest corridors). Other less tangible costs, such as those associated with aesthetic losses or fears of electromagnetic radiation, are typically not compensated. Any proposal to preempt local laws could provide for compensating these less tangible costs. However, such a system would have to grapple with the problem of monetizing difficult-to-prove costs and the incentive of those seeking compensation to overstate their losses.
282. Time-of-use rates reflect pricing based on the cost of electricity during a specified time frame. See NORESCO, Glossary of Terms, http://www.noresco.com/site/content/info_glossary.asp?letter=T (last visited Feb. 14, 2008).
283. Real-time pricing is instantaneous pricing of electricity based on fluctuating demand. See NORESCO, Glossary of Terms, http://www.noresco. com/site/content/info_glossary.asp?letter=R (last visited Feb. 14, 2008).
284. For a thorough discussion of how much capacity these sorts of demand-responsive programs could save, see U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-04-844, ELECTRICITY MARKETS: CONSUMERS COULD BENEFIT FROM DEMAND PROGRAMS, BUT CHALLENGES REMAIN 21-31 (2004). While real-time meters would pay for themselves relatively quickly, they need to be installed at every customer's connection to work efficiently. In most places, the problem of coordinating and financing the installation of meters has thus far proven insurmountable. See id. at 31-42.
285. See id. at 27-28.
286. See supra note 166 for an explanation of how price elasticities of demand are expressed and measured.
287. This should be intuitively reasonable if we assume that gas and electricity are, for some customers at some times of year, truly essential commodities. However, that proposition assumes that customers can afford to pay for energy at the floor level of demand. If they cannot, then perhaps price elasticities are higher at lower levels of demand but for politically unacceptable reasons. See supra note 166 for a measure of these elasticities.
288. Identifying the "truly needy" is the kind of decision that governments make regularly, but in this context it is complicated by the fact that the class of customers who "cannot afford" energy will vary with the price of energy. Those living in poverty may not be able to afford energy at price x, while middle class customers may not be able to afford energy at the price of 50x.
289. Most POLR or default service programs in the United States and Europe do not subsidize ratepayers in this way. Rather, they keep rates low and limit access to default service to the needy. See, e.g., White, supra note 178, at 943-44. Rate subsidy programs for the needy do exist in many places, but they tend to involve a binary one-time decision whether the customer qualifies for the subsidy based on a static means test.
290. On the other hand, the FERC seems to be moving in this direction with its recently published advanced notice of proposed rulemaking soliciting comment on a package of proposals designed to make wholesale markets in the United States more efficient. See Wholesale Competition in Regions with Organized Electric Markets, 72 Fed. Reg. 36,276 (proposed June 22, 2007) (to be codified at 18 C.F.R. pt. 35), available at http://www.ferc.gov/whats-new/comm- meet/2007/062107/E-3.pdf.
291. See Harry M. Trebing & Sarah P. Voll, Infrastructure Deregulation and Privatization in Industrialized and Emerging Economies, 4O J. ECON. ISSUES 307, 308 (2006).
292. Energy Markets; Va. Governor Proposes Tougher Enviro Requirements for Deregulation Bill, GREENWIRE, Mar. 28, 2007, http://www.eenews.net/ Greenwire/2007/03/28/3/.
293. See Alex Philippidis & Bob Rozycki, What Changes Await Albany on Day One?, WESTCHESTER COUNTY BUS. J., Oct. 30, 2006, at 1 (discussing Eliot Spitzer's plans to increase regulation of utilities);
294. see also First Virginia, Now Michigan?, RESTRUCTURING TODAY, Mar. 30, 2007, at 1 (describing a proposed statute eliminating competition in Michigan);
295. New Jersey Working Group Could Spell Disaster for Market, RESTRUCTURING TODAY, Apr. 5, 2007, at 1 (describing New Jersey's review of its electricity market).
296. For a description of this "cherry-picking" tendency, see supra note 133 and accompanying text.
297. For a description of "municipalization" and other ways that industrial customers find their way to least-cost energy providers (and off of the monopoly provider's network) even in a regulated environment, see supra note 133.