Hardly anyone has heard of Cheryl LaFleur, but she is one of America’s most powerful government officials, entrusted with vast authority to oversee the electricity, oil and natural gas industries. She chairs the Federal Energy Regulatory Commission (FERC), a tiny government agency with only 1,500 employees. Its budget is covered not by taxpayers but by the industries it regulates.
Her sworn duties include making sure charges for electricity are always just and reasonable. That means suppliers should be reasonably compensated and customers should pay reasonable prices. But she has consistently ignored this responsibility. When presented with serial indicators of unjust prices, she puts on a blindfold and sits on her hands.
In a Feb. 18 letter to six senators and 13 representatives, LaFleur demonstrated beyond any doubt her fealty to electricity companies and disregard for consumers. The 19 legislators expressed alarm over the quadrupling of prices paid just to have power plants available in New England to supply electricity during peak times. The price was $1 billion and change five years ago. Last month’s auction hit $4 billion and would have been much higher but for price caps.
LaFleur, a Harvard educated lawyer, politely thanked the lawmakers for writing her about their concerns. She then told them that nothing could be done.
Nothing to see here
FERC fails to provide oversight, part of a “broken system,” according to Rep. Joseph Kennedy III, a Massachusetts Democrat whose district includes Brayton Point, a large power plant whose owners withdrew it from the auction. That withdrawal explains half of the electricity supply shortfall in the New England, which has only worsened in the past five years. By withdrawing Brayton Point, its new owner, Dynegy, expects to reap an extra $500 million in revenue from its other New England power plants, most of which will be profit.
LaFleur said she did not observe anything wrong. That is bad enough, but then she went on to make the astonishing statement that even if something were amiss, she is powerless to act. That should set off alarms in the White House about her competence, bias or both.
Referring to challenges made to last year’s auction, with its $3 billion price tag, she wrote that since the auction rules were followed, nothing was amiss. Noting that those auction rates have automatically taken effect because the commission did not block them, she told the 19 lawmakers that because the matter “is no longer an open case, we are unable to reopen the question of the justness and reasonableness.”
LaFleur’s assertion contradicts FERC staffers who said in a recent court filing, “Petitioners do have available recourse to challenge the auction rates. Petitioners are free to file a complaint challenging the justness and reasonableness of the rates under section 206 of the Federal Power Act.”
FERC officials, who were made available on condition they not be named or quoted directly, told me no contradiction exists between her letter and the court filing. They asserted that while last year’s auction case is over, those who think the results are unjust should file a complaint about the auction rules rather than the auction results.
LaFleur’s assertion that simply obeying the existing electricity market rules ensures just and reasonable prices is absurd.
LaFleur also told lawmakers that she could do nothing because of the filed rate doctrine, which holds that once rates are set, they cannot be changed until a new rate case. However, she is wrong about the law.
Congress, through the Federal Power Act, authorizes her and her fellow commissioners to block unjust and unreasonable rates. That law specifically authorizes FERC to order detailed tracking of receipts and to demand refunds — with interest — whenever, after rates were raised, any money paid to the utilities was above the just and reasonable level. In addition, the withdrawal of Brayton Point from the market did not comply with Section III of New England Market Rule 1, contrary to what LaFleur wrote. That violation imposes a duty on FERC to correct.
Her assertion that simply obeying the existing electricity market rules ensures just and reasonable prices is absurd.
Theory and reality
William Hogan, a professor of global energy policy at Harvard and the head of its electricity policy group, supports electricity markets as a replacement for traditional regulation of monopoly utilities. In New England, however, he has found that “the real electricity system involves features that are difficult or impossible to fully reconcile” with the model market, he wrote in a working paper, “Electricity Market Design and Efficient Pricing.”
The idea that markets are best for pricing electricity and ensuring future supplies rests on what he called the “fundamental assumption” that market prices provide investors with clear and strong signals as to when and where to invest in new power plants. This theory implies that “efficient prices are all that would be needed to provide the right incentives” for companies to invest in new power plants, fuel supplies, transmission lines and other corporate-owned infrastructure.
And yet “real market systems do not conform to the simple theory,” he wrote. A problem with the theory is the jacking up of prices through artificially induced scarcity. That is exactly the problem that critics, including me, see in New England. “One of the principal challenges,” in keeping markets honest, according to Hogan, is how to “distinguish between (good) high prices caused by scarcity and (bad) high prices” caused by withholding power supplies.”
To address this problem, he supports a policy that New York moved to adopt last month and that Texas put in place last summer. It requires paying power plant owners to keep some turbines in reserve so that when demand for electricity is high and anything goes wrong, such as a power plant breakdown, replacement power can be supplied in moments.
LaFleur must go
Whether or not markets work, LaFleur’s letter, together with her earlier opinions in rate cases, demonstrate contempt for those who have identified unjust and unreasonable results, tariff violations and failings of the existing market rules. The FERC chair is in effect a judge, and she has shown clear bias. Her assertion that she lacks power to correct injustices raises questions about both bias and competence.
Not incidentally, she was a senior executive and acting CEO of National Grid, a British-owned electricity and gas utility in the Northeast. Sen. Harry Reid of Nevada tried last summer when he was Senate majority leader to block her nomination, saying she would act in the interests of utilities and against customers.
President Barack Obama should fire LaFleur. Allowing her to remain in office would only add to the awful Obama legacy of shielding Big Business from law enforcement, including the failure to prosecute the easily provable crimes of executives at too-big-to-fail banks.
Whether or not Obama acts, Congress should issue subpoenas and begin a full-scale investigation of FERC before it enables more economic damage.