Excerpt from the Executive Summary:
News of Enron’s accounting improprieties and subsequent collapse have been part of the continued eventful last two years for the electric supply industry. Shortly after the skyrocketing prices in California and the West of 2000 and 2001 had subsided, the Enron developments began to come to light in late 2001. This has lead to investigations by several federal agencies and revelations of improper trading and reporting practices of other energy companies. As a result of this and reduced demand for electricity, the industry has been hit by a “credit crunch” as investors have become more wary and has forced many energy companies to cut back on trading activities, sell assets, and reduce future investments in order to improve their balance sheets. In the face of all the industry turmoil, while many retail markets remain relatively inactive, particularly for smaller residential customers, overall market activity has increased from last year. Wholesale markets since California settled down, continue in general to function well from an operational standpoint, however, there continues to be strong evidence that significant market power is being exercised in all markets that have been examined.
The difference between the pricing of transmission services for retail customers and the
pricing for wholesale customers could hardly be more striking.. Retail customers still pay
for transmission in exactly the same way that they have done for generations, namely through bundled retail rates. There are no unbundled retail transmission tariffs as such. Rates are based on the classic, time-honored methodology of cost of service regulation, namely capital investment minus depreciation times rate of return, plus expenses. The rate is then adjusted to account for customer class differences.
With one or two possible exceptions related to future transmission services, wholesale
customers generally pay, or at least have the option to choose to pay, an unbundled,
transmission-specific rate and then choose their supplier from the marketplace. The
transmission price will at least reflect the discrete costs of providing transmission-specific
services or, depending on the pricing system employed in the locality the service is being
rendered, may well be reflective of all costs actually being incurred on the system, including
congestion costs. In short, transmission-specific price signals are, with a few possible
exceptions, given solely to wholesale customers. They are not conveyed to retail customers
either directly or indirectly.