GAO Says Electricity Consumer Safeguard Inadequate

March 6, 2008
04:41 PM
Sens. Russ Feingold (D-WI), Jeff Bingaman (D-NM) and Sam Brownback (R-KS) are working together to protect consumers of electric utilities from harmful business transactions and to ensure fair competition between small businesses by examining a practice known as cross-subsidization.
Today, the Government Accountability Office (GAO) released a report -- requested by the three senators -- that found that the Federal Energy Regulatory Commission (FERC) “does not have a strong basis for ensuring that harmful cross-subsidization does not occur.”
Cross-subsidization, according to GAO, is “unfairly passing on to consumers the cost of transactions between utility companies and their affiliates.”  Cross-subsidization harms consumers and prevents fair competition with small businesses when, for example, an electric utility company and its affiliates or its holding company do not maintain corporate and financial separation.  Harmful cross-subsidization can be in the form of an electric utility providing significant financial loans to stave-off bankruptcy of its parent holding company or affiliates.
“I have always been troubled by cross-subsidization and this GAO report only further demonstrates why we must continue fighting for ring fencing,” Feingold said.  “These unfair practices force electricity customers to foot the bill for another companies’ expenses and stacks the deck against small businesses.”
“It was only with agreement to strengthen merger reviews that Congress decided to repeal PUHCA in the first place,” Bingaman added.  “If, as the GAO report indicates, FERC is not providing adequate consumer protection to insulate a regulated utility from potentially riskier activities of an unregulated affiliate, then that is a very serious matter that we will have to look in to.”
The report was requested by Feingold, Bingaman and Brownback when the Senate voted in 2005 to repeal the Public Utility Holding Company Act of 1935 (PUHCA).  PUHCA had stood as a barrier to cross-subsidization and other abusive affiliate transactions for decades.   The senators were concerned that repealing PUHCA might leave consumers unprotected from cross-subsidization.
In 2005, Feingold and Brownback introduced the Fair Competition and Financial Integrity Amendment to require FERC to establish “ring fencing” rules to help ensure that the financial integrity of a public utility is not harmed by the repeal of PUHCA.  Ring fencing is a term used to describe the legal walling off of a regulated utility from its unregulated affiliates.  Insulating the utility in this way is intended to protect customers of the regulated utility.
#  #  #