Power charges unfair, PSC says

The Baltimore Sun

Maryland consumers overpaid for electricity by at least $87.5 million in 2006 because outdated market rules exempted certain power generators from price caps designed to prevent windfall profits, state utility regulators allege in a federal complaint filed this week.

The state Public Service Commission alleges that regional power grid operator PJM Interconnection is still allowing the owners of 17 Maryland electricity plants to use the rules to exert control over market prices at times when no one is bidding against them.

The complaint asks the Federal Energy Regulatory Commission to investigate whether the money should be refunded and indicates that a more complete analysis might prove that the actual losses to consumers in 2006 were higher. And it criticizes PJM management for continuing to allow the exemptions over the objection of its chief market watchdog and for keeping his analysis of the problem under wraps until recently.

Valley Forge, Pa.-based PJM said yesterday that it is examining the complaint and will decide later whether a response is warranted. The federal commission is evaluating the complaint as well. A FERC spokesman could not be reached yesterday for comment.

Steven B. Larsen, PSC chairman, said the complaint was the first in a series the state commission plans to make in an effort to address federal regulations that hurt Maryland consumers.

"The markets are supposed to be set up so that they're competitive, because it's presumed competitive markets create reasonable prices," he said. "But by definition, these aren't competitive prices."

The PSC does not know the identity of the 17 power plants in question because PJM's market monitor did not disclose their names for proprietary reasons. Constellation Energy Group, which supplies the majority of the electricity to BGE's 1.1 million customers, said none of its Maryland plants are among them.

But the PSC says market distortions outlined in the complaint forced all customers to pay more, regardless of their energy supplier.

"We're not suggesting the generators acted inappropriately, but they were the beneficiaries of flawed federal policies," Larsen said.

The PSC complaint asks FERC, which oversees wholesale electricity sales, to change the rules. Individual Maryland consumers would likely see little cash if the PSC succeeds in getting the money refunded. But the PSC analysis suggests such a ruling would reduce future power prices for customers in Maryland and other states under PJM jurisdiction.

The complaint comes at a time when consumer groups are increasingly questioning the fairness of the wholesale energy market, claiming that it is vulnerable to manipulation by market players and doesn't deliver lower prices. The wholesale market provides the foundation for electricity rates in deregulated states.

The criticism is especially acute in Maryland, where customers of Baltimore Gas and Electric were hit with a more-than-70-percent rise in rates during the past two years.

Concerns about fairness were bolstered when Joseph Bowring, who heads PJM's market monitoring unit, complained last April that the grid's management had interfered with his independence as the market watchdog. Maryland and several other states complained to FERC, recently resulting in a settlement giving Bowring's unit greater autonomy. Bowring is charged with ensuring that the wholesale market is competitive and fair.

The PSC used Bowring's analysis of price-cap exemptions as the foundation of its complaint to FERC. In one instance, Bowring alleged that an unnamed generator who had a price-cap exemption earned $20 million in excess payments over a two-week period by exerting market power. It is unknown whether the generator was in Maryland. But industry experts say it likely doesn't matter, since local electric prices are often influenced by out-of-state generators who supply the region.

Bowring said PJM declined to take action on his complaint, and the generator continues to enjoy the price-cap exemption today.

The Maryland commission argues that the generators in question are distorting the market and inflating prices for customers throughout PJM territory, which includes Maryland, 12 other states and the District of Columbia.

The complaint gets at the heart of PJM rules aimed at ensuring fairness in electric markets. Normally, PJM dispatches power generators in order of cost - cheapest power first, more expensive power last - until all of the demand on the grid is met. The last - and highest - price accepted is the one paid to all generators. That price is called the "clearing price," and is similar to how prices for other commodities, such as wheat, are established in a competitive market.

The system works when there are enough players in the market to ensure adequate competition. But when too few generators are available to bid, PJM imposes a mandatory cap on rates the remaining generators can charge.

However, FERC allows certain generators to be exempt from the caps. The exemptions apply to power plants built during specific time periods starting in 1999, and to a cluster of plants located in certain areas where generation and transmission are in short supply. In all, 43 plants have exempt status within the entire PJM territory.

At critical times, those plants may be asked by PJM to supply power even if they aren't the cheapest source of electricity available.

The problem, critics contend, is that the exempt plants are taking advantage of their status to boost prices when they have no one bidding against them. Worse, the small number of plants involved are often the last, most expensive generating units dispatched to the grid.

"Everybody in the system loves these guys because everybody else makes out like a bandit," said Lester Lave, an economist and energy expert at Carnegie Mellon University.

PJM said it suggested to FERC in 2003 that the exemptions be eliminated. The federal commission agreed some were no longer justified, but left others in place.

That's because the "grandfathered" plants were built with the expectation they would not be subject to price caps, allowing investors to recover their costs. Market regulators reasoned that it would be unfair to change the rules after investors had already committed their money to the projects.

paul.adams@baltsun.com

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