Federal regulators yesterday struck down market rules exempting certain Maryland power generators from price caps designed to limit windfall profits, potentially saving utility customers nearly $90 million a year, state regulators said.
The ruling is a partial victory for the state Public Service Commission, which complained to federal regulators that certain unnamed generators were taking advantage of their price cap exemptions to overcharge for electricity at times when no one was bidding against them. In its order, the Federal Energy Regulatory Commission ruled that price caps should be applied equally to all generators.
However, FERC denied the state commission's request that energy companies be forced to refund past overcharges, which it estimates at $87.5 million in 2006 alone.
Steven B. Larsen, PSC chairman, said the ruling is still important because it closes the door on future overcharges, potentially saving Maryland ratepayers hundreds of millions of dollars over a period of years.
"We didn't have numbers for any year other than 2006, but the cost to consumers of this exemption if you extrapolate from '06 was between $80 million and $90 million a year, every year," he said.
However, FERC said in its ruling that it wants to review regulations that determine when generators are subject to price caps in the future. Some generators want the rules loosened, arguing that price caps are imposed too often and are hurting the market. Regional power grid operator PJM Interconnection is evaluating those concerns, and FERC said it is willing to wait until that process is finished before launching its own review. The outcome could affect how much benefit ratepayers receive as a result of FERC's decision yesterday.
The PSC alleged in its Jan. 15 complaint that PJM allowed 17 Maryland electricity plants to avoid price caps despite objections from its market monitoring unit, which is charged with ensuring that the market is fair and competitive. The commission said it did not know the identity of the 17 plants, because that information wasn't disclosed by the market monitor for proprietary reasons. Constellation Energy Group, which is the largest power generator in Maryland, said none of its plants were among those in question.
PJM said it was not opposed to FERC reviewing the rules and making changes. However, PJM opposed Maryland's request for refunds, saying power generators shouldn't be punished retroactively for following rules FERC approved in its past orders. FERC sided with the grid operator.
The ruling will have limited impact on utility bills, which collectively dwarf the amount of alleged overcharges. But Larsen said it is an important step in the commission's continuing campaign to influence federal market rules that it believes are hurting consumers. The commission blames wholesale market rules in part for the roughly 85 percent increase in rates for Baltimore Gas and Electric Co. and other utilities since deregulation was passed in 1999.
The ruling bolsters critics who say the PJM wholesale market is not sufficiently competitive and is vulnerable to manipulation. Maryland's large investor-owned utilities, including BGE, buy their power from wholesale suppliers. The prices they receive are influenced by what happens in PJM's wholesale energy market.
"Most people, I think, in the industry have a pretty strong opinion that PJM is not at all doing enough to address market power," said Robert McCullough, an Oregon energy industry consultant, referring to the ability of some generators to use their "market power" to influence prices.
PJM took steps to bolster its market monitoring unit's independence after Maryland and other states complained to FERC last year that management had interfered with its role as watchdog. A spokesman for PJM said yesterday there is disagreement about how much the price cap exemptions outlined in the PSC's complaint actually contributed to higher costs for consumers, and whether market power was being exercised in every case. The grid operator said it would take a deeper analysis to determine the true impact on prices.
The PSC based its complaint to FERC on an analysis conducted by Joseph Bowring, who is PJM's chief market watchdog. Bowring alleged that in one instance, an unnamed generator who had a price-cap exemption earned $20 million in excess payments over a two-week period by exerting market power. Bowring complained that PJM declined to take action on his complaint.
State officials argued that "exempt" generators were distorting the market and inflating prices for consumers throughout PJM territory, which includes Maryland, 12 other states and the District of Columbia.
The FERC ruling concerns PJM rules aimed at preventing such abuses. PJM's job is to dispatch 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 bid 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 commodities markets.
The system works fine when there is plenty of competition among generators. But problems arise when too few generators bid to supply power in a particular area. When that happens, PJM "caps" the price the generator can receive. However, certain plants were given exemptions from the caps.
Exempt plants included those built during specific time periods starting in 1999, and a small number of plants located in critical areas where generation is in short supply. When power is short, those plants are needed regardless of whether they are the cheapest available. Until yesterday's ruling, 43 plants within PJM enjoyed exempt status.