Energy inquiry has soft landing

The Baltimore Sun

Call me cynical, but it sure seems like Edison Mission Marketing & Trading had something to hide.

After regulators began investigating the Boston-based electricity seller in 2005, Edison Mission misled them with "protracted" evasions, wasted "extensive" amounts of their time and committed "severe" violations of its duty to tell the truth, the Federal Energy Regulatory Commission said two days ago.

Serious stuff, and you might think FERC is finally policing the wild and woolly electricity bazaar. But here's the problem: The agency has said nothing about the troubling Edison Mission behavior it set out to investigate, which independent consultants say looks similar to price-manipulation schemes employed by Enron and others.

La di dah. More problems on the "PJM" wholesale electrical grid, which sets sky-high prices for BGE and other utilities, thanks to deregulation. Another wimpy gesture by FERC. And Exhibit No. 3,458 showing that the electricity "market" that was supposed to deliver competitive prices doesn't fit that description and hasn't fulfilled that promise.

In interviews, Edison Mission officials denied wrongdoing other than what they said were inadvertent "deficiencies" in responding to FERC's investigation. The company has stopped the tactics that prompted the inquiry, said Paul Jacob, president of Edison Mission Marketing & Trading. In any event the practice was part of a legitimate, "overall risk management system" that enabled the company to meet contractual commitments, he said.

Others disagree.

"This is a complex scheme that has been routinely practiced" by electricity sellers to drive up prices and reap millions in excess profits, says Robert McCullough, an Oregon-based consultant who was key in getting to the bottom of the Enron mess.

At Edison Mission it involved selling power from Illinois generation plants on PJM's "day-ahead" market for wholesale electricity. The company was required to offer all its juice, but it demanded such high prices for part of the supply that there were no takers. This could have let it "hit the jackpot" on hot, peak-use days when buyers had no choice but to pay the huge markup, says Kenneth Rose, an independent energy consultant based in Ohio. (Edison says this never happened.)

Alternatively, withholding megawatts by slapping them with outlandish price tags could have depressed the supply, driven up overall prices and allowed Edison Mission to sell at inflated rates in the "real-time" market the next day.

It's the reverse, McCullough suggests, of the prank in which you order a dozen pizzas, fail to collect them and then wander in later to buy at a sharp discount from the desperate restaurateur. Among others to pull this was Enron, which reaped millions in Canada in the late 1990s through what it called "Project Stanley," he said.

Edison Mission couldn't quite get its story straight.

First it said it needed to conserve power because of the risk of tornadoes. Then it said there was a companywide policy to demand very high prices it knew would never be accepted. When FERC poked holes in that argument, Edison Mission acknowledged there was no policy.

Worse, the company deleted critical e-mails even after FERC ordered it to preserve them. "In fact, Edison Mission retained and produced some key documents but not others from similar time periods, leading staff to question whether the documents had been selectively preserved," said FERC's order.

This went on for three years!

What was the final result? On Monday FERC fined Edison Mission a puny $7 million and ordered it to spend $2 million more on improving its "compliance" with document requests. ($9 million is nothing in the high-rolling world of wholesale electricity. Edison Mission made $414 million in profit last year.)

And that was it. Not a single head has rolled at Edison Mission. And there was no evaluation of the behavior that drew the agency's suspicion in the first place. Nowhere does FERC's order say that the company reaped any improper profits, Jacob correctly notes. But nowhere does it say the company's selling practices were OK, either.

It's the weirdest filing I've ever seen. The investigation covered more than 20 witness interviews and depositions and "tens of thousands" of memos, reports and spreadsheets, but FERC forgot to write the final chapter.

"I can't say anything beyond what's stated in the order," FERC spokeswoman Mary O'Driscoll e-mailed yesterday.

McCullough thinks the agency lacks the wherewithal to reach a conclusion. His firm spent years picking apart "high-offer" tactics in Texas and Canada, he said. "I would be surprised if FERC had either the expertise or the computing ability" for similar analysis, he said.

Or maybe this is yet another example of the agency's softness on Big Energy.

Because the Edison Mission plants were in Illinois, whatever they did wouldn't have had much effect on Maryland. Unfortunately, this state's generation plants share the same grid, the same rules and the same federal regulation that apply in Illinois.

What else might be going on?

Unlike the New England grid, PJM refuses to ban unrealistically high offers in the day-ahead market. Recently FERC found that large market shares enabled some unidentified Maryland electricity producers to reap "unjust and unreasonable" profits. (The agency capped their prices but, typically, didn't make them pay back the money.) The failure of a New York hedge-fund affiliate a few months ago will probably cost PJM consumers tens of millions of dollars more.

These kinds of things go on in wholesale electricity markets across the country. Let's hope that whichever party enters the White House in January will give FERC new blood and a backbone.

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