Auctioning Electricity

Wholesale market sets prices, but critics say system is vulnerable

April 16, 2006|By PAUL ADAMS | PAUL ADAMS,SUN REPORTER

VALLEY FORGE, Pa. -- Though consumer anger is largely focused on BGE, some say the true origins of Maryland's rising electricity prices lie in a sedate office park in this suburban community 25 miles outside Philadelphia.

More famed as the place where George Washington's encamped army survived a brutal winter, this is also home to the PJM Interconnection, whose primary function is to act as the air traffic controllers of power for electricity providers in Maryland, Washington, D.C., and all or parts of 12 other states.

Twenty-four hours a day, monitors for the independent grid operator sit in a control room three stories underground and watch a giant, wall-sized screen that displays every major power transmission line stretching from Chicago on one end to New York on the other. Their job is to keep those lines from overloading and ensure the smooth delivery of electricity to 51 million residents who reside within the largest centrally dispatched power pool in the world.

But it's what happens upstairs that has millions of customers in Maryland and elsewhere reaching for their wallets.

Three flights up from the dimly lit control room is where staff of the PJM - named for the original grid of Pennsylvania, Jersey and Maryland - run the region's wholesale electric market, which has become ground zero in the debate over whether electric deregulation has helped or hurt consumers. Under deregulation, BGE and other utilities must buy their electricity from competitive wholesale suppliers, who take their cue from the PJM spot market when deciding how much to charge.

But critics say the roughly eight-year-old power market - a sort of stock exchange for electricity - might be vulnerable to a legal form of market manipulation by cagey power generators, who could withhold power supplies at key times and artificially drive up prices.

Also, they blame certain free-market trading rules for making some power generators rich during periods of peak demand while pushing electricity prices for consumers higher than they would be under a traditional regulated system.

"Are we worse off? I think the answer to that is `yes,'" said Lester B. Lave, an economics professor at Carnegie Mellon University and co-director of its Electricity Industry Center. "To be more careful with it, I would say deregulation the way it was done in Pennsylvania and Maryland, and so on, certainly has been a failure."

PJM officials and many deregulation defenders dispute such claims. They point to several years of data that show the wholesale market has lowered generating costs while fostering a competitive trading system that results in extremely tight profit margins for power producers.

Those and other free-market benefits have been masked, they argue, by the soaring cost of natural gas, coal and other fuels burned to make electricity. Despite the recent political fight in Annapolis, those factors are beyond the control of both utilities and the PJM.

"The primary driver is just fuel [costs]," said Paul Joskow, an economics professor at the Massachusetts Institute of Technology and director of its Center for Energy and Environmental Policy Research. "There's nothing anybody in the legislature can do about that."

It's an academic debate that has raged for several years among economists and regulators, but it has largely been ignored by the public, which until now has been shielded from rising prices as a result of rate caps imposed as part of the transition to free markets.

With those caps expiring, consumers in Maryland, Delaware and other deregulated states are waking up to soaring energy costs, prompting a political outcry and calling attention to recent studies that argue deregulation has not benefited consumers.

Lave and his colleagues at Carnegie Mellon point to a number of flaws in the market, including a concern that large energy suppliers could withhold power from the market or demand higher prices during periods of peak demand. If enough suppliers followed that lead, utilities would be essentially blackmailed into paying stratospheric prices.

The group conducted simulations demonstrating how power suppliers could quickly learn to anticipate each other's moves, creating the temptation to collectively bid prices higher in what researchers termed a form of "tacit collusion."

So long as the suppliers aren't discussing their plans with each other, such behavior wouldn't violate antitrust laws.

PJM says its staff of 16 market monitors guard against such behavior, quickly investigating suppliers who act suspiciously. In instances when there are too few generators bidding to supply power, the PJM immediately caps prices at the cost of production. Suspected cheaters are referred to federal regulators.

"It keeps everybody honest," said Joseph E. Bowring, PJM's chief market watchdog.

The danger remains

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