Electricity honey pot is starting to stink

December 21, 2007|By JAY HANCOCK

Exelon Corp. stock has nearly tripled in four years, but Merrill Lynch analyst Jonathan Arnold understandably still considers it a "buy." Thanks to rules that guarantee a bonus for operating generators that would have been running anyway, Arnold calculates in a recent report, electricity consumers will be forced to pay Exelon an extra $1 billion in the next three years.

That's on top of the extraordinary profits Chicago-based Exelon will earn from operating its low-cost nuclear generators in an era of record-high energy prices.

Small wonder that an unlikely band of industry, local and state governments and lefty consumer groups is pleading with Washington to investigate not just Exelon, but the entire bulk-electricity trade. On Monday the group filed a complaint with the Federal Energy Regulatory Commission, urging it to open a nationwide probe into whether wholesale-electricity sales are "unjust and unreasonable" and therefore illegal.

Flawed wholesale markets mean high prices for everybody. In Maryland and other deregulated states, utilities such as Baltimore Gas and Electric buy juice on the wholesale grid and pass the cost to users.

FERC has resisted a thorough probe at every turn despite copious evidence of cheating and monopoly profits. But saying "no" now would be breathtaking. When Ralph Nader, the American Chemistry Council, the Ohio Hospital Association, the Maryland Office of the People's Counsel and 37 other groups agree there's a problem, there's a problem.

Deregulation was supposed to lower prices by spurring competition and inducing companies to install new generators. But hardly any were built, leaving incumbents with scarce power supplies and few limits on what they can charge.

Companies blame rising fuel costs for high consumer prices, but they're charging far beyond what they need to pay for more-expensive natural gas, coal and so forth.

Without federal inquiry the true size of this "electric honey pot," as energy consultant Edward C. Bodmer describes it, will never be known. Grid managers are bound to confidentiality, and "you can't get to the bottom of it because you can't get the data," says Susan N. Kelly, general counsel for the American Public Power Association, one of the groups petitioning FERC.

But evidence keeps mounting that the honey pot is deep and sweet beyond the fantasies of tycoons.

We know about the outrages perpetrated by Enron in California and Oregon, which emerged only because of bankruptcy and criminal scandal.

The staff of the Texas Public Utility Commission wants TXU to pay $171 million in penalties for allegedly withholding power to drive up the price. TXU denies it. In Illinois, Exelon and others just agreed to pay $1 billion to settle allegations they manipulated a wholesale auction.

Joseph E. Bowring, market monitor for PJM Interconnection, which runs the grid in a dozen states from Maryland to Illinois, found instances of millions of dollars in actual or potential "excess payments" collected by unidentified generators. His grid bosses silenced him, and after bitter litigation PJM agreed this week to let him operate independently. But that doesn't mean that he'll uncover all abuse or that FERC will do anything about it if he does.

The PJM grid may be the best place in the world to be a generator. Even after BGE prices popped 70 percent thanks to deregulation, PJM saw fit to pay generators an added surcharge for guaranteeing power during times of high use.

Baltimore's South River Consulting has calculated that BGE parent Constellation Energy will reap $200 million a year from this "reliability charge" at two plants alone.

Merrill Lynch's Arnold figures reliability bonuses will funnel $220 million to Exelon next year, $330 million in 2009 and $510 million in 2010. (Thanks to Steve Daniels at Crain's Chicago Business, who first reported on this, for sending me the report after Merrill declined.)

Who can blame Pittsburgh's Duquesne Light for wanting to secede from PJM? Who's shocked that Maine is exploring quitting the New England grid because of reliability charges?

Who's surprised that consultant Bodmer, in a sworn affidavit to FERC, found Constellation and four other PJM generators are making "supra-competitive" profits - more than they would in a competitive market or a regulated market?

Much as the Enron felons did a few years ago, defenders of expensive electricity yammer on about "price signals" - the need to lure generation investment with the promise of profits.

Price signals, however, are a necessary but not sufficient condition for a functioning market. Without transparency and genuine competition, they're just an excuse to mint money. If FERC won't pry the lid off the honey pot, Congress should.


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