Openness needed in electricity market

April 09, 2008|By JAY HANCOCK

When bids from power providers to provide electricity to BGE households flunked a test to ensure fair prices two years ago, Maryland regulators changed the rules and approved high offers anyway, a new report shows.

Was that reasonable? How much did that move contribute to the 70 percent price increase suffered by Baltimore Gas and Electric Co. customers?

We don't really know. Gov. Martin O'Malley has won some rebates for BGE customers, but the real work of Maryland rate relief must still be done: cracking open the black box that allows a powerful cartel to control the state's electricity marketplace.

At least when Arab sheiks and South American blowhards fix the oil markets, they announce what they're doing. Who would have thought Maryland's deregulated electricity market would be less transparent than OPEC?

"It is our belief that Marylanders still do not have all of the facts necessary to understand why the price of electricity remains high," said Robert McCullough, an Oregon energy consultant who found that in at least one case BGE customers paid 20 percent more than the market price for juice.

Last week's report on BGE's electricity deals is prime evidence. The report, by law firm Kaye Scholer, found that BGE and parent Constellation Energy Group did nothing wrong during the process that led to historic price increases and Constellation winning most of BGE's business.

But it is pocked with blackouts -- 124, by McCullough's count -- and raises more questions than it answers. (Disclosure: McCullough's firm bid and lost on another analysis job that the Public Service Commission awarded to Kaye Scholer.) A censored report on a secretive auction doesn't generate huge confidence.

"There was a whole paragraph blanked out on page 6," says Kenneth Rose, an energy consultant based in Ohio. "Why? Every single word? Who is this protecting?"

What wasn't blanked out raises eyebrows. Deregulation required BGE to shop for electricity in Maryland's wholesale power market -- a market dominated by its corporate parent, Constellation Energy, which took over BGE's generation plants. At one 2005 auction, every single offer exceeded a threshold that regulators had set to prevent exorbitant prices.

What happened next? The PSC, under Gov. Robert L. Ehrlich Jr. and Chairman Kenneth D. Schisler, raised the threshold, allowed generators to re-bid and passed along the high prices to BGE households.

"It raised a red flag for us," PSC Chairman Steven B. Larsen, who replaced Schisler, said yesterday. But after Kaye Scholer's analysis, he said, "we feel there were legitimate reasons" for raising the price limit, including unsettled energy markets in the wake of Hurricane Katrina.

OK, but it would be nice if independent experts could replicate Kaye Scholer's findings. That's the gold standard for verifying any information. But it can't happen here, because the key data are secret. Larsen blames state laws and contracts that prohibit disclosure and laments the failure in the recently concluded General Assembly session of a measure that would have increased visibility. There is nothing in O'Malley's BGE deal that prevents the legislature from passing this bill and peeling back other veils.

Missing information is also a watchword for PJM Interconnection, the nonprofit Pennsylvania-based manager of the Mid-Atlantic grid and wholesale megawatt market. PJM is basically chartered by the Federal Energy Regulatory Commission. Numerous market players complain about opacity at PJM, which is where the real money is made. Jurisdiction limits how much state regulators can control PJM, so if the grid is flawed Marylanders pay the price no matter how vigilant Annapolis is.

Flawed it is. Surcharges to prompt construction of new generation plants have mainly enriched Constellation and other incumbents. Millions in hedge-fund defaults got passed on to BGE and other PJM members, thanks to lax collateral rules. PJM and federal regulators exempt several Mid-Atlantic generators from price caps even though there is little competition.

PJM prices have often been suspiciously higher than what underlying changes in fuel costs and other generation expense would require, suggesting tacit or explicit collusion, says McCullough. But without the ability to see exactly how those prices were obtained, there is no way to know.

At the request of regulators in Maryland and New Jersey, PJM's independent market monitor is investigating whether it makes sense for BGE and other utilities to buy juice through auctions. That inquiry, begun last year, survives the BGE settlement.

"We're looking at whether the wholesale market can support a competitive retail auction," Joseph Bowring, the market monitor, said yesterday. Heck of a question to ask now, because BGE has been holding auctions for years. But no scrutiny of Maryland electricity is too much.

Yesterday, the Organization of Petroleum Exporting Countries announced its latest market fix. We've agreed to limit supply, drive up prices and buy another fleet of Rolls-Royces, was the basic message. Give them credit for honesty.

jay.hancock@baltsun.com

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