Plugging into a windfall

Our view : Concerns over wholesale power price-setting are justified

June 08, 2008

Let's say there's a potential shortage of eggs in the future and you are a federal agency in charge of making sure there are enough to go around. You can't order farmers to buy more laying hens, but you can write rules that result in people paying more for eggs so farmers will have money to expand.

But what if you end up with the same number of hens? What if all you accomplish is to pad the wallets of farmers? That's essentially the question raised last week by Maryland's Public Service Commission and a broad coalition of state regulators and consumer advocates with regard to electricity costs.

Their complaint with the Federal Energy Regulatory Commission centers on wholesale auctions involving what is known as the "reliability pricing model" conducted by PJM Interconnection, which operates the 13-state regional power grid that includes Maryland. The groups say about $12 billion in added "capacity" charges for power that will be supplied from now through 2011 are unjust and unreasonable.

It is a chicken-or-the-egg argument. Power producers argue they need higher prices to justify the enormous (and rapidly rising) expense and risks associated with building new generation. But as Maryland PSC Chairman Steven B. Larsen and others point out, they ought to at least have expansion plans (to build a peak generator here or refurbish one there) on the table before their efforts are so richly rewarded.

Make no mistake, new generation has to be financed somehow, but it ought to be done as efficiently as possible. The wholesale market is complex, but it's also fundamentally flawed. The PJM auctions offer this obvious disincentive to new generation - producers who might build a plant would cause wholesale prices to drop for existing production.

It may be too much to expect FERC to order refunds to utility operators that might eventually trickle down to consumers, but it is certainly reasonable for the government to offer incentive pricing for genuinely new generation and not just reward companies for showing up at the auction.

For Baltimore Gas & Electric customers, the stake is more than the estimated $1 billion or more in overcharges (which isn't exactly chicken feed to begin with). At the very least, the complaint provides ammunition for those who believe the energy market needs less deregulation and more re-regulation if ratepayers are to receive value for their money.

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