Big profits threatened, power firms cry to D.C.

February 14, 2011|By Jay Hancock

Economists and big-business types will tell you that government price controls are a loser's game, doomed to harm consumers and producers alike. It's mainly true.

President Richard M. Nixon's 1971 price controls caused shortages and failed to snuff inflation. Botched price administration contributed mightily to the fall of the Soviet Union. Electricity price controls drove California utilities into bankruptcy a decade ago.

So you might wonder why two weeks ago power companies such as BGE parent Constellation Energy frantically urged Washington to slap price controls on electricity.

The answer is obvious only if you've been following the industry. Traditional controls, decreed by governments to try to protect consumers, keep prices low.

Electricity companies want regulators to keep prices high! Genius, from Constellation's point of view.

But these price controls are just as poisonous as the other kind. They'll block construction of badly needed power plants while forcing consumers to continue to pay billions of dollars extra for electricity.

I'm talking, of course, about the wholesale electricity market managed by PJM Interconnection. A nonprofit organization dominated by generation companies, PJM has become increasingly important — and not nearly enough known to the public — with electricity deregulation.

Based outside Philadelphia, PJM sets the rules for how Baltimore Gas and Electric, Potomac Electric Power Co. and other mid-Atlantic utilities buy the megawatts they deliver to customers. Anything PJM does to keep wholesale electricity prices high keeps prices high for you and me.

In recent years, the grid manager has forced utilities to pay a reservation fee for future electricity. I've likened the charge to a personal seat license at M&T Bank Stadium. You pay once for the rights to a Ravens ticket and again for the ticket. (But instead of paying only once, as with a PSL, you pay PJM's charge year after year.)

The idea was that giving power companies a big bonus on top of their normal profits would "incentivize" them to build generation plants. The reality is that the companies pocket huge amounts of money while states such as Maryland wait in vain for the plants.

The reservation fee is called a "capacity" charge, or, at PJM, the "reliability pricing model." I figure it costs each BGE household an extra $175 a year and will cost all Maryland electricity customers an extra $5 billion from 2007 to 2014. While electricity prices have declined in recent years, they would be even lower without inflated capacity charges.

States are taking matters into their own hands. Worried about powering its future economy and mad about high costs, New Jersey is partially seceding from the PJM scheme and essentially building its own plants. Rather than selling their power into the PJM-run wholesale market, the plants would get a guaranteed price from the utilities. Maryland is considering a similar course.

The power companies are apoplectic. Not only would New Jersey and Maryland flout the status quo by charting the energy future without PJM. They would also save customers billions by using the new plants to deflate PJM's high capacity charges.

It's complicated, but basically New Jersey — and Maryland, if it takes the same route — would bid the new plants at a very low price at PJM's annual capacity auction. If the going rate for Johnny Unitas signatures is $100 and I come along and offer them for $2, everybody else's price is going to plummet.

How effective this would be can be gauged by how loudly PJM and the power companies are screaming.

Constellation Energy is "deeply concerned" about what Maryland and New Jersey are up to, Constellation boss Mayo Shattuck warned a couple weeks ago.

"New Jersey has now enacted a law that interferes with and undermines the PJM wholesale capacity market," says a federal lawsuit filed by Constellation and a bunch of other power companies.

New Jersey's law would "artificially depress" the capacity auction and lower revenue collected by power companies by $2 billion a year, said PJM's market monitor.

Oh, the injustice. Power companies are outraged that states are using PJM's own rules to fight back.

So of course they want the rules changed. In a 227-page plea they've asked federal regulators to thwart New Jersey and Maryland by raising the minimum bid for capacity in the wholesale auction.

In other words, price controls. These captains of commerce, these brave defenders of free markets, are fiercely against government meddling like this — unless it guarantees their profits and bonuses.

But the larger truth is that wholesale electricity under PJM has never been a free market. It's administered by hundreds of bureaucrats applying hundreds of arbitrary rules.

Would New Jersey's ploy "artificially depress" prices? Well, for years the present rules have artificially inflated prices. The whole PJM system is artificial, a mutant cross between the New York Mercantile Exchange and the Soviet Electric Power Ministry.

The industry's attempt to change the rules in the middle of the game is a tacit but damning acknowledgment of that.

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