Shocking electricity prices follow deregulation

A Maryland Public Service Commission (PSC) report says BG&E conceded in hearings it "has no direct financial incentive to keep generation rates low for its customers." Constellation profit rose 50% last year to a record $936 million.

"There appears to be a conflict between Constellation's objective in selling electricity at the highest price and BG&E's obligation to get the lowest price," says PSC Chairman Steven Larsen.

Paul Allen, Constellation's vice president of corporate affairs, says Constellation is supplying much of BG&E's power because it's "the low-cost provider." Allen blames the rate increases on natural gas price increases after Hurricanes Katrina and Rita in 2005.

Natural gas represents a small portion of electricity generation but has a disproportionate effect on wholesale prices. That's because idle natural gas plants that rev up to meet excess demand on hot days charge high prices that all generators, even low-cost coal plants, receive. Such "spot market" prices also affect rates for long-term contracts. By contrast, regulated utilities must charge customers the average cost of all their generation.

Illinois officials cite a more sinister explanation for rate increases triggered by last year's wholesale auction. In a complaint to the Federal Energy Regulatory Commission, state Attorney General Lisa Madigan accused 15 wholesale suppliers of manipulating prices. One way that could have happened, the complaint says, is by prospective bidders withdrawing from the auction to drive up prices in exchange for winning bidders agreeing to buy their power in separate contracts.

"The short answer is, 'Bunk,' " says John Rowe, CEO of Exelonexc, one of the bidders named in the complaint and parent company of Commonwealth Edison.

The attorney general has agreed to drop the complaint if the rate-cut package is signed by the governor.

In Texas, state regulators have proposed a $210 million fine against TXU after a consultant's report found the company withheld power from the spot market in 2005 to push up wholesale prices.

Questions also have been raised about the regional power grid operators that manage the flow of electricity between states and oversee auctions, and whose members include utilities and suppliers. Joseph Bowring, who monitors power purchases for Mid-Atlantic grid operator PJM Interconnection, told FERC in May that PJM kept him from reporting that utilities paid $20 million more than necessary for power because of one generator's market dominance, among other problems.

To discourage manipulation of wholesale purchases, FERC has proposed new rules, including making suppliers disclose their bids to other bidders after a brief lag. Bids are now kept secret for six months. "We're trying to increase the transparency," says FERC Chairman Joseph Kelliher. He says FERC is closely monitoring power markets and, with a 2005 law, can now impose hefty fines for manipulation.

Meanwhile, states worried about rate increases have scaled back deregulation. A new Virginia law gives utilities fresh incentives to build power plants and ends retail choice for most customers to ensure a sufficient customer base to finance the generators.

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