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Feature

Gridopoly

Your electric bill never went down the way deregulators promised it would—and never will. It might get much, much worse.

Photo: Illustrations by Tom Chalkley, License: N/A

Illustrations by Tom Chalkley


On Jan. 31 Clean Currents, a well-regarded supplier of “green” electric power to residents of Maryland, Washington, D.C., and Pennsylvania, suddenly ceased operations, saying a spike in wholesale power prices had forced it out of business. On Feb. 4 a minor snow and ice storm knocked out power to some 182,000 of Baltimore Gas and Electric’s 1.2 million customers. It took the company until Feb. 9 to restore power to all of them. A much larger storm last Thursday knocked out 17,000 more, a lucky break for the region after the same storm knocked out a half a million to the south.

While these events were unrelated, they remind Baltimoreans how far we have come since electric power deregulation began more than a decade ago. Economists and people associated with Enron Corp. projected a 40 percent price break for every customer of electric power. Utility companies fought the proposal as though those price breaks might really happen.

Maryland deregulated its system in 1999, joining the wholesale “free market” administered by the PJM Interconnection, a non-profit corporation that monitors and administers this region’s electric grid. Here in Baltimore, rates for Baltimore Gas and Electric’s residential customers were capped until 2006 at about 5 cents per kilowatt-hour.

Since then, BGE’s “Standard Offer Service” has approximately doubled, to 9.6 cents per kilowatt-hour. But your bill has increased by more than just the electricity price. A 72 percent power price increase locked in 2007 was deferred and tacked on to another part of your bill, costing you about $3 per month until 2017. BGE’s “delivery charge” has also increased—that went up $3 a month just last year. There is even something called the “EmPOWER incentives.” BGE’s residential customers see a surcharge of about $2.42 a month on average for those. Summed together, the electric bill for a typical customer has increased by about 61 percent in the past decade. Even adjusted for inflation (27 percent from 2002-2012), the average bill has increased by 29 percent.

In the summertime you can save a little money by allowing BGE to turn your air conditioner down just about the time things are hottest. That program, called “Peak Rewards,” is meant to prevent power blackouts during heat waves, when power demands surge. BGE and other companies pay you, and they are paid in-turn for those megawatts you don’t use. PJM calls that Demand Response, and it accounts for seven percent of the “power” traded in the area at peak times.

That the new and better “free market” system requires you to swelter or otherwise do without the power you used to get as a matter of routine under the old, regulated system is telling. Deregulation theorists always envisioned consumers giving up some of the electricity they always got before, in the interest of “efficiency.” And it does work, sort of.

But it’s not enough—or it won’t be for much longer.

Three times in January—on the 6th and again on the 23rd and 27th—PJM Interconnection urged consumers in its 13-state region to conserve electricity because of strained capacity, an unprecedented event that received virtually no public notice. PJM’s first request concerned every one of the 61 million residents under PJM’s umbrella. The call on Jan. 23 was to BGE and Pepco customers around central Maryland only, and on the 27th the call went out once again to everyone in PJM’s 13-state territory from Kentucky to New York.

The strain on the largest electric power system in the world was never supposed to happen, according to deregulation theory. It was also entirely predicted by deregulation critics, a tiny minority of industry players who pointed out that reliability and price stability are worth a lot more than the initial deregulation model supposed.

That initial model assumed that power companies would sell their watts at “just above marginal cost.” It was incredibly naive.

What happened instead was that the players—starting with the system’s biggest proponent, Enron Corp.—gamed the system to make billions. The result was huge (albeit temporary) profits for the trading companies—and insane bills and blackouts for customers.

Since PJM—thought by many to be the best of the regional Interconnection System Operators (ISOs)—opened the world’s first wholesale electricity market in 1997, the organization has changed its rules countless times trying to keep the bidding fair and the flow reliable. The result is that the locally governed, regulated and mainly reliable electric power monopolies Baltimoreans (and most American consumers) had in the 1990s have been transformed into semi-unregulated monopolies whose profits are all but guaranteed. Reliability has eroded while prices and volatility increased.

And the big power players like it that way. They sued to stop governors in New Jersey and Maryland from trying to improve the situation.

And you—now offered a choice of more than 30 “electric suppliers” alongside Baltimore Gas and Electric (whose ballooning fees you must pay regardless)—are not supposed to notice any of it as you shop for a better deal that isn’t better, and can never be.

Here is how we got here, and how we might get to somewhere better.

THE CHOICE IS YOURS

 

 

Number of retail electric power providers available to Baltimore customers in 2006..........

5

YOU HAVE HAD “CHOICE” in your electric service provider since 2006. You can choose environmentally friendly suppliers (wind power costs about 30 percent more than Standard Offer), price-cutters, long- or short-term contracts. You now have the pleasure of answering telemarketers’ calls at dinner, and conversing with friendly door-to-door salesmen offering to help you get a better deal on your amps.

But all of those salesman work for companies that must deliver those electrons through wires owned and operated by BGE. And they have to buy the power they sell to you from the grid managed by PJM. Things on that grid have been getting hairy.

Number available today..........

31

Number not publicizing their rates..........

9

Percentage difference between lowest price offer and BGE’s Standard Offer (one year or more contract)..........

13

Number of companies sanctioned by Maryland PSC since 2009 for fraud or other problems.........

2

FIG. 1 Day-Ahead Daily Average On-Peak Power Prices
The U.S. Energy Information Administration released this chart on Jan. 14, observing that cold weather was creating high “spot” prices for electricity in the Northeast.

In this region, electric power prices follow natural gas prices, and those spiked past $20 per million British Thermal Units (BTU) after a key pump that supplies the region failed on Jan. 6—gas from that pump usually runs at about $4-$5. The U.S. Energy Information Administration, a federal agency, said, “According to PJM’s preliminary report, there were nearly 40,000 MW of forced outages on the evening of January 7 and morning of January 8, far more than encountered during the top six winter peak demand days of the past five years, which saw, at most, about 16,000 MW of forced outages. PJM estimates around 6,000 to 9,000 MW of the January 7-8 outages were due to natural gas curtailments.”

The loss of a single compressor pump might cause catastrophic power outages in a fully regulated system. Then again it might not—particularly if that regulated system had not predicated its peak load needs on the voluntary curtailment of end users. On Jan. 6 PJM called for such voluntary shut-offs. It did so again on Jan. 23 and on the 27th, after an unplanned outage at both Calvert Cliffs nuclear plants left the region in the power lurch as temperatures plunged into the single digits.

“It’s not something that happens very often,” says Ray Dotter, a PJM spokesman.

The demand response program has been in place for several years, he says, requiring big users (including, for example, BGE) to cut back if PJM asks them to. “Right now that obligation only extends to June through September,” he says. “We’re working to change those rules.”

Though he says PJM won’t be sure for several weeks how much power was saved by their call for volunteers, he thinks it was about 2,000 megawatts—a bit more than 1 percent of the system’s capacity. Such small changes can have big effects—as when they prevent a system-wide blackout, or when they keep the price low enough that customers don’t revolt—or go out of business.

But the system of paying people to turn off their stuff also has a downside: the more you do it, the more you need to do it. “The more demand response you have as resources, the more you need it throughout the year,” Dotter says.

FIG. 2 Zone 5 Gas Spike
This is a graph of natural gas prices at Transco Zone 5, which serves customers within PJM.

Gas that usually costs $5 suddenly cost $135. PJM swung into action, on Jan. 23 making two requests to the Federal Energy Regulatory Commission (FERC) to lift a long-standing price cap on electric power in the market. The cap was $1,000 per megawatt—four times the price seen just a couple weeks before during the first cold snap.

Gas over $120 meant power generators would spend $1,200 to produce a megawatt they were compelled to sell for only $1,000, PJM fretted.

FERC immediately approved one request, to allow companies that sell into the market during the gas spike at under their cost to produce to be given “make whole” payments later. Last Week, FERC approved PJM’s request to allow those over-$1,000 prices to set the market through the end of march.. “That’s not a make-whole,” says Dotter. “That’s the price.”

In the market structure that has been in place since deregulation, the highest price for needed power at a given time sets the price that all producers operating at that time are paid. This auction system is what has made power plants so much more profitable than they used to be when state regulators allowed them only their cost to produce plus a nice profit.

Stock analysts say Exelon—BGE’s parent company and the generation company that feeds most of Maryland—tracks natural gas prices. When gas goes up, so does Exelon’s stock. But PJM’s market construct may help buoy the company when gas prices don’t.

FIG. 3 Net Income Before Non-Recurring and Extraordinary Items 2003-2012
This graph from the Edison Electric Institute’s 2012 Annual Report shows the steadily improving fortunes of shareholder-owned electric utilities under the restructured market system. The smooth upward march could have come from the “bad old days” of locally regulated monopolies, except the increasing numbers in recent years have come during the worst recession in 70 years, and at a time when demand for electric power is actually falling. How can they make more money selling fewer megawatts? For the answer, see Fig. 4.

FIG. 4 Revenue Per Kilowatt-Hour Sold
The secret is to charge more. Utilities are filing more rate cases nation-wide—53 in 2012, up from 50 in 2011. The 66 filed in 2009 exceeded the highest of many decades. Many of these cases involve building new power plants, EEI says, but many of them are just to raise funds: “Utilities’ desires to implement surcharges, trackers, riders, etc. was also a notable cause for filings, as was recovery of rising operations and maintenance expenses.”

 

Another way to charge more is with Congestion Pricing. In its last auction, PJM received a clearing price for power in the 2016-17 season of $59.37 per megawatt:

FIG. 5 Base Residual Auction Results

But Maryland does not pay that price. We’re in something PJM calls the MAAC LDA, a “locationally constrained” area. PJM’s market rules mean people in Baltimore pay approximately double the basic price—$119.13 per megawatt.

But now look at that base price. Our new price of $119.13 was down from the previous auction rate of $167.46—the amount we’ll be paying in the winter of 2015-16. This year the PJM base load price was only $27.73.

In other words, if your electric bill floated with the overall PJM wholesale price it would have nearly doubled from last year’s price, which was a record low of $16.46. But the price two years before that—2010-11, was $174.29. How system-wide clearing prices can be so volatile in a three-year-ahead market is something of a mystery. What is not a mystery is the effect such volatility has on the provision of new power plants: it keeps them from being built, because investors don’t know if they will be able to sell the power for a bonanza—as in $174 per megawatt—or for one-tenth that.

As PJM reported after its last three-year auction, the ISO “as a whole failed the Market Structure Test, resulting in mitigation of any existing generation resources. Mitigation was applied to a supplier’s existing generation resources resulting in utilizing the lesser of the supplier’s approved offer cap for such resource or the supplier’s submitted offer price for such resource in the RPM Auction clearing.”

In other words, the free market is no such thing. PJM officials spend much of their time attempting to calculate what prices might be if there were a free market, and then devising rules that will, if everyone follows them in letter and spirit, result in such prices. One problem there is that the players in the market are constantly scheming to game the rules. One other problem is that the rules themselves seem to prevent more competition from developing.

“You have to have the mitigation to control, because it’s not a perfect supply-and-demand situation,” says Dotter. “The market monitor can limit the price you can offer—it still covers the price to produce and it always will.”

Translation: In this “free market,” big power companies are free to do anything but fail.

Mayo Shattuck III was Exelon’s CEO until his retirement last year, and he’s still chairman of the board. Shattuck’s pay more than tripled during the past 10 years, from about $2.8 million in 2002 to $8 million in 2012 (he reportedly cleared more than $15 million in 2008.)

Having had enough of the congestion pricing and sick of waiting for new transmission lines to magically appear, the state of Maryland in 2012 ordered BGE and two other state power companies to put out a request for proposals to build a new gas-fired power plant in Waldorf, Md. The Public Service Commission (PSC) further instructed the companies to execute a contract to pay a more or less fixed price for the power from that plant, so that the plant operators could expect to be paid back for building it.

BGE did not like that one bit. “BGE opposed the effort to force new subsidized generation in to the market on the basis that the capacity is unneeded and would raise costs to our customers for the next 20 years,” says Rachael Lighty, a BGE spokeswoman.

PJM opposed the move as well—and a similar deal approved by New Jersey Gov. Chris Christie.

PJM has pricing rules to avoid the possibility that the new plant will depress the so-called market price too much.

All of this complicates the free market, as, of course, does the new layer of regulation at the PJM (and its “Independent Market Monitor.”) That these new layers of regulation and rule making might introduce yet more inefficiency into the market for electric power than existed in the “bad old days” of integrated utility companies seems not to have occurred to the regulators or the federal judges who sometimes get a peek inside this world.

Here is what that complexity looks like (from the PJM Market Monitor’s 360-page 2013 Annual report—the section on proposed rule changes):

“From Section 13, “FTRs and ARRs”:

• The MMU recommends that the FTR forfeiture rule be applied to UTCs in the same way it is applied to INCs and DECs. Currently there is no FTR forfeiture rule implemented for Up-to-Congestion Transactions (UTCs). A proposed tariff change that would apply the FTR forfeiture rule to UTCs is pending at FERC. The FTR forfeiture rule should be applied to UTCs in the same way it is applied to INCs and DECs.

That was one of a dozen rule changes that the market monitor suggested. There have been many such rule changes since PJM opened the market in the mid- 1990s—so many that Dotter says no one has kept count. “You start in any system with a high-level concept and how do you get down into the details that make that work,” he says.

The details span thousands of pages. City Paper read a goodly portion of them to prepare this story. We can’t begin to say we understand the whole thing, but the 29 percent more we pay than we used to—which is down slightly from the 2009 peak—tells us all we need to know about the promises made by deregulators a decade ago.

We pay more and we get less—less reliability, and less actual power—while people states away tweak rules and regulations that nobody outside their industry—and few inside it—can hope to understand.

The most remarkable thing is that some people still believe the promise.

Power has always been complicated, says Dotter, but the present restructured regional market, with its multiple layers of regulators, its dizzying array of payment exceptions, its burgeoning payments to anyone willing to not use electricity when they need it, and its court fights about who has which jurisdiction, is still a vast improvement over what we had before.

“Now you do have competition,” Dotter says. “You have new entrants. We talked about demand response—that’s a low-cost alternative to new generation . . . in the old world you only had to be efficient enough to satisfy the regulators.

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