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News Analysis

Pennsylvania loses faith in FERC, looks for help from the Justice department.
Fortnightly Magazine - August 2002

to finish what it started, and to be prepared to do more to monitor and enforce the markets it creates.

PJM: When a Model Design Is not Enough

On June 13, the Pennsylvania PUC offered evidence that market abuse can occur and can leave electric consumers without remedy, even in a region with a market design in place that largely satisfies the theories of federal regulators.

The case concerned PPL Electric Utilities Corp., and its activities in PJM in the market for installed capacity. With its ICAP obligation, PJM requires utilities and others who serve retail load to purchase forward rights to electric capacity in an auction market or otherwise to pay a deficiency charge at a preset amount. The problem arose when it appeared (at least to the PUC) that ICAP rules allowed PPL to play both ends of the market.

Pennsylvania has now forwarded the matter to the U.S. Department of Justice-and to FERC-and has encouraged those agencies to take further action against the company. The PUC also asks FERC to improve its market monitoring and enforcement. ()

The PPL case began when state regulators asked the PJM's Market Monitoring Unit to conduct a study of the regional power market. That was after daily auction prices for capacity rights, which had been clearing at levels ranging from $0 to $5 between Sept. 15, 2000 and Dec. 31, 2000, rose to $177.30 or above for nearly three months. The PUC believed that PPL had unilaterally raised the price of ICAP credits to unprecedented levels.

According to the PUC, PPL found itself in a unique position on Jan. 1, 2001-as the only entity in the market with uncommitted capacity resources.

The "utility wasted no time in taking advantage of this situation," says the PUC, "and in fact had anticipated it for some time." Meanwhile, the regulators say, PPL had fought proposals at FERC to revise the ICAP rules to make it more difficult for suppliers to demand auction prices equal to the default deficiency penalty.

For its part, PPL blames the price spike on the imprudent decision by most marketers to rely on daily capacity markets instead of buying capacity for the long term. It says it had offered long-term contracts to the marketers at a "very moderate price." But state regulators disagree.

The PUC says PPL had boosted power exports at a time when the total capacity obligation of the system was rising. That, says the commission, had allowed PPL to become the only holder of capacity longer than the total market. As a result, says the PUC, PPL was able to bid any price into the daily auction, knowing that the marketers short of their obligation would either have to pay that price, or pay the full deficiency penalty.

PPL, however, believes that it simply followed the market rules put in place by PJM, and that if any parties suffered injury, the fault lay with market design.

"PPL EnergyPlus acted ethically and legally in this market, as we do wherever we do business," says Paul T. Champagne, president of PPL