The latest dispute over PJM’s bidding rules has raised the level of uncertainty in organized electricity markets. Efforts at reform have created a market structure so jumbled that it can’t produce...
Pulling An Inside Job
PJM loses luster in a squabble over market monitoring.
at Illinois nuclear plants operated by Exelon Generation Co. (ExGen) totaled only about $17.80/MWh in 2004. Madigan adds that a recent study by Argonne National Laboratory and the University of Illinois found that marginal-power generation prices in the region fell between $20 and $28 over 90 percent of the time. The Argonne study suggests that marginal production costs remain under $36/MWh for 95 percent of hours.
Add in the fact that one bidder — ExGen — won 97% of the single-tranche contracts to provide standard-offer power supply to ComEd via the most valuable contracts (the 41-month auction term), and Madigan begins to see evidence of some sort of manipulation or collusion. In a supporting affadavit, industry consultant and occasional Fortnightly author Robert McCullough had suggested that a dominant bidder like ExGen “could control the level of competition it might face by choosing which products to make available to other bidders through bilateral contracts prior to the auction.” That is, that a dominant supplier could corner the winning bids by selling power to competitors beforehand at the bilateral market price, thus encouraging them to skip the auction, or to submit only uncompetitive bids in the auction.
So why the high auction prices?
According to the analysis of the Illinois commission staff, the auction prices included risk premiums. These premiums stemmed largely from the fact that the auction required suppliers to bid not on a fixed quantity of megawatts or demand, but in tranches that each reflected a fixed percentage of load ultimately to be served, whatever that load might turn out to be. Thus, the risk relates to possible future changes in population or economic growth rates, and the propensity of customers (especially the C&I class) to switch to alternate suppliers. The staff pegged the implied risk premiums at 7%, 11% and 12% for the three ComEd contract terms, and 18,% 21%, and 25% for Ameren. The risk of switching explains why the C&I premium ran higher — at 53% and 68%, respectively. ( See, Post-Auction Public Report of the Staff, Illinois Commerce Commission, Dec. 6, 2006, at www.icc.illinois.gov/docs/en/ Post_Auction_Public_Report_Staff.pdf .)
In fact, the commission staff suggests that the state’s retail choice plan has fared well, in terms of price comparisons.
After accounting for the initial rate discounts and freezes imposed after 1997 when Illinois took up retail choice, and after also considering general price inflation (23% from 1997 to 2006; 67.5% for energy costs over the same period), the staff reports a real rate decrease of 22% in real terms for ComEd’s retail residential nonheating customers, in comparing pre-1997 rates with post-auction bills. On the same basis, Illinois Power would show an 11% rate cut. Rates rise 5% for CIPS and 18% for CILCO.
Comments and answers to the Illinois AG’s complaint won’t be due until at least the first of June.
Maine: Gone Missing?
Much has been written already in other media — including this magazine’s electronic sister newsletter, Fortnightly’s SPARK — about the studies underway at the Maine Public Utilities Commission to consider whether Central Maine Power and Bangor-Hydro should