Some see utilities fixing prices under competition. Really? I'm shocked.
Did you hear the one about the 10,000 percent rate increase? Ask FERC chairman James Hoecker or his colleague, Curt Hébert. They'd be happy to tell you. They don't even need their own joke writers. This story, you see, is absolutely true.
It seems that Virginia Electric & Power Co. wanted to squeeze just a little more profit from its Kerr-Henderson transmission line. VEPCO uses that line to wheel power for the Southeastern Power Administration, one of those federal power marketing administrations that the conservative think tanks are always saying should be sold off as private businesses. SEPA generates electricity at its John H. Kerr Dam, in south central Virginia, a few miles from the Carolina border. It relies on VEPCO transmission to carry the Kerr capacity and energy to its hydro preference customers in North Carolina.
But what do you know? Last fall VEPCO informed SEPA of a slight adjustment in transmission rates: up from $13 per megawatt per month to $1,310 per MW/month. SEPA's typical yearly bill for this particular transmission service would rise 100 times over - from $14,400 to about $1.4 million.
So it came as no surprise that when the Federal Energy Regulatory Commission took up the case on Dec. 29, it suspended the proposed rate increase and begged the parties to try to settle. The FERC appeared sympathetic to SEPA's plight. It showed its colors by quoting a supporting protest filed by the North Carolina Eastern Municipal Power Agency, one of SEPA's preference customers: "[It's] difficult to imagine how a rate increase of this magnitude could be justified under any meaningful definition of 'just and reasonable.'" Docket No. ER99-417-000, 85 FERC ¶61,448.
Enter Hoecker and Hébert. "Get over it," was the unspoken message in their joint dissenting opinion filed Jan. 11. "Genuine issues of material fact are not in dispute."
According to H&H, neither SEPA nor any other intervenor had even suggested that VEPCO's proposed rate exceeded costs. VEPCO, you see, had determined that about 70 percent of SEPA's wheeled power ended up going elsewhere over the company's transmission system. Thank heaven for loop flows. So VEPCO rolled in the embedded costs of its entire grid into SEPA's little short-haul wheel. It was all perfectly kosher, wrote Hoecker and Hébert: "SEPA and the other intervenors do not even argue that VEPCO's proposed rate is not cost-justified." The dissenters felt that if a hearing were justified, it would serve only to settle the one single issue in the case: "Whether the Kerr-Henderson line is or is not integrated with the entire VEPCO transmission system.
"If one concludes, as we have, that VEPCO is entitled to recover its costs ¼ then any recovery below that level ¼ would come out of someone else's pocket."
LAST MONTH I SPENT TIME ON THE PHONE WITH WILLIAM HOGAN, the well-known economics professor from Harvard University, famous for his work with the Harvard Electricity Policy Group and the consulting firm Putnam, Hayes & Bartlett, and tried to get him to admit - if not completely, then just a little bit - that the FERC itself might be the ultimate culprit responsible for the higher-than-expected market prices for energy seen last summer in the PJM Interconnection, and cited in the recent complaint filed by Old Dominion Electric Cooperative. ODEC's complaint is explained further in the article on regional power pools that appears on page 24 of this issue.
Back in November, ODEC had charged that electric restructuring, with the formation of an ISO, spot market and locational marginal pricing, had led to sudden, unexplained increases in energy prices with PJM, sometimes running as high as $999 per MWh, that being the maximum limit on spot market energy prices set by PJM.
ODEC suggested that the blame lay with a so-called "price cap" ($165/MWh) on generation internal to PJM, imposed temporarily by the FERC and still in force today. According to ODEC, investor-owned utilities and other generation owners within PJM were distorting the market, exporting their power to areas outside the pool, such as to Ohio, Indiana and other states within ECAR, the East Central Area Reliability Coordination Agreement, where those severe price spikes were seen in June. That way, said ODEC, the producers could get around the cap through a "loophole" by re-importing the power back into PJM, where the importers could bid the supply at market prices. ODEC asked PJM to add a rule allowing it to recall such power exports for sale inside PJM at cost-based rates, to keep the PJM price down. It also asked the FERC to investigate the run up. See generally, FERC Docket EL99-9-000, complaint filed Nov. 4, 1998.
Into the fray steps Hogan, the principal guru behind the theory of the computer algorithms used by PJM to manage transmission congestion (locational marginal pricing) and set up a spot energy market, with both managed by the independent system operator. Like any proud father, Hogan ran quickly to PJM's defense. In an affidavit he filed with Dr. Scott M. Harvey, a director with the consulting firm of Putnam, Hayes & Bartlett, Hogan explained how the FERC had not imposed a cap on energy prices, but only a cap on supply bids, which could not be responsible for the price run up.
But in his affidavit, Hogan could not help himself. He suggested that ODEC was the real guilty party.
"[I]t is not 'gaming' by sellers that would raise prices," wrote Hogan. "Rather, ODEC's concern is with the behavior of [PJM] market participants that would undo the 'gaming' that ODEC would rely on to suppress prices in PJM."
BUT THE FERC'S BID CAP, I ASKED. "Doesn't that distort markets?"
"No," replied Hogan, when I put the question to him. "That's not the problem. The FERC's bid cap is a market power mitigation strategy. If PJM plant owners bid in their generation too high to discourage any takers, that would produce the same effect as withholding generation from the market. That's why the FERC capped supply bids for PJM internal capacity at cost. The FERC's bid cap just replicates what would happen in a competitive market. It's much better than what they do in California, with the must-run plants."
So what's behind the high prices in PJM?
"I wasn't surprised by last summer's prices in PJM," Hogan explained. "I was surprised by the price spikes in ECAR and, given that, it was surprising that prices didn't go even higher in PJM. ¼ It was the prices bid in from outside the pool that caused the run up within PJM.
"When prices are high in ECAR, they [ODEC] want to build a wall. Then, when prices are low in ECAR, they want to take the wall down."
So I kept pushing. "Why isn't the FERC's bid cap seen to distort markets, just like any other artificial limit on markets is seen as distorting?" But Hogan wouldn't budge.
"No, the FERC's bid cap isn't a problem," Hogan insisted. "But if your objective is to keep prices artificially low, even when they're high somewhere else, then yes, you've got a problem, and you need something more radical - like what ODEC wants."
But then he gave in just a little:
"Perhaps the $999 cap is the market distortion."
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