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Electricity Prices Rise Amid Flaws in the Utilities Market

By David Cay Johnston

A growing chorus of large industrial power users, municipal utilities and consumer groups say there is a reason the price of electricity has not fallen since the federal government opened the heavily regulated utility industry to competition a decade ago. The new markets, they argue, do not work right.

They point to a variety of reasons.

For one thing, when electricity producers offer to supply power for use the next day, utilities pay everyone the highest price accepted. One study in Texas, where electricity bills have been rising sharply, found that because of this auction system, consumers pay a lot more than they would have under the old system where the state regulated prices.

They also contend that producers can withhold power or limit production, with little risk of penalty, even when demand is at its highest, meaning prices soar.

“Shutting down a power plant in July is like the mall closing on the weekend before Christmas, but in July last year, 20 percent of generating capacity was shut down in California,” said Robert McCullough, an economist whose Oregon consulting business is advising some of those contending in lawsuits that prices are being manipulated.

The government agency that oversees the electricity market — the Federal Energy Regulatory Commission — set the rules before allowing market prices for electricity to replace regulated prices. A coalition of large industrial companies filed a complaint in September, arguing that the energy commission had failed to ensure proper competition and that it had stymied efforts by others to investigate allegations of improper conduct by withholding some of the data it collects.

“The ‘markets’ that are rolling off the commission’s production line are not fit for their public purpose,” wrote Robert A. Weishaar Jr., the lawyer for the industrial companies.

The commission dismisses the critics, saying that where it has determined that a market for electricity exists, the prices in that market are assumed to be “just and reasonable,” the standard set in federal law. The commission’s rules seek to curb monopoly power, but not oligopoly power, in which a few firms control the market. The commission says that anyone manipulating markets will be discovered either by the monitors in each regional market, by competitors or utilities that buy power, by the commission or even by the public.

Allowing producers of electricity to compete for utility customers should assure the lowest possible price, the commission says.

But the opposite has sometimes been true.

For eight hours last May, for example, the price of a megawatt of power in New England leaped from about $50 to almost $1,000. The region’s electricity exchange attributes the spike to congested transmission lines, but has kept the identities of the high bidders secret.

Its own studies say that the exchange’s rules make it possible to inflate prices artificially during periods of high demand and that at least one producer has manipulated prices in the past, though its identity was not disclosed.

Officials of other exchanges all said they had strict rules to ensure that capacity is not withheld from the market to inflate prices artificially.