Pennsylvania Officials Say Evidence Points to Utility's Manipulation of Market

Pennsylvania Officials Say Evidence Points to Utility's Manipulation of Market

By Benjamin Y. Lowe, The Philadelphia Inquirer -- June 14

Pennsylvania regulators yesterday said evidence suggests that PPL Corp. last year manipulated the region's electricity market, causing deregulation programs in Pennsylvania and New Jersey to falter.

The Allentown utility during the first quarter of 2001 profited at the expense of rival utilities and used its position as an electricity generator to force some of those competitors out of the market, the Public Utility Commission said in a 64-page decision.

"It appears evident that PPL aggressively sought to exploit market rules by obtaining a corner on [the market] and ... utilized it to maximize profits and ... undermine its wholesale market competitors," the commission said.

The PUC voted 5-0 to refer the case to the Pennsylvania Attorney General, the Federal Energy Regulatory Commission and the U.S. Justice Department. The PUC started its investigation in November, and yesterday's decision was based on a report from the region's electricity market operator, consumer advocates, electricity companies and commercial users.

PPL, responding to the decision, said its behavior was appropriate.

"We are convinced that all transactions ... by PPL companies were legal and ethical, and in compliance with applicable laws and regulations," Paul T. Champagne, president of PPL EnergyPlus, PPL's marketing company, said in a written statement. "We are confident that any fair investigation of our actions will confirm this fact."

The company also said its actions were not anti-competitive.

The Pennsylvania Attorney General's Office said it would investigate the matter and "determine what action is appropriate," according to spokeswoman Barbara Petito.

The Justice Department, which is involved in its own anti-trust investigation of region's electricity market, did not return phone calls seeking comment.

A FERC spokesman said the commission is studying electricity markets nationwide and could make recommendations for reform this summer.

The PUC's evidence against PPL stems from a sudden, sharp rise in certain wholesale electricity rates in January 2001.

Under deregulation laws in Pennsylvania and New Jersey, startup electricity companies were encouraged to enter the market as alternatives to the region's six large, established utilities, such as PPL. The goal was for them to offer low rates to consumers.

But the startup companies did not have their own generation plants and had to buy their power in the wholesale market from PPL and the other big utilities.

In January 2001, PPL was the only generator with excess power available to sell to the new companies, and it raised rates in one segment of the wholesale market, the reserve, to six times their normal levels.

Market rules gave buyers no choice but to purchase the reserve at the higher prices.

So the alternative electricity companies raised rates to their consumers above those charged by traditional utilities or left the market, operated by PJM Interconnection, of Valley Forge.

The PUC in its decision also said there are fundamental problems with the design of the region's wholesale electricity market, which allowed PPL's actions to occur. The PJM market runs roughly from New Jersey south to West Virginia and west to Ohio.

The PUC -- along with consumer advocates, alternative electricity companies, and analysts -- said PPL's actions dealt a near death-blow to retail electric competition in Pennsylvania and New Jersey.

The actions caused many alternative electric companies serving customers in the two states to raise their rates or stop serving customers since January 2001.

Since then, 38 percent of 96 alternative electricity companies have left and 252,235 customers, or 44 percent of those using alternative suppliers, are back with the big utilities.

The shakeout in New Jersey was worse: 93 percent, or 94,167, of the customers there using alternative electric suppliers have returned to their traditional utility since January 2001. Moreover, 12 of the 26 start-up companies are not serving customers there -- although some of them are in other markets.

The PUC and other state officials said the market could be manipulated again. That is why alternative electricity suppliers have not returned to the market.

"[The reserve] is one of the factors that has made it more difficult for competitors to compete," Pennsylvania Consumer Advocate Irwin "Sonny" Popowsky said yesterday. "If wholesale prices are subject to manipulation and are excessive, you can't expect the retail market to be working."

PJM and utilities that sell the reserve have said that the reserve requirement is the best way to make sure electricity service is uninterrupted.

But regulators said the requirement -- as demonstrated by PPL -- gets in the way of competition.

"[The reserve market] is having a chilling effect on competition," Glen R. Thomas, the PUC chairman, said yesterday. "We need to be constantly watching this [reserve] market to make sure it's maturing in a competitive way."

The type of electricity trading in the PPL case is different from the trading in California last year that is under federal investigation.

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