Report Finds No Evidence of Power Pricing Scheme against New England Consumers

Report Finds No Evidence of Power Pricing Scheme against New England Consumers

By Peter J. Howe, The Boston Globe -- June 5

The organization that oversees New England's electric grid and wholesale power market said yesterday that a new report has found no clear evidence that power-generating companies have successfully schemed to drive up prices paid by consumers.

The study by David B. Patton of Potomac Economics Ltd., an independent market adviser to grid managers ISO New England, addressed whether occasional spikes in wholesale power prices last year could have been caused by generators withholding supply by shutting down plants or limiting their operation.

Patton said his study "cannot exclude the possibility that discrete instances of physical withholding occurred via specific outages or deratings," meaning companies such as Northeast Utilities, PG&E, Sithe, and Mirant said they could produce only limited amounts of electricity from their plants in hopes of jacking up prices.

But, Patton said, "New England markets have been workably competitive [with] little evidence of persistent economic or physical withholding." He said it will remain crucial for the Holyoke-based independent system operator, or ISO, to monitor the wholesale market and unilaterally cut prices when it appears they have been driven up by manipulation.

Gordon van Welie, president of ISO New England, said the study is proof that New England has achieved "competitive outcomes given the less-than-perfect market rules. To achieve greater efficiency, we must proceed to an improved market design that will result in a better market for all stakeholders. . . . Every day, the ISO must be vigilant in ensuring the rules and practices within the marketplace are unfailingly fair and competitive." In May 1999, New England moved from a system of having regulated monopolies set wholesale market prices to a competitive market that relies on bids from generating companies.

In recent years, the ISO has faced questions from the Union of Concerned Scientists, officials in Maine, Massachusetts Attorney General Thomas F. Reilly, and others about whether big generators were manipulating the market to drive up prices.

Because the market price for power is set by the last, highest bid the ISO taps to produce the amount of electricity needed that hour, keeping plants out of operation or restricting their output can drive up the so-called market clearing price.

Besides yielding short-term windfall profits, generators and energy traders could make millions in profits by driving up long-term contract prices, according to people who have called for probes of generator actions.

Neal B. Costello, general counsel for the competitive power coalition, a Boston-based trade group representing power plant owners, said, "We're pleased but not in any way surprised" by the report, which follows earlier ISO New England consulting studies indicating that there may be flaws in the wholesale market but no rampant or coordinated abuse.

"There was no collusion among generators, no inappropriate behavior, and now we have yet another study that confirms that," Costello said.

In one part of the study, Patton attempted to calculate "output gaps," or an estimate of how much power production plant owners might have actually held back at key times. In every case, Patton said, those gaps appeared to represent less than 1 percent of generators' capacity.

During 15 hours last summer when wholesale power prices soared to their federally set cap of $1,000 per megawatt hour, about 25 times normal levels, Patton said it was emergency imports of power from New York that set the price, not a bid by plants inside New England. It appeared there were "legitimate and efficient" reasons for prices to hit $1,000, the report said.

"No clear evidence of economic or physical withholding" of power "during these high-priced hours emerged from this analysis. However, it is important [for ISO] to continue to monitor for such behavior." Alice Moore, Reilly's public protection bureau chief, said, "We are glad that ISO New England is monitoring the New England wholesale electricity market and encourage them to continue to do so to ensure that the abuses that occurred in California do not happen here."

Costello, however, said the ISO needs to move to "market-based solutions" including approval of more peak-period generation stations to cover periods of high demand when prices soar, improved transmission to bring cheaper power into areas such as Greater Boston, and more market-based incentives for big electric users to curb use when demand hits extreme levels.

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