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Pa. PUC Probes Report Of Electric Mkt Price Manipulation

Updated: Tuesday, December 4, 2001 08:15 AM ET

(This report was first published late Monday

PHILADELPHIA (Dow Jones)--The Pennsylvania Public Utility is investigating a report that an electric company exerted undue influence and manipulated prices in the region's wholesale electricity markets early this year.

The PUC voted unanimously Friday to initiate the probe after receiving a report from the independent operator of the Mid-Atlantic region's power system, PJM Interconnection LLC, that an owner of electric capacity manipulated prices for capacity from January through March.

The report said a company, which PJM didn't identify, single-handedly pushed wholesale daily capacity prices higher than they would have been in a competitive market, enjoying a virtual monopoly in the capacity market during the first quarter.

"The PUC takes our market-monitoring responsibilities very seriously," Chairman Glen R. Thomas said in a release. "It's for that reason we asked PJM to provide this report and why we will conduct this important investigation. All parties must have confidence that electric markets at the wholesale level are working fairly."

The electric company didn't violate PJM rules, but "the behavior constituted the exercise of undue market power and was inconsistent with the intended consequences of the rules," the PJM report said. PJM, with federal approval, later made a change in its rules in response.

"The rules were designed to try to make the market work effectively. If someone exercises market power within the rules, it's still inappropriate," said Joe Bowring, manager of PJM's market-monitoring unit.

PUC spokesman Tom Charles said the commission is investigating whether the company acted improperly. The PUC could forward its findings to the U.S. Department of Justice, the Federal Energy Regulatory Commission, the Securities and Exchange Commission or the Pennsylvania attorney general, or all of those agencies, if appropriate, he said.

The PUC hopes to establish the identity of the company in question. PJM said it operates under a confidentiality agreement with its members.
Prices in the PJM daily capacity markets were about $0 per megawatt day from Oct. 1, 2000, to Dec. 31, 2000, the report said, but were $177 for most of the period from Jan. 1 to late March, when they started to decline.

During the first quarter, the capacity supplier in question offered more available capacity than the daily demand less the capacity offered by all other suppliers, PJM reported. To meet their obligations for installed capacity, retail electricity marketers had to buy capacity from the company.

"In effect, such a seller has an effective monopoly position in that it is the only seller of capacity to the residual market demand," PJM said. Some marketers could have purchased a portion of the required capacity for less than $177 if they had done so at an auction before Jan. 1, PJM said.

If market manipulation did occur, retail electricity marketers, but not the consumers they supply, would have been subject to the higher prices, according to Charles. Interested parties have until Jan. 15 to submit comments to the commission.

Retail electricity marketers in the PJM region must possess enough capacity to supply their customers, as well as a 19% reserve, Pennsylvania Consumer Advocate Irwin "Sonny" Popowsky noted.
"I think consumers were harmed at least indirectly because the problems in the capacity market made it more difficult for competitors to come in and serve retail customers in Pennsylvania," Popowsky said.
Consumers are protected by rate caps put in place as part of Pennsylvania's 1996 electric competition law, but "competitors have to try to come in and beat those prices, and the problems in the capacity market, I think, have made it a stumbling block for some competitors," he said.

The number of marketers in the state has declined, according to Popowsky, who said a difficult capacity market has contributed to that decline. Pennsylvania has been considered a leader in opening its retail electricity market to competition.

PJM said in the report that its rule change corrected a design flaw that stifled robust competition in the installed capacity market by allowing sellers like the one in the report to unilaterally set the price at an uncompetitive level - namely, at an amount equal to the roughly $177 deficiency charge a marketer must pay for failing to meet its capacity requirement.

Previously, revenue from these deficiency charges was allocated to holders of unsold capacity. PJM officials found that this policy encouraged holders of unsold capacity to withhold capacity or sell at the deficiency charge level of $ 177, the report said.

The amendment to the rule for distributing the capacity deficiency charge funds may reduce some revenue distributed to owners of excess capacity, but those owners generally should receive at least the market value for excess capacity needed by the pool, PJM contends.
"We are continuing to watch that market very closely," PJM's Bowring said.

Popowsky, the PUC, New Jersey and Maryland consumer advocates, NewPower Holdings Inc.'s (NPW, news, msgs) New Power Co., and GPU Energy, whose parent recently was acquired by First Energy Corp. (FE, news, msgs), were among the parties supporting PJM's rule change. PPL Corp.'s (PPL, news, msgs) PPL Electric Utilities and PPL EnergyPlus opposed it in proceedings with the FERC, which approved the change effective June 1, 2001, the PJM report said.

In July, retail energy marketer New Power filed a complaint with the FERC over "exorbitant" rates for installed capacity in PJM markets. The company complained that rules for ensuring reliable electric service in PJM's region are "unjust and unreasonable, and unduly discriminatory and preferential" against new competitors.

-Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@

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