Connecticut's legislators are again facing a decision on whether to scrap its decade-long experiment with a managed electricity market and create a public power authority that could purchase electricity directly for the state's consumers.
The issue appears to be a continuation of the long argument over electricity "deregulation" that has dominated the electricity industry since the early 1990s. The issue led to Illinois' decision to create a state power authority last year.
But it has new implications and some new political propulsion as the national debate revs up over curbing power-plant carbon emissions and how to modernize the electricity grid, some industry leaders say.
Connecticut's electricity market has produced the highest retail electricity prices in the continental United States, protests State Attorney General Richard Blumenthal. To him, this is evidence of generators' excessive prices, speculative windfalls by power traders and other market abuses. "We now have a system that is dysfunctional, destructive, disgraceful," Blumenthal told reporters when introducing the legislation.
"The market is fair and competitive," countered Dan Dolan, vice president of the Electric Power Supply Association in Washington, which represents unregulated power plant operators that sell electricity to distribution utilities. "The state regulators, the federal regulators and the independent system operator for [each] region have all found them so. They look at the data every day." Connecticut's prices are the result of its heavy dependence on high-priced natural gas to fuel generators and inability to import more power from outside the state, he said.
'Incredibly complicated markets' foster debate
Both sides might agree that the managed electricity markets operating in more than half of the country are complex almost beyond comprehension for non-economists. "These are incredibility complicated markets," Dolan said. "That's [their] unique nature."
But complexity means that when electricity prices rise, consumers are left with "trust me" assurances from regulators and monitors, market critics say. And when prices go really high, a backlash has followed against the system itself, as in Connecticut's case.
Consumers will face dramatic electricity price increases again if plans proceed for a huge buildup in renewable energy, expansion of the transmission grid, and a cap-and-trade regime to control greenhouse gas emissions, industry leaders warn. The market for a cap-and-trade system has the potential to add another byzantine layer of rules on top of already complex wholesale electricity markets today. That could accelerate public bafflement and outrage as prices rise.
"Sometime during the decade ... there will be sharp increases in electricity, and the public isn't prepared," said Glenn English, CEO of the National Rural Electric Cooperative Association, speaking at the EnergyBiz Leadership Forum in Washington this week.
Ray Beavers, CEO of United Cooperative Services in Cleburne, Texas, added, "We are dealing with tremendous complexity. Consumers have no idea."
Tom Kuhn, president of the Edison Electric Institute, warned that a sharp run-up in electricity prices could trigger customer protests and demands to roll back climate legislation.
The consumer backlash forming in Connecticut arises not only from high power prices, but from the confidentiality imbedded in New England's power trading system and similarly convoluted power markets, said Robert McCullough, an Oregon consultant who is supporting the push for a Connecticut state power authority. Details about generators' identities and bids are kept secret, he said. Supporters of the system say this promotes competition and prevents collusion. McCullough said secrecy blocks independent assessment of the system's fairness.
Secrecy in electricity trading raises suspicions
"It's very similar to what's happening in financial markets. We have complex products, structures that are not transparent. You cannot see those trades," said state Rep. Vickie Nardello, a Democrat who co-chairs the Connecticut legislative committee considering the energy agency. "We want to put a player into the system that will force the others in the state -- the independent power producers -- to actually compete" in their bids to supply power.
"Right now, the energy auctions are very secretive. There's no way to find out who's bidding and what the bids are. It opens the window to manipulation," said Jennifer Millea of AARP, which has been lobbying its 630,000 Connecticut members in support of Blumenthal's plan.
For more than a century, electricity prices were regulated to cover utilities' costs and yield a reasonable profit. In New England, as in other managed energy markets, short-term wholesale electricity prices are determined in a competitive bidding process, with generators offering various amounts of power at prices they choose. Prices also rise when congestion on power lines prevents cheaper power from reaching New England. That congestion factor is added to the bidding through a "locational marginal pricing" formula.
Put simply, ISO New England -- the region's grid manager -- chooses the lowest bid first, then the next lowest, and so on up the "stack" of bids, until there are enough bids to supply the power needed for each hour of the day. Generators are expected to bid the immediate "marginal cost" of producing one more unit of power based roughly on their operating costs, says McCullough. The highest bid selected "clears the market," and all generators selected receive this price regardless of what price they bid.
The established economic principle of marginal cost pricing is designed to ensure that the most efficient choices of generation are used first. And when supplies are tight and prices rise, that signals customers to cut back on energy use and provides power companies with an incentive to add more generators or transmission lines, Dolan said. It is working in Connecticut, he added, where new transmission lines and generators are on the way.
Are the most efficient generators chosen?
In a report commissioned by AARP, McCullough argued that New England generators are offering bids significantly above their marginal costs and that the system generates windfall profits for the generators making lower bids. In many managed markets, very high bids are regularly offered, he said. In New England, bids of $999.99 for 1 megawatt of power an hour occur every day, he added. "[This] is a symptom of market manipulation."
Dolan responded that such bids come from generators whose plants run rarely during the year, when demand is highest. Such bids enable generators to keep the plants in operation for when they are needed. Daniel Jones, vice president of Potomac Economics and the independent monitor of Texas' power market, said extraordinarily high bids, such as those McCullough cited, rarely succeed in his state's auctions. And when they do, they serve a purpose. "We have to use prices to ration demand when supply is scarce. Electricity isn't like other markets," he said. The lights have to stay on.
McCullough said if the market is fair, identify the bidders and give consumers some confidence in the process -- or create a public power agency and let it into the competition.
"No power agency can ever guarantee lower anything," said Mark Pruitt, head of the Illinois Power Agency -- the model for the Connecticut plan. "The difference is that a power agency provides options and flexibility for the consumer." Pruitt said his agency will find out soon how effective it can be in buying power on behalf of the state's two big utility distributors. And from there, the debate is set to resume.