Here’s the definition of a cartel:
cartel –2 : a combination of independent commercial or industrial enterprises designed to limit competition or fix prices — from Merriam-Webster Online Dictionary
Is PJM a cartel?
Here’s what the Maryland Public Service Commission said about PJM’s bulk electricity auctions:
Under the Reliability Pricing Model, auctions were conducted in 2007 and 2008 to establish the price and supply of electricity capacity for the years June 2008 through May 2011. The complaint alleges that these auctions were not competitive, were subject to price increases by incumbent generators, yielded excessive prices, and did not accomplish the intended purpose of stimulating new generation for the periods in question.
Here’s a link to the full story about the MD PSC’s complaint to FERC. Four other states as well as private electric utilities told FERC that PJM’s auctions resulted in $12 billion in overcharging of electrical customers in the PJM region. Neither the WV PSC nor the WV Consumer Advocate Division appear to have joined in the case. Maryland’s PSC has joined in similar complaints to FERC about PJM every year for the past four years.
Note especially the MD PSC’s claim that PJM’s policies do not stimulate new generation. Why does PJM say we need PATH? Because new generation is not being built quickly enough on the east coast. Why not? Because PJM is actually restricting the creation of new generation. Hmmm.
The Pennsylvania Public Utilities Commission has also held hearings on the impact of PJM’s markets on its electric customers’ rates. Here are some quotes from testimony by Susan Kelly, VP of Policy Analysis of the American Public Power Assocation before the PA PUC:
Higher prices paid by customers –
One of the simplest measures of the success of restructured retail and wholesale market structures is whether, as originally claimed, “deregulation” has reduced prices for consumers. While it is true that electricity and other energy prices are rising across the country, retail electric rates are higher in states with deregulated markets, and the rate disparity between rates in traditional regulated states and deregulated states is increasing.
Deregulated states shown in this comparison are those that have implemented retail choice, no longer have retail price caps and are located in RTO regions. Prices in deregulated states are 56 percent greater than those in the remainder of the country.
Energy traders exploiting PJM price setting –
Hedge funds, investment banks and other financial entities have been participating in RTO markets (both the power supply markets and the market for Financial Transmission Rights (FTRs)) through the auctions that the RTOs hold periodically to set power prices and allocate FTRs. These entities often do not participate in these auctions to purchase power or to hedge a transmission or power supply transaction. Rather, they participate in the hopes of extracting dollars from these complex markets. The oft-cited rationale for allowing such activities is that these financial players “add liquidity” to the RTO markets. APPA, however, is concerned that the profits these players are making from RTO markets come from the pockets of retail consumers, in the form of higher power supply prices and transmission service charges.
Worse yet, consumers can end up footing the bill for such financial players when they make the wrong bets. The most spectacular example of this is the January 2008 complaint that PJM filed against the so-called “Tower Companies,” an affiliated group of trading companies with offices in New York City. In December 2007, two Tower Company-affiliated hedge funds defaulted on payments to PJM, after they suffered financial losses associated with FTRs that they had purchased for speculative purposes.9 PJM estimated that the total defaults for these two funds from their November 2007 invoices through to May 2008 would be close to $85 million.10 PJM subsequently filed a complaint against the Tower Companies, including one of the two defaulting hedge funds, Power Edge, LLC. PJM has alleged that the Tower Companies manipulated PJM’s FTR and day-ahead energy markets, and is seeking restitution and other remedies. (APPA filed a motion to intervene in this case, expressing its support for PJM’s actions.) On April 30, 2008, the FERC issued an order holding PJM’s complaint in abeyance pending the outcome of its own Office of Enforcement (OE) staff’s investigation into this matter.11 As of this writing, FERC has taken no other public action in the case. Unless the Tower Companies are required to disgorge monies to remedy the defaults, it appears that other PJM customers may have to cover the FTR revenue shortfalls. In APPA’s view, this would be a grossly unjust result. Retail consumers in PJM, including those in Pennsylvania, should not have to backstop the losses of hedge funds speculating in PJM’s markets.
PJM policies suppressing investment in new generating plants –
The failure of the basic RTO market design to produce needed new entry and infrastructure investments has not led the RTOs or FERC to question the wisdom of the basic market design, but rather to layer on new markets.
It might be useful here to insert two quotes from the story about MD PSC’s FERC complaint:
The complaint alleges that these auctions were not competitive, were subject to price increases by incumbent generators, yielded excessive prices, and did not accomplish the intended purpose of stimulating new generation for the periods in question. For the PEPCO and BGE service territories, no new generation was bid into the capacity auctions for these periods.
“We could not escape or ignore the fact that the transitional auction results will, if left alone, force Maryland ratepayers to pay almost $2 billion for capacity that never materialized,” said Maryland PSC General Counsel Douglas R. M. Nazarian.
No one else is involved in decision making except FERC and PJM –
The failure to disclose full market data in a timely fashion so that all interested parties (including state PUCs, state attorneys general, and customer representatives) can examine exactly what is happening makes it much more difficult for them to detect potential market manipulation. The full brunt of the task of policing RTO markets thus falls initially on the RTO market monitors and ultimately on FERC, as they are the only entities with access to this confidential information.
Hiding market information from everyone except select “insiders” –
Only the RTO’s market monitoring unit and the FERC’s staff currently have access to the confidential data needed to examine which generators are submitting what bids, and whether their bids have any relation to their costs, or are instead the product of market power, or even an attempt to manipulate the market. Yet the FERC has taken the position that only in the most extraordinary of circumstances will it allow third parties, including customer representatives and state PUCs, even to intervene to comment on a settlement already negotiated by FERC’s OE Staff, which has the effect of curtailing customers’ and state PUCs’ legal rights. Finally, it claims that it has exclusive jurisdiction over prices produced in RTO wholesale markets, and asserts that no remedies are available to customers or their representatives in other forums.
So, what do you think? Does PJM fit the definition of a cartel?