Federal Electricity Regulators Let Stand Largest Market Manipulation Since Enron: Every Family’s Utility Bill in New England Will Rise by $110
Statement by Tyson Slocum, Energy Program Director for Public Citizen
In one of the most brazen regulatory failures in recent American history, the Federal Energy Regulatory Commission (FERC) split 2-2 and refused to address allegations raised by Public Citizen, the Connecticut Attorney General and others that a private equity firm manipulated a New England power auction earlier this year. The result of the alleged manipulation raised prices by $1.4 billion, leaving every household to pay $110 in higher utility bills.
Power prices are therefore threatened not by U.S. Environmental Protection Agency rules (as some industry spokespeople have claimed), but by the failure of FERC to enforce rules restricting market manipulation.
Once a year, the New England Independent System Operator (ISO-NE), the private group overseeing the region’s deregulated power market, holds a capacity market power auction in an effort to procure adequate supplies three years in advance. Prior to this year’s auction, Energy Capital Partners, a private equity firm founded by former Goldman Sachs bankers, purchased Brayton Point, a large power plant in New England.
Five weeks after closing on the purchase, the firm announced it would shutter the plant, timing the retirement to directly coincide with the New England capacity auction. This closure threw the auction into disarray, forcing the ISO-NE to alter the auction’s bidding criteria, resulting in auction prices double those of the previous year. The final price tag: power prices $1.4 billion higher than they would have been had Energy Capital Partners placed Brayton Point into the auction. The direct impact is $110 for every New England household.
Energy Capital Partners has control over at least five other New England power plants, which means that the company had financial incentive to withhold capacity: The money lost by closing Brayton Point is far exceeded by the increased revenues earned by its five other power plants because of the spiking capacity auction rates. Public Citizen calculated that Energy Capital Partners will earn $74 million in higher capacity payments – an amount far higher than if the firm simply had kept its new acquisition, Brayton Point, in operation for the capacity auction.
Rather than directly respond to the allegations of manipulation, FERC instead chose to run out the clock. Section 205 of the Federal Power Act says that, in the absence of commission action,a filed rate goes into effect after 80 days. Letting the time lapse, FERC allowed the filing to go into effect without formally responding to the detailed allegations of market manipulation supplied by Public Citizen, the Connecticut Attorney General and other parties.
Three hours after FERC’s order, a scathing dissent was posted by two of FERC’s four commissioners, Norman Bay and Tony Clark. Bay and Clark blasted the agency’s inaction, concluding:
“[T]here is evidence suggesting the exercise of market power, and it is uncontroverted that the market power, if it existed, was not mitigated. In the words of ISO-NE, prices resulted from a ‘non-competitive auction.’ To the extent any portion of those prices was attributable to an exercise of market power, the auction will have imposed unwarranted costs upon consumers. Moreover, it is possible that ISO-NE may have violated its Tariff in the way it conducted the auction. On this record, we do not believe that ISO-NE has carried its burden of establishing that the auction results are just and reasonable. As a result, we would set this matter for a fast-track hearing and settlement procedures.”
Likely embarrassed by the stern dissent, FERC’s Chairwoman, Cheryl LaFleur, issued her defense just after 6 a.m. today, arguing that because the ISO-NE followed a previously-approved process, FERC did not need to examine whether the outcome of that process actually resulted in “just and reasonable” rates, as required by the Federal Power Act. She said:
“Specifically, the Commission’s determination has been based solely on its assessment of whether ISO-NE conducted the auction in accordance with its established, Commission-approved tariff. This approach is consistent with both Commission and judicial precedent that the tariff on file, which specifies the rules and procedures by which a particular rate is calculated, is the pertinent filed ‘rate.’”
LaFleur, who serves as FERC chair through April 2015, when Bay will succeed her, was a corporate electric utility executive prior to her FERC service.
LaFleur’s reasoning – that because FERC had blessed the complex set of market rules prior to the auction, the auction results satisfy the “just and reasonable” standard – directly echoes FERC’s flawed approach in the early days of the California electricity crisis. Back then, Enron, like Energy Capital Partners, followed FERC’s regional market rules. But Enron exploited poorly designed market rules by engaging in capacity withholding to generate larger profits for its other units.
In Enron’s case, capacity withholding entailed moving power out of state (and then reselling it back into state at inflated prices) and shutting down power plants to create shortages that drove up prices at its other units. Again, Enron’s strategies were the result of savvy energy traders who knew how to exploit the poorly designed bureaucratic market structure.
It would be one thing if Energy Capital Partners’ withholding resulted in the production of coherent market signals to incentivize additional generation to meet the region’s needs, or even resulted in price signals to benefit cleaner generation. But it does neither. The withholding demonstrated that the ISO-NE has a poorly designed market structure that susceptible to manipulation by the sophisticated former Wall Street bankers that run Energy Capital Partners.