Deregulation disaster II: New Yorkers cheated by electricity market manipulation and pricing oddities

 

One reason utility deregulation has cost New Yorkers big money: It’s established a new class of middlemen who zap millions from ratepayers’ pockets.

Your electric bill contains clues to how the system works.

For decades before deregulation, you bought your power straight up from Con Ed. The state regulated your entire power bill, and there was one price that took in the cost of generating electricity as well as the cost of running power lines to your home. Con Ed owned generators as well as the power lines.

When deregulation kicked in in 2000, your electric bill was divided into two sections — supply and delivery.

Delivery is Con Ed’s cost of maintaining wires, transformers and other equipment that brings electricity to your home. In New York, the price of electricity delivery  is closely regulated by the state Public Service Commission. When Con Ed asks the state for a rate increase, its request applies only to the delivery charges. The company now has a rate case pending before the state.

Supply is the cost of the actual electricity, which utilities like Con Ed buy from generating companies on the wholesale market. Under deregulation, Con Ed was ordered to sell its  power plants. Today, Con Ed generates only a small amount of electricity, as a byproduct of its steam plants.

While delivery prices are tightly regulated by the state, supply prices are not. Supply prices can also vary greatly from month to month. In June 2012, Con Ed charged residential customers 12.8 cents for a kilowatt hour of electricity it bought from generating companies. By December, that price per kilowatt hour had dropped more than half, to just 6.1 cents. Those prices don’t include Con Ed’s cost of delivering the electricity to your home.

Con Ed does not mark up the price of the power it buys — you pay what Con Ed pays.

Con Ed and other utilities buy some power through long-term contracts with generating companies. They also buy electricity through an auction system operated by the New York Independent System Operator, a non-profit organization set up to organize the state’s wholesale electricity market. Some ISO auctions sell electricity a day ahead of when it’s needed; others sell electricity in real time.

Under deregulation, utility companies aren’t the only players in this market. Electricity contracts are traded by Wall Street banks and other companies. Over the years, traders have been accused of manipulating markets in New York and elsewhere.

One of the biggest such schemes occurred in 2008, when energy traders were accused of ripping off New Yorkers of hundreds of millions of dollars by shipping unneeded electricity across the state’s power grid. The traders were taking advantage of varying prices at different points in the grids serving Ontario, New York, Pennsylvania, and several nearby states. A New York Post story on the topic is here

It’s taken five years, but some of the money is finally on its way back to consumers. One of the companies involved in the trades, Constellation Energy, agreed last year with the federal government to pay a $135 million fine and disgorge $110 million in illicit profits. Out of the disgorged profits, $48 million has been allocated to New York consumers. State officials are now deciding how to distribute that money. Read the Federal Energy Regulatory Commission ruling in the case here.

Price fixing has also been a problem. The federal government in 2011 accused Morgan Stanley and National Grid of manipulating the price of electricity produced by generating plants in Queens. The scheme was conservatively estimated to have cost Con Ed customers $157 million. The federal government’s rundown of how the complex scheme allegedly worked is here. Morgan Stanley agreed to settle the case with a $4.7 million payment, and National Grid agreed to settle by paying $12 million – just a fraction of the alleged scheme’s cost to consumers. Neither company admitted the government’s allegations.

Don’t be quick to blame Con Ed or other local utilities for this problem. Price manipulation hurts local utilities’ business, and they’ve complained angrily to the state and federal governments about the problem. Time will tell whether the New York ISO succeeds in dealing with these issues.

Retail markets have pricing problems too.

Many New Yorkers have opted to power their homes with electricity from an ESCO – an energy service company, such as IDT, Ambit, or Public Power.

Recall that your electric bill is divided into electric delivery and electric supply charges. Those who have switched to an ESCO still pay Con Ed to deliver their electricity, just as always. But the ESCO gets the money for the supply portion of the bill. ESCOs are creatures of deregulation. Before 2000, they didn’t do business with residential electricity consumers in New York.

Keep in mind that ESCOs play the same complicated wholesale markets that Con Ed and other electricity delivery companies play. Contrary to what ESCO marketers claim, there’s no evidence ESCOs get lower prices for their customers. In fact, there’s some data showing ESCOs actually do worse. A study in National Grid’s upstate territory released in 2012 found that electric customers who chose an ESCO paid an extra $413 over a two-year period.

There’s no published information that helps consumers know for sure what rates they’ll pay to an ESCO in the months after they sign up. The Public Service Commission is studying ways to give consumers better data about ESCO prices. It’s also taken some steps to crack down on deceptive marketing practices by ESCO salespeople.

My earlier deregulation disaster post is here.

About Bill Sanderson

I'm a New York-based journalist, and a former reporter at the Concord Monitor in New Hampshire, the Bergen Record in New Jersey, and the New York Post. My work has appeared in The Wall Street Journal, MarketWatch.com and Politico New York. Twitter: @wpsanderson.
This entry was posted in Con Ed, Deregulation, energy service companies, Public Service Commission. Bookmark the permalink.

5 thoughts on “Deregulation disaster II: New Yorkers cheated by electricity market manipulation and pricing oddities

  1. Liam McDermott says:

    Wall Street firms make billions by dealing in financial futures markets. This enables the trading of massive amounts of electricity (on paper) moving between the US and Canada. Futures contacts allow companies that have no ownership of actual electricity, infrastructure or generation to make billions by manipulating market prices.
    The best part about it is that many of these futures contracts have to be swapped out for physical delivery so the power will ultimately show up where it is supposed to be. The trading of physical/financial forwards is a massive money maker on the back end.
    You touched on capacity being the second half of your bill after generation. This may no longer be the case but in 2008, Wall Street traded capacity as well. I personally dealt in this market. Bigger players would come in and crush smaller companies like LIPA for instance. LIPA only has one guy who trades capacity every once in a while. Traders like him are very easy to manipulate and intimidate because they have little market experience. It was a quick and easy way to raise peoples electricity bills on Long Island while make money for ourselves. There was not a lick of regulation.

    • Deborah says:

      Is more regulation within the current regime the answer? Perhaps we need an entirely new paradigm on power market regulation.

      • Liam McDermott says:

        I do not think electricity can be effectively regulated. Unlike oil which is a true global commodity and is traded over multiple exchanges, power is traded over the counter on a patchwork of regional and local utility grids. I have heard that Dodd-Frank mandates trades be posted on the electronic ICE system, but this will not make a real difference in my opinion. Electricity cannot be stored and its price is driven by a multitude of forces including weather and the natural gas market. These factors make electricity the most volatile commodity on Wall Street. It is a true “old boys club” with only a handful of companies directly involved in trading which makes it easy to manipulate markets and chalk price increases up to volatility. The only solution is to return electricity to complete government regulation and ban trading as it was in years past. I have heard rumors that this is exactly what is going to happen, but who knows.

        • Deborah says:

          I don’t think that the current regulatory experiment in the northeastern US will hold. The advocates said that such a market structure would result in lower prices for customers. That remains to be seen here. Texas is a state where the new regulatory schema appears to work fairly well but Texas is an exception seeing as how it’s self-contained.

          • Liam McDermott says:

            Texas ERCOT trading takes place all over the country and the world for that matter. I don’t know why it being “self-contained” would make a lick of difference. A quick Google search will tell you that deregulation raised residential rates $11 Billion…this number does not take into account all the additional cost that businesses pass onto consumers as they pay exorbitant rates as well.
            Texas loves energy trading…about 75% of my clients were in Houston. What other state is big enough for an Enron sized fraud? 😉

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