For decades Wall Street financial engineers, teaming up with electric power producers, have gamed wholesale electricity auctions to earn bigger profits than either a regulated utility or a competitive market would yield. This month they made a major advance in their campaign to get rich by subtly draining your wallet. Yet every major news organization ignored this.
This latest development took place in New England, which already has America’s most expensive electricity. February’s electricity auction saw the annual cost to customers rise to $4 billion, up from about $3 billion in last year’s auction and less than $2 billion in the 2013 auction. That $4 billion figure would have been much higher but for a rule capping prices.
By the way, that $4 billion is not for the electricity, which costs extra. The $4 billion price tag is for capacity payments made to owners just for promising to run their power plants in 2018 and ’19.
If that sounds bizarre, it’s because it is. It is comparable to government taxing us to pay auto dealers to keep enough cars and trucks on their lots to satisfy expected future demand.
Half the states also have auctions that set the price of electricity for periods ranging from a year down to a few minutes. The other half still rely on traditional rate regulation, which has its own problems.
If there is abundant capacity to produce power at peak periods, such as hot summer afternoons, then prices will not rise much, if at all. But if there is barely enough power to meet demand, then prices rise significantly. And if capacity is just 1 percent less than demand, the wholesale price soars.
In these auctions every producer gets the top price even if most bid far less. These are known as clearing price auctions, in which the highest bidder sets the price for all suppliers…
Robert McCullough, an Oregon utility economist known for busting industry myths, says gaming of electricity markets is easy and lucrative, as long as regulators look the other way.
“With perfect competition, you always bid your marginal cost — as the economist Alfred Marshall was pointing more than a hundred years ago,” McCullough said. “However, when your market share is sufficiently high that you have the potential to set the market price, it is in your interest to raise your price above marginal cost, even though you will lose some of your market share” because one or more of your fleet of power plants will produce no electricity and thus not collect any money.
“This gets even better when you can buy someone else’s plant and shut it down,” McCullough added, because the reduced capacity means higher prices. Combined with the savings from not operating the shuttered plant, the result is much bigger profits.
Yes, these are the same schmucks who bankroll Republican agitprop about how free market capitalism guarantees our freedom. They leave out the part about buying politicians, buying off regulators with better-paying jobs as a reward when they’re through pimping the biz.
Then you get to double dippers like North Carolina’s governor Pat McCrory. He had a whole career working for Duke Energy. Left to become the gpvernor and, no doubt, will return to being officially on the payroll, once again, after he’s through directing that state’s legislative mediocrity into further kissing corporate butt.