Manipulation of Illinois Wholesale Power Auction?

Michael Giberson

A reader (in the comments here) asked whether we had any opinions on the complaint filed last week by the Illinois Attorney General alleging manipulation of the Illinois power procurement auction. Here’s the basic story, via Business Week and the Associated Press:

Last year, the Illinois Commerce Commission oversaw a reverse auction, where power suppliers offered the lowest prices at which they would sell electricity to Ameren and ComEd, which then sell the electricity to consumers.

The auction produced unexpectedly high increases over previous rates — 22 percent higher on average for ComEd customers and 55 percent higher for some Ameren customers. For some individual customers, the increases turned out to be even more.

[Attorney General Lisa] Madigan argued the huge increases must be a result of corporate misconduct. She said the average prices offered by wholesalers — which include the parent companies of ComEd and Ameren — are twice the actual costs of producing the electricity.

Generally speaking, it is impossible to come to a clear conclusion based upon the public version of the complaint documents — all of the potentially exciting parts are blacked out. (If any reader happens to have an un-redacted version to share, I could provide a better informed opinion.)

Overall, however, the public parts of the complaint don’t impress.

The logic illustrated in the Business Week quote captures the general thrust: prices have gone up sustantially for some customers and therefore there must be manipulation somewhere. (Not surprising to me that rates would go up after a ten-year old retail rate cap expires, but it is easy to see how someone not paying too much attention to the details of the state’s utility regulations might be suprised. I wonder if Madigan intends to associate herself with this latter class.)

The Chicago Sun-Times offers commentary on the complaint, with additional specificity on the rate cap:

The higher prices we are now paying for power stem from a decision made in 1997, when the Legislature put the state on the road to deregulating electricity. Rates were cut 20 percent and then frozen for 10 years. … The hope was that competition to Exelon Generation would emerge, but that didn’t happen, in part because the artificially low rates discouraged new entrants to the power market.

The best part of the complaint, on my cursory reading of the redacted version, compares the auction prices to NYMEX contract prices for delivery of power into Northern Illinois over similar time periods. The complaint also spins a not implausible story about how the market share of a dominant firm in the area could have resulted in implicit coordination among diverse bidders and the appearance of collusion. Not enough detail in the public version to assess the claims, but it could have happened.

These comments represent just my off-hand opinion based on a cursory review. Perhaps the truly damning evidence has been blacked out of the public document. Note that Lynne offered a skeptical opinion of the wholesale procurement auction on somewhat different grounds last June (in short, she thinks other approaches to retail competition will work better, but read her post). The Illinois auction was modeled on the New Jersey Basic Generation Service Auction which has been in use since 2002.

6 thoughts on “Manipulation of Illinois Wholesale Power Auction?

  1. I really don’t understand where the Democrats are coming from on this issue.

    They want the old regulated rates, but they also want competition. Well, isn’t it possible that the old regulated rates are so low that no one can supply electricity at them?

    The lack of competition is simply a reflection that the old rates were too low. But Madigan and her ilk need to spin this as collusion and conspiracy. That’s just sick.

    Isn’t there a law of human nature that the simplest and most obvuous answer is generally the correct one?

    Anyway, now that there’s a framework for buying electricity at auction, if the new rates really are a ripoff (and I just paid about 10 cents a kilowatt hour in February. Doesn’t seem outrageous to me) then electricity competition should become the norm in short order. If not, maybe those rates are TOO LOW.

  2. Howdy, Cuzz! I have recently joined the ranks of the buzz cuts, as I hinted earlier.

    Just in the last few days I pulled a series of electricity prices from EIA, 1990-2005, and then I added 2006 from the monthly database. You know, Illinois has really gotten quite a deal in that period of time. Now, they were paying high rates in the early 90s, in real terms, but their prices have steadily dropped (real), clearly during the rate freeze period. So, it should be expected that their rates should jump to reach market.

    On the other hand [advocating Mephistopheles here] I don’t know what arrangements were made for the transfer of Exelon’s nuclear fleet. Those plants were having real trouble in the early 90s. I remember thinking that ComEd was clearly going to go bankrupt. They didn’t, and those plants are good performers today. But I worry that the transfer prices on those nuclear plants might not have been equitable from the consumers’ perspective. I really don’t know in this case, but I think there were places in the country where consumers paid down “stranded cost” only to be out of luck when the costs aren’t stranded any more. I think this happened in more than one place. Texas comes to mind. I know… buyer beware. I just think some public service commissions made some very bad choices in letting go of assets in which their constituents had stranded benefits. Or, they let go of them cheap and had the consumers pay the stranded cost. That’s the real screw job that’s now coming home to roost. The downside of that is that it’s trashing the competitive market model, when it really doesn’t have much to do with market structure.

  3. It is interesting how nuclear power has shined under competition when it was so weak under competition. Without going back to look up the numbers, I think that outage rates have dropped from around 20% down to near 5% for nuclear units over the past 10 years or so.

    In the specific case of Exelon (ComEd’s parent), during the proposed merger with PSEG Exelon’s efficient management of its nuclear fleet was touted as a potential benefit from the merger. So what your saying is that ComEd has not always been the sterling performer in this regard? But now, with shareholder money more immediately on the line, ways to improve have been found.

  4. Efficiently run nuclear power plants are a recent phenomenon. Exelon has done a good job of getting its act together and running its plants much more efficiently, so much so that it believes that it can transfer its management model to other plants, and is looking for more plants to buy.

    It is sort of an economy of scale in management.

    DOUG brings up good points regarding stranded costs, but aren’t those all in the past? If they got the plants for cheap, that doesn’t help them provide cheap power in future time periods (other than the fact that they may not have any capital costs other than maintenenace).

    Like I said, we’re now getting charged about 10 cents a kW-hr, vs. 8 and change under the regulated rates. 10 cents is not a lot to pay if you look at rates nationwide. It is either average or a little below average.

  5. Great back and forth guys!

    I’ve heard criticisms that the reverse auction in IL only includes annual and blended 3-year contracts for default service. Inclusion of longer time horizon products could allow for better portfolio management and bring prices down??

    I’m still not sure I completely understand the argument. Any thoughts?

    Also any idea when BlueStar is actually going to enter the residential market in IL? They’ve been hinting at it for a while.

  6. I was walking past the Bluestar offices last week and almost stuck my head in to introduce myself … but I got all shy and didn’t. I should have.

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