Wednesday, June 13, 2007

Justice Department Investigating NY Energy Markets

New York's wholesale energy market is being investigated for possible antitrust violations, according to a recent news report. A Newsday story indicates that a subject of the investigation may be possible withholding of capacity from the market, to drive prices up. This revelation has raised further questions regarding the proposed merger of National Grid and Keyspan, which controls significant amounts of generation capacity in the New York City markets.

Wholesale prices for electricity are under FERC jurisdiction. In a recent case at FERC, some market participants and the New York PSC claimed that due to withholding of capacity from the market, prices were inflated by as much as $157 million in 2006. See Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006? That case involved no claim for refunds of unreasonable charges, which were passed through to retail customers by New York CIty area utilities, principally Con Edison. Instead, the parties sought to revise flawed rules of the NYISO to limit the amount of future overcharges. A proposal to that effect was rejected by FERC.

It is unclear whether there is an antitrust remedy that would protect consumers. Indeed, the structure of the private utility markets allowed by FERC to set rates seem to allow sellers to withhold electricity from the market through various techniques and bidding strategies. Sellers accused of price manipulation may invoke FERC's approval of the NYISO market rules that allow price manipulation through withholding tactics and gaming that does not involve overt conspiracy.

The situation illustrates a major weakness of FERC's market rate system. FERC allows wholesale prices to be set in secret auctions; inflated new prices can be charged without the possibility of public scrutiny and regulatory review, and unreasonable charges are passed through to retail consumers, with no refund remedy. The lack of transparency, elimination of regulatory review and elimination of refund remedies, in the view of some utility consumer advocates, including PULP, violates the Federal Power Act. Cases in the D.C. Circuit Court and in the U.S. Supreme Court are now raising the issue whether FERC exceeded its powers in allowing unfiled unreasonable rates and rate changes.

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