CA: Power Suppliers Accused of Manipulating Prices by Intentionally Reducing Output to Boost Prices

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Power Suppliers Accused of Manipulating Prices Energy: Study says plant owners and resellers in state cut output to boost profits--a claim they deny.

By NANCY RIVERA BROOKS, Times Staff Writer

Electricity suppliers, particularly in Southern California, are manipulating prices by withholding power at key times, according to a study paid for by Southern California Edison. The study, led by an MIT economics professor and based on regulatory and industry data on power plant operations, found that plant owners and electricity resellers made huge returns starting in about June by cutting back power generation at some plants, creating artificial shortages. The resulting tight supplies sent prices soaring and the operators were able to make more money on their reduced electricity production than they would have if all of their power plants had been operating at full strength, the study said. The report did not estimate the dollar cost to consumers, but the state Public Utilities Commission estimated Tuesday that Californians were overcharged by more than $4 billion for electricity this year. Power plant owners have repeatedly denied profiteering in the California market, saying they have operated their plants in a responsible way and that their market actions have been legal business tactics. "We are not withholding anything," said Tom Williams, a spokesman for Duke Energy North America, which owns three power plants in California. "We are running the plants as hard as they can run this year." Edison said it commissioned the study to help the Federal Energy Regulatory Commission figure out exactly how the market was manipulated over the summer to produce sky-high prices. A heated debate is raging in California over whether last summer's record electricity prices were the result of market imbalances--tight supplies and heavy demand--or whether market participants deliberately caused the price spikes. With such evidence, SCE said, federal regulators should be a step closer to ordering refunds to electricity users as well as to SCE, a unit of Rosemead-based Edison International, and Pacific Gas & Electric Co., PG&E Corp.'s San Francisco-based utility. Those two utilities were unable to pass the full cost of electricity on to customers because of a state-mandated rate freeze. Those uncollected costs now total more than $5 billion. The FERC had set Wednesday as the deadline for comment on its proposal to make sweeping but primarily technical changes in the way electricity is bought and sold in California. The proposed order, issued Nov. 1, was a bitter disappointment to California officials, regulators, utilities and consumer advocates who had hoped the commission would order power generators and resellers to refund some of the profits made last summer when prices soared. Federal law requires that when electricity prices are set by the market rather than by regulators, the prices must be "just and reasonable." FERC found that prices in California last summer were at times unjust and unreasonable, but a staff investigation could find no evidence that individual market participants were driving up prices--a finding that FERC would need to order refunds. The SCE study found no evidence that power plant owners were working together to raise prices, which would be illegal under antitrust law. But given the tight electricity supply in California, generators did not need to work together to boost prices, according to the study's authors, Paul L. Joskow, director of the MIT Center for Energy and Environmental Policy Research, and San Francisco-based energy consultant Edward Kahn of Analysis Group/Economics Inc. The study identified several contributing factors to California's expensive power, including reduced electricity imports, heavier demand, sharp increases in prices for pollution-control credits, and high prices for natural gas, which fuels most power plants in the state. But even accounting for all those factors, "our analysis leads us to conclude that truly competitive prices in the California electricity market would have been substantially lower than those observed this past summer," Joskow and Kahn wrote. Instead, the study found that significant amounts of electricity were not sent into the market at times when demand and prices were high. The authors acknowledge that the information, obtained from the U.S. Environmental Protection Agency and the Western Systems Coordinating Council, an industry reliability-monitoring group, is incomplete and does not shed any light on a common industry practice in which power plant owners sell some of their plant capacity to market middlemen. Those middlemen would be responsible for the amount of electricity produced--or not produced--under their contracts. The SCE study found withholding of electricity--that is, producing less power than the plants were capable of generating--by all five primary owners of electricity-generating plants in California, which the big investor-owned utilities were required to sell. The data suggest that more power was withheld by plants in Southern California than in Northern California, according to the study. In Southern California in June, for example, power plants owned by AES Corp. and Reliant Energy each withheld nearly 1,140 megawatt hours of electricity--or nearly one-third of their generating capacity--during times when prices were highest, the study found. Plants owned by Dynegy withheld 986 megawatt hours, or nearly half of capacity, while Duke withheld about 90 megawatt hours, or 12%. (A megawatt hour is enough electricity to supply about 1,000 homes for an hour.) In Northern California in June, plants owned by Southern Energy withheld nearly 850 megawatt hours and Duke plants about 140 megawatt hours, the study said. "Generators found it profitable to drive up prices," Joskow said in an interview. He said FERC should compel generators to produce confidential corporate data on power production at their plants. AES spokesman Aaron Thomas said the study's conclusions were "ridiculous" in light of the fact that it ran its plants more hours than allotted under California's strict air quality rules. "We ran like crazy last summer," Thomas said. "So it's funny to hear people talk about withholding." Williams of Duke Energy said that not all plants are able to run at full capacity because of environmental restrictions. Duke's 700-megawatt plant on San Diego Bay must run at no more than 60% of capacity to avoid damaging the bay's ecosystem, he said.

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