Since Mike Miller and the Maryland General Assembly deregulated electricity in 1999, BGE and other utilities must buy electricity on the wholesale grid. Once utilities made their own power, marked it up for a modest profit and sold it to consumers. Now electricity depends on a so-called "market" that actually is replete with market failures.
Why is this so? Electricity isn't like products that trade in other markets. You can't bottle it, so there are no inventories. This makes price manipulation easier. At the same time there are huge barriers to entry, so incumbent producers have quasi-monopoly power. This makes price manipulation even easier.
I didn't have room for this in today's column, but let's review some of the problems we know about just from the last year and a half. The cockroach theory certainly applies here -- there are a lot more that you don't know about than the ones you can see.
-- May 2008. The Federal Energy Regulatory Commission reveals that Edision Mission spent three years evading questions and delivering misleading information about suspicious selling practices that look similar to price manipulation schemes employed by Enron and others. The practices took place in PJM, the grid that serves Maryland and a dozen other states. FERC fines Edison $7 million for lack of candor but doesn't say whether the behavior under investigation was proper or improper.
-- April 2008. Maryland's Public Service Commission decides that the wholesale auction that led to a 70 percent price increase for BGE households was proper. But the investigation is largely confidential, and the final report is riddled with blackouts.
-- December 2007. Hedge fund affiliate Power Edge LLC loses an estimated $80 million on aggressive electricity bets on the PJM system that didn't pan out. Under PJM rules, the losses are not absorbed by Power Edge's parent. Tower Research Capital. They must be paid by BGE and other PJM members.
-- September 2007. Texas regulators recommend fining TXU Corp. $171 million for alleged price manipulation of wholesale electricity. The matter is still pending, and TXU has refused to turn over some documents to the Texas Public Utility Commission.
-- April 2007. Joseph Bowring, market watchdog for PJM, publicly accusses his PJM bosses of silencing him when he tried to speak out about market irregularities and outsize profits by generation companies, including those in Maryland. The accusation leads to a turnover in top PJM leadership, a measure of independence for Bowring and a FERC investigation that found some profits made by Maryland generators were neither "just" nor "reasonable." FERC, however, declined to reclaim the excess profits for consumers.
-- March 2007. An investigation commissioned by Illinois Attorney General Lisa Madigan finds "disturbing evidence of price manipulation" in that state's wholesale electricity markets. The finding leads to a billion-dollar settlement with Illinois electricity producers.
-- Early 2007: Consultant Edward Bodmer tells Congress in a sworn statement that deregulation has allowed BGE parent Constellation Energy and four other PJM generators to make "supra-competitive" profits - more than they would in a truly competitive market or a regulated market.
-- From the Tacoma News Tribune: Since 2005, FERC has "conducted 64 investigations that have resulted in 13 settlements involving the payment of $40 million in civil fines" for price manipulation in electricity and natural gas. FERC "also pursued two enforcement actions that resulted in the payment of nearly $460 million in fines." Given the high profits of price manipulation, though, the fines are merely a cost of doing business.