The Buffalo News
Was power overpriced by $100 million?
Complex trades may have boosted bills in state
By David Robinson NEWS BUSINESS REPORTER
Updated: 08/27/08 6:58 AM
Federal energy regulators are investigating whether electricity trading schemes have caused New York state consumers to pay hundreds of millions of dollars too much for their power.
The Federal Energy Regulatory Commission confirmed has been investigating whether electricity traders have been manipulating power prices through complex transactions aimed at capitalizing on differences in the cost of transmitting electricity.
How much those transactions have inflated power prices in New York state is not known, but several consumer groups, power marketers and other entities have estimated that the alleged manipulation could have inflated prices by at least $100 million, and possibly more than $415 million.
“New Yorkers are already financially burdened due to economic hardships, and can ill afford to bear the brunt of overcharges for their energy,” Gov. David A. Paterson said Tuesday in a statement urging a speedy probe by FERC. “Anything less than a swift and comprehensive investigation, as well as restitution, would be unconscionable.”
At the center of the investigation are a rising number of transactions that began to appear in January from a small number of traders, according to the New York Independent System Operator, which manages the state’s power grid and took steps to curtail the problem trades last month.
The suspicious trades scheduled electricity from around Lake Erie to be shipped to the New York City area along a circuitous route that passed through Ontario, Michigan, Ohio and Pennsylvania to take advantage of lower transmission costs by avoiding the transmission bottleneck that exists between upstate New York and New York City.
But because electricity follows the path of least resistance, regardless of the scheduled route, ISO officials estimate that 80 percent of the power followed a more direct — and much more costly — route through New York state and Pennsylvania.
“This means that the certain market participants were sending their power through the most expensive and congested corridors, but not paying the fees like everyone else,” wrote U. S. Sen. Charles E. Schumer in a letter to FERC.
And because the suspect trades increased the amount of power flowing through already congested transmission lines, it drove up electricity prices for all New York consumers by triggering additional fees that are passed on to residential and commercial customers.
The state Consumer Protection Board has estimated that the trades have cost New Yorkers more than $100 million this year, while others place the figure much higher. Pepco Energy Services, a Virginia-based energy marketing company, estimated the costs at a minimum of $415 million in a FERC filing. Other estimates are in the $240 million to $290 million range.
“No one is probably close to figuring out how much this gamut is worth,” said Gerald A. Norlander, the executive director of the Public Utility Law Project, an Albany-based advocacy group for low-income consumers.
Norlander and others are urging FERC to identify the traders who made the suspicious transactions and impose significant penalties on them, including restrictions on future trading.
“The people who were overcharged in this instance should get their money back,” said Mindy A. Bockstein, executive director and chair of the Consumer Protection Board. She said FERC should institute pricing rules to prevent future manipulation.
“It’s a small number of market participants, and this FERC investigation should reveal more about them,” said Connie Cullen, a New York Power Authority spokeswoman.
A number of parties also are urging FERC to take steps to force those traders to make refunds for the overcharges that the transactions caused. Norlander, who has requested a public investigation, said it is unclear how much restitution could legally be sought.
“Quite simply, the commission should not allow market manipulation to go unpunished,” wrote Michael B. Mager, a lawyer representing dozens of the state’s biggest industrial customers, in a FERC filing earlier this month.
The New York ISO last month took steps to limit the trades by imposing new tariffs on the eight different circuitous routes used by traders. ISO officials said in a FERC filing that those steps should reduce the questionable trades, but would not eliminate them entirely, as it attempts to develop additional ways to monitor electricity trading.