Electricity auction to generate odd bids Wall Street financiers, other could try to sell power to ComEd

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1 Electricity auction to generate odd bids Wall Street financiers, other could try to sell power to ComEd Chicago Tribune - September 3, 2006 By Robert Manor Very soon, a company that can't generate enough electricity to turn on a flashlight will want to sell the power that will light up your home. That electricity might be brokered by a trading arm of gasoline retailer Shell Oil Co. or banking colossus JPMorgan Chase & Co., and go through a bidding process that industry executives promise will keep prices in check. Trouble is, your electricity bill is likely to shoot up as a result. This week, Illinois will embark on this great deregulation experiment. The power supplied to homes by Commonwealth Edison and others will be purchased in an annual auction in which electricity can be bought from anyone, whether they generate it or not. The auction, which begins Tuesday, will set the price of electricity for residents and small businesses starting next year. No one debates the fact that electric bills will go up as a result. What is unknown is by how much. Estimates vary, but rates could jump 20 percent to 30 percent, though ComEd says it will try to stretch out increases over several years to lessen the impact. But if New Jersey's auction provides a road map, and many say it does, rates may go higher. That worries consumer groups. They contend that an auction in which Wall Street financial houses and other companies that don't generate power are invited to bid on delivering electricity to utilities needlessly drives up prices. Critics say those bidders will buy electricity from generators, almost certainly including Exelon Corp., which owns ComEd, and attempt to sell that power for a profit through the auction. "This whole system is set up to create the illusion of competition when there is no competition," said David Kolata, executive director of the Citizens Utility Board. "No matter who you are, in some way you are going to have to be buying your power from Exelon."

2 Television commercials featuring ComEd Chairman Frank Clark have swamped the airwaves, with Clark explaining that Illinois is nearing the end of a decade-long rate freeze, part of deregulation of the industry. ComEd and Ameren Corp., which also provides power in Illinois, warn of double-digit increases in consumers' bills. Proponents of the auction, including the Illinois Commerce Commission, argue it is the most open and efficient way to obtain the cheapest power. "Everybody is going to have a fair chance at this," said Tom Kennedy, manager of energy policy for the ICC. "It is the best way to procure energy." Others say the middlemen bidders add competition and will drive prices down. Looming over the auction is Exelon, which will play a huge role because of the enormous amount of cheap electricity it generates from its fleet of nuclear plants. But under the rules of the auction, Exelon cannot sell most of that inexpensive electricity directly to consumers. "The electricity auction will not save money for consumers; it will generate windfall profits for Exelon, ComEd's parent company," Illinois Atty. Gen. Lisa Madigan said Friday. "That's not fair, and it is not what the General Assembly intended when it authorized deregulation in 1997." Exelon's Illinois reactor fleet is the single largest source of electricity in the state, generating much of the power used here. The size and efficiency of its nuclear operations makes it able to provide electricity cost-effectively. When the auction was set up, state regulators decided Exelon could put up for bid no more than 35 percent of its 11,379 megawatts of nuclear capacity. The ICC said this was done to keep Exelon from dominating the auction through its size and cheap electricity, which would squeeze out competitors. ComEd's northern Illinois service territory consumed an average of 10,844 megawatts an hour last year, according to ICC figures.

3 Exelon has to do something with the power it cannot bid at auction. Critics say Wall Street firms and energy traders will buy Exelon's inexpensive excess electricity, add a markup and bid it into the auction, resulting in higher prices for consumers. One University of Chicago auction expert believes Illinois' way of procuring power is deeply flawed. "If Exelon is the low-cost provider, why should Illinois residents pay more?" asked Robert Zeithammer, assistant professor of marketing at the University of Chicago Graduate School of Business. "That is not fair at all, and it is going to increase prices." Zeithammer said limiting Exelon's participation creates economic inefficiency, which allows higher-priced generators and traders to enter the auction. "What the state is naively hoping is that the inefficient players will somehow establish a low price," Zeithammer said. "I don't see how that could happen." The experience of New Jersey, which has bought electricity via auction since 2002, is troubling to consumer advocates, mainly because the Illinois auction is virtually a replica of New Jersey's. In what is called a descending clock auction, bidders begin by offering more power than the state needs. The price goes down with each round of bidding, as will the amount of electricity offered, as some bidders, unable to make a profit, drop out. The auction ends when the amount of electricity bid equals the state's needs. Bidding will be done through the Internet. To preserve competition, bidders will not know what competitors are offering. And independent monitors are supposed to ensure there is no collusion. Seema Singh, the chief lawyer for the New Jersey Division of the Rate Counsel and an advocate for consumers, said her state's five annual auctions have been successful.

4 "If we had not had these auctions, the prices would have been much higher," Singh said. "I think it has worked pretty well." And Singh said bidding by financial houses and traders has caused no problems. "It increases the pool of suppliers that are participating," she said. That, she said, holds down electricity rates. But the results of the auction are not popular with New Jersey consumers. Power bills have risen 100 percent since "Generally, the public is not happy with the increases," Singh said. "Generally, they are dissatisfied." One of the winners in the New Jersey lottery, according to state records, was financial giant JPMorgan, which confirmed that it owns no power-generating operations. Another winner in a past auction was Coral Energy, a trading company owned by Shell. Asked if Coral Energy has any generating capacity, spokeswoman Habiba Ewing answered, "No." "I cannot elaborate," she said when asked how the company obtained electricity for New Jersey. Exelon, ComEd and other participants in the auction said they are limited in what they can say publicly, for fear of giving away information or affecting the outcome of the bidding. But one experienced energy trader, speaking on condition of anonymity, said consumers need not fear that financial houses will obtain cheap electricity from Exelon and bid it at a huge markup in the auction. "These generators are capitalists," he said. Exelon doesn't need to sell its excess electricity to trading companies or financial houses cheaply, he said, because it can peddle the power on the spot market. A vigorous market exists for electricity sold on short notice, he said. And, the trader said, the Illinois auction will benefit from its size.

5 "You are going to get pretty feverish competition in that state," he said. And while New Jersey can point to some success with its auction, somewhat similar auction attempts have failed in other states. In late 2004 Ohio tried an electricity auction. But regulators in the state rejected the final bids because they came in higher than the existing price of electricity. It tried again in March, but so few bidders were interested that it was called off. In Maryland, power bills would have jumped 72 percent in 2007 after the state held an auction to procure electricity for the Baltimore area. "All hell broke loose," said Brad Heavner, a former executive director of the Maryland Public Interest Research Group. Heavner said the state legislature fired the regulatory commissioners who had approved the auction. Regulators are suing to get their jobs back. Meanwhile, electric rates have become a major political issue in the state, and no one is sure of the outcome. "We need to restructure the auction," Heavner said. "We know what does not work." Although it has not gained much attention, Madigan has sued to block the auction in Illinois. The attorney general's office says that under its interpretation of utility law, the ICC first must determine that there is competition among electricity suppliers before it can approve market-based rates. No company has stepped forward to offer electricity directly to residential customers. "I have spent the past year fighting the auction in the courts, and I am hopeful that when the courts finally review the ICC's decision to approve the auction, they will strike it down," Madigan said. "I will continue to challenge the legality of the auction to protect consumers from unjustified and unnecessary rate increases." rmanor@tribune.com