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Wednesday, September 27, 2006

Utility denies cutting capacity in Texas to influence prices

By ELIZABETH SOUDER / The Dallas Morning News

TXU Corp. may have manipulated wholesale electricity supplies and prices last year, according to an annual review of the Texas market.

An outside company hired by the state's Public Utility Commission found evidence that a power producer shut down some of its generating capacity on certain days in 2005 in order to squeeze supply and boost prices.

The report doesn't specifically name TXU, but it states that the company in question had about 13,000 megawatts of available capacity. The only company in Texas with that much juice is TXU.

The report by Potomac Economics Ltd. highlights a growing concern among industry insiders around the country that big companies could control local power generation markets, boost wholesale prices and squash competition.

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The report also comes at a time when TXU is trying to get permits to increase its generation capacity by about 50 percent. The growth plan is already a hot political topic ahead of state elections because of pollution concerns.

TXU spokesman Chris Schein said the company doesn't withhold electricity from the market and doesn't manipulate the market.

"It's an economist's perspective of what the market data appear to show, but it doesn't reach any conclusions," he said of the report.

Terry Hadley, a PUC spokesman, declined to confirm whether the report points at TXU, nor would he say whether the commission is looking into the issue.

"The PUC will determine if more investigation is appropriate," he said.

State regulators could levy hefty fines on any company found to have manipulated the market.
Power to manipulate

The two largest generation companies in Texas had enough capacity last year to manipulate the market 75 percent of the time, when demand couldn't be satisfied by the other companies alone, the report said.

TXU and NRG Energy are the state's biggest producers.

The report crunched numbers on how often the largest producers were in a position to manipulate the market and how much generation those companies kept offline during periods of heavy demand.

Dozens of companies own power plants in Texas.

Demand for electricity fluctuates depending on the time of year and the weather. Generation companies turn on their most efficient, cheapest plants first. As demand rises on a hot summer day, for example, the companies must fire up the older, less efficient plants.

The spot wholesale price reflects the most expensive electricity generated at a given moment.

If a big company turned off an efficient plant on a busy day, that could prompt a less efficient plant to turn on, generate higher-priced electricity, and boost prices across the entire market.

By analyzing how much capacity the large companies used each day last year, and comparing that data to the amount of capacity that could have been generated more cheaply, the report shows that one company withheld power.

And the report showed in a chart that the company in question offered up to 13,000 megawatts of power to the market. TXU has total generating capacity of 18,300 megawatts. Its next-largest competitor, NRG Energy, has about 10,700 megawatts in Texas.

"One company had a larger share of unutilized economic capacity than the other suppliers," the report states. "This unutilized capacity grew at higher load levels when the effect on prices was generally highest."
Higher bills

Deregulated markets across the country face a similar possibility of manipulation, experts say.

And that can lead to higher utility bills for consumers.

"What it means is ultimately higher prices because the spot market for electricity drives the costs paid by the competitive retailers," said consumer advocate Tom "Smitty" Smith, Texas director for Public Citizen. "If they're setting their prices, they're going to ratchet the prices up in order to cover such events."

True, said Mike Rowley, director of wholesale operations for Stream Energy, a retail electricity provider.

"It takes away some of our profit margin. But you know what we're going to do? We're going to increase our rates" if retailers have to cover the cost, he said.

Kenneth Rose, a researcher at Michigan State University, said in his annual performance review of electric power markets in August that deregulated markets across the country could be manipulated.

Texas deregulated its electric market in 2002.

"The structure that is emerging more closely resembles that of an oligopoly, where there are only a few firms supplying all or most of the output, than a truly competitive marketplace," Mr. Rose states in a section describing wholesale markets.

"It is likely that suppliers are currently using strategic bidding techniques and withholding strategies to raise the price," according to the Rose report written for the Virginia State Corporation Commission.

In the highest-profile case to date, Enron Corp. was accused of a similar situation in California.

Last year, Enron agreed to pay $1.52 billion to settle charges that it manipulated California electricity markets during that state's 2001-02 energy crisis, part of $5.15 billion extracted from it and four other utility companies. However, Enron filed for bankruptcy protection in late 2001, limiting the possible repayments.

Various schemes uncovered by investigators showed that Enron sent electricity from California to other states to sell for higher prices; moved electricity from California and then back into the state to sell for uncapped interstate prices; and charged fees for moving electricity and relieving congestion, without actually moving any electricity or relieving any congestion.
Monitoring market

Texas Rep. Sylvester Turner, a Houston Democrat who has been critical of electricity prices and deregulation, on Tuesday called on the PUC and ERCOT (the Electric Reliability Council of Texas) to carefully monitor the market. ERCOT recently hired Potomac Economics to set up shop at the grid manager's headquarters and monitor market trades.

"We are at a critical phase right now in the state of Texas in terms of where we are going in the deregulation of this market. Come Jan. 1, 2007, the gates swing wide open, and companies can charge whatever the market can bear," Mr. Turner said.

Staff writer Terry Maxon contributed to this report.

E-mail esouder@dallasnews.com
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