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Biggest rip-off in Illinois history?

Friday, Mar 16, 2007

Like I wrote in this morning’s Capitol Fax, if AG Madigan is right, then this revelation is beyond huge

Attorney General Lisa Madigan alleged Thursday that corporate manipulation caused the huge jump in electric rates that Illinois consumers are facing, and she asked federal regulators to suspend the rates and investigate.

Electric rates have soared since January, when a 10-year freeze on prices expired. The new prices were set through a “reverse auction” that was meant to keep rates as low as possible.

But Madigan says the auction yielded prices far higher than the actual cost of producing electricity. That’s because some 15 power companies manipulated the process, she claimed in a complaint to the Federal Energy Regulatory Commission.

Exelon Corp., the parent of power company ComEd, immediately denied the allegations.

More

In a 31-page complaint filed with the Federal Energy Regulatory Commission, Madigan lays out what she says is evidence that last year’s power auction involving Ameren and ComEd may have been fixed to ensure that specific wholesale suppliers got the most lucrative parts of that business _ at the expense of rate-payers who ended up with bills some 40 percent higher than they should be under a competitive market. […]

“The wholesale suppliers are charging prices that are at least double the marginal cost of generating electricity,’’ the complaint alleges. It goes on to allege that “there is evidence that some of the wholesale (power) suppliers manipulated prices in the auction,’’ possibly with secret side-agreements among the suppliers.

The complaint states that “quid pro quo arrangements’’ are a “likely’’ explanation for unexpectedly high power rates that resulted from the reverse auction, which was ostensibly designed to ensure that Ameren and ComEd got the cheapest possible power supply contracts from competing wholesale electricity providers.

It is “possible’’ that “departing bidders’’ were rewarded with side-agreements that their power would later be purchased “at favorable prices,’’ the complaint states. It cites a similar “market manipulation scheme’’ that was uncovered in the Enron corporate scandal.

[Emphasis added]

More

State Sen. William Haine, D-Alton, praised Madigan’s action and suggested it could lead to the Illinois Senate passing a bill to return Ameren’s rates to last year’s frozen levels as soon as next week.

“If the auction was tampered with, obviously, it should be thrown out,” he said. “If there is fraud in the procurement process, it’s across the board. All of it is void. It’s the fruit of a poisoned auction, and as such, these contracts are voidable, which means we have a new ballgame in the procurement of electric power based upon lower rates.”

CUB’s response

It’s abundantly clear that the auction and the rate hikes it produced must be scrapped.

True dat.

Meanwhile, Sen. James Clayborne picked a really bad day to complain that CUB and AARP, of all people, are not negotiating in good faith…

Some Illinois consumer advocates are being so inflexible in their demand that newly raised electric rates be legally forced back down that they’re endangering attempts at a compromise with the utility companies, the state Senate’s top utility negotiator hinted Thursday.

“I’m not going to say (they’re) obstructionist. I just feel like they haven’t come to the table in good faith,” said state Sen. James Clayborne, D-Belleville.

He said advocates, including the Citizens’ Utility Board and AARP, “aren’t cooperating like they’re supposed to” in closed-door negotiations that Clayborne is conducting, looking for a compromise to ease the impact of electric rates that skyrocketed this year after Ameren and ComEd deregulated in Illinois. […]

“If being uncooperative means not agreeing with the utilities … and representing the best interest of our members, then yes, we’re uncooperative,” said Donna Ginther, director of state affairs for AARP-Illinois.

The charge is ridiculous, particularly in light of Madigan’s investigation.

* Madigan’s press release

* FERC complaint

* Supporting exhibits

- Posted by Rich Miller        

19 Comments
  1. - Truthful James - Friday, Mar 16, 07 @ 8:35 am:

    Kudos to the AG. If Ameren and ComEd did this, they ought to be on the hook for punitive damages. The same thing goes for the other suppliers.

    The company stockholders should suffer, the Boards represent them. If bankruptcy comes, by the way, they don’t shut down. A trustee runs them on behalf of the court.

    As incompetent as the ICC is, instead of cowering in their cages, the staff should have been watching the markets. Good “intelligence” would have been necessary. We are going to get to the point that the State (ICC) should act as a bidder and assign the contracts to the utility.


  2. - fedup dem - Friday, Mar 16, 07 @ 8:52 am:

    The hell with punitive damages. If this is true, then the executives of the electric companies should rot in prison until they die! This constitutes a criminal conspiracy, and the criminals involved should pay for their crimes.


  3. - fedup downstate dem - Friday, Mar 16, 07 @ 9:02 am:

    I hope that Sen. Clayborne tones down the rhetoric. The Senate Democratic Leadership already has a sizable credibility problem when it comes to dealing with the utilities, particularly ComEd. His comments don’t give me much confidence that a fair deal for electricity consumers will be worked out.


  4. - Squideshi - Friday, Mar 16, 07 @ 9:05 am:

    These private utilities have had their chance. They’ve prooven that they can not be trusted. It’s time for a new paridigm. Publicly owned regional cooperatives are the new way to go, and we’re already starting to see significant increased interest in this idea throughout the state.


  5. - GettingJonesed - Friday, Mar 16, 07 @ 9:12 am:

    Rich
    This item really needs to be bumped to the top
    The AG lays out the facts on over pricing and manipulation. Should send all the ComEd tankers running for cover.
    Looks like the three year freeze is right around the corner.
    And of course ComEd bonds will drop - Oh My.
    Who really cares!


  6. - Other shoe - Friday, Mar 16, 07 @ 9:39 am:

    So what happens if the utilities end up bankrupt? Doesn’t a bankruptcy judge set rates? Isn’t it out of the state’s hands at that point?


  7. - Still an Idealist - Friday, Mar 16, 07 @ 9:45 am:

    I’m not a huge fan of Ameren or anything, but there is one comment in AG Madigan’s press release that concerns me…

    AG Madigan cites the *marginal* cost of generating power, and based on that cost, she concludes “Ameren and ComEd customers should not have to pay twice the cost of generating the electricity needed to serve them.”

    A marginal cost is the cost of producing one additional unit of power. It is NOT an average cost of producing power. In utilities, average cost is almost always higher than marginal cost, which is why utilities tend to be monopoly enterprises in the first place.

    If these headlines that “customors are paying double what it costs to generate power” are based on marginal cost rates, this is not a scandal. This is Econ 101.


  8. - GettingJonesed - Friday, Mar 16, 07 @ 9:50 am:

    Still…
    Wake up.
    People in Illiois have finally caught on that the electric companies have screwed everyone.
    It cannot possibly cost more to distribute the power than it does to generate it.
    Wonder if we should reserve some cells next to Libby and Skilling for the power boys?


  9. - Team Sleep - Friday, Mar 16, 07 @ 9:54 am:

    As I wrote a couple of weeks ago, reverse auctions are terrible for the consumer and the state in general. All they accomplish is a “driving up” of the cost of electricity, which in turn allows Ameren and, to a lesser extent, ComEd, the ability to charge more per kW/h and tack on added delivery fees. What a shame. Illinois has much higher rates than other states, and Ameren, which is based out of St. Louis, does NOT have nearly the same kW/h rates for Missouri. Hmmm…I wonder if that is a result of action by the Missouri GA or the inaction of the Illinois GA?!


  10. - Carl Nyberg - Friday, Mar 16, 07 @ 10:14 am:

    If these allegations are true, it seems like Emil Jones should be investigated to see if he was part of a criminal conspiracy to violate anti-trust laws and consumer protection laws.

    To me, it would be completely unacceptable for him to remain in charge of Senate Democrats if he helped the utilities to engage in illegal price gouging.

    Whether it can be proven beyond a reasonable doubt Emil Jones knew of the conspiracy, I cannot accept that he worked so closely with ComEd and Ameren without better scrutinizing what his political supporters were doing. If ComEd or Ameren violated the law Emil Jones must go.


  11. - GettingJonesed - Friday, Mar 16, 07 @ 10:31 am:

    Carl:
    If you read the documents the “charges” are actually a set of facts that have been ignored so far. The open question is if FERC — a whole owned partner of the nation’s utilities — will do anything.


  12. - Truthful James - Friday, Mar 16, 07 @ 10:31 am:

    fedup dem –

    I concur — just like Enron. The shareholders (including the institutional ones with huge blocks) have got to get a kick in the assets. They elect the Board. That is what takes them into bankruptcy.


  13. - Cassandra - Friday, Mar 16, 07 @ 10:38 am:

    Clayborne seems to have forgotten that it’s not a good idea to piss off the seniors.

    Maybe it’s time for the Dems to put in another negotiator? This one seems a bit self destructive.


  14. - Anon - Friday, Mar 16, 07 @ 12:21 pm:

    Rich,

    With all due respect, I think you and several of the commenters have drunk too much CUB kool-aid on this one. The Speaker is right: auction was rigged to produce the highest value for power for all producers (which disproportionately benefited Exelon). He’s also right, in my opinion, that rigging a regulatory process so that customers pay more for a vital good or service is morally wrong. However, what’s happened is/was legal under IL and federal law. There’s a difference between rigging and manipulating. It is extremely unlikely that the auction was manipulated which is what the AG is alleging. The auction didn’t need to be manipulated because in Illinois, all the power is generated by 4 companies. If Exelon’s 11 nukes were owned by 11 companies and the 66 coal plants in the state were owned by 66 companies, we’d have competition on the generation side. A reverse auction would make sense in that case as each plant owner would have a different lowest price they’d be willing to accept as the bidding went down. Heck, any form of procurement would achieve a lower price than the auction did in IL if you changed the underlying structure of the generation market.

    As it is, only four companies own 98% of the generation in the state so there’s no competition. This lawsuit is just another way to drive ComEd to the table. Its unfortunate that ComEd executives don’t realize that all they need to do is go to the Speaker on bended knee with a very large check for rate rebates for 2007, a willingness to freeze rates for one year and this whole thing will go away. Ameren, on the other hand, is screwed because they can’t write a check big enough to solve their rate problems right now. However, if Exelon were smart, they’d be figuring out how to legally help Ameren write that check because if you “solve” the all electric customer problem, a lot of the political wind for doing more on this issue goes out of the sails over in the Senate which leaves the Speaker out there all alone. If I were Ameren’s parent company, I’d be selling assets to raise the $200 million that they could pass out in rate rebates, district improvements etc.

    Finally, there is no question that the feds have jurisdictional control over the contracts that resulted from the auction. Even if Ameren goes in to bankruptcy court, the contracts would be either 1. preserved or 2. settled very close to their original terms but in either case, Ameren ratepayers (and to a lesser degree, utility shareholders) would pay. This has been fully litigated in California and the Speaker’s position ultimately loses if this gets to a federal court. The Speaker and the AG should be praying that the utilities in IL don’t go bankrupt because 1. they lose all control of the outcome and 2. the outcome will still yield higher rates than where they’ve been for the last 10 years. The generating companies have this wired into federal law and unfortunately for us, Illinois’ still a member of the United States. Wish it were different (not IL being part of the US) but it is what it is.
    position ultimately loses if we get to a federal court. The Speaker and the AG should be praying that the utilities in IL don’t go bankrupt because 1. they lose all control of the outcome and 2. the outcome will still yeild higher rates than where they’ve been for the last 10 years. The generating companies have this wired into federal law and unfortunately for us, Illinois’ still a member of the United States.


  15. - NW burbs - Friday, Mar 16, 07 @ 1:09 pm:

    CUB says hindsight is 20/20: “It’s abundantly clear that the auction and the rate hikes it produced must be scrapped.

    …Anyone following Enron’s shenanigans could’ve told you that as soon as our legislators put the ink on the bill’s paper.

    Then again, several of us voters DID tell them that over and over.

    Republicans kept complaining that business had to be deregulated and the market opened up. And Jones kept raking in utili-dough.

    Guess what? Free markets ain’t really ‘free’, now are they?

    This is much more than “10 years of built up rate increases all coming at once”.

    Let’s hope AG Madigan can actually get some help from the closed-door-meeting Feds under the current president.


  16. - Truthful James - Friday, Mar 16, 07 @ 1:37 pm:

    Anon –

    Square me away. Was the Invitation to Bid (Reverse auction) limited to Illinois producers of electricity? How ridiculous, since wheeling charges (the cost to pass over other grids and deliver to the purchaser’s grids are now quite small. FERC did see to that.

    You still don’t rule out the possiblity of collusion among the bidders. That is an offense itself.


  17. - State Worker w/ MBA - Friday, Mar 16, 07 @ 8:34 pm:

    Ameren ask for a rate increase in Missouri. The state looked at their books and told them NO they could not justify allowing an increase. Guess we are paying for it here since our state did nothing to revent the problem.


  18. Trackback Knowledge Problem - Tuesday, Mar 20, 07 @ 11:31 pm:

    Manipulation of Illinois Wholesale Power Auction?…

    Michael Giberson A reader (in the comments here) asked whether we had any opinions on the complaint filed last week by the Illinois Attorney General alleging manipulation of the Illinois power procurement auction. Here’s the basic story, via Business …


  19. Pingback Manipulation of Illinois Wholesale Power Auction? « Knowledge Problem - Tuesday, Jun 9, 09 @ 4:54 pm:

    […] A reader (in the comments here) asked whether we had any opinions on the complaint filed last week by the Illinois Attorney General alleging manipulation of the Illinois power procurement auction. Here’s the basic story, via Business Week and the Associated Press: Last year, the Illinois Commerce Commission oversaw a reverse auction, where power suppliers offered the lowest prices at which they would sell electricity to Ameren and ComEd, which then sell the electricity to consumers. […]


Sorry, comments for this post are now closed.


* Reader comments closed for the weekend
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