Power prices manipulated in three cases:
Alberta Power Pool probe concludes
Edmonton Journal - May 29, 2002
by Bryant Avery
Alberta electricity prices
can be artificially increased by power trading firms
operating under the province's deregulated rules, according to an Alberta Power
Pool investigation of three "major incidents" of price distortion. The power
pool, the provincial body that oversees the wholesale market, says in a report
that power trading firms sometimes withhold power from the grid, creating a
shortfall which forces up the price for periods ranging from minutes to hours.
As a result, Alberta customers occasionally may be paying higher prices than
Power pool spokesman Wayne St. Amour could not provide an estimate of the total
yearly cost. Nor would he reveal the value of the three investigated cases.
Despite the findings, a summary of the power pool report dated April 30
recommends no changes to the province's trading rules, intended to provide ample
flexibility for power companies selling onto the grid.
The summary, which acknowledges the power pool investigated three major
incidents of price "distortion," states that "this behaviour is common with
smaller megawatt shifts." The pool is recommending that no changes be made to
the way the new commodity market operates, St. Amour said.
"The phenomenon is not significant to the extent that it would require us to
make amendments to our rules," he said. But Dale Hildebrand, who advises major
corporate power consumers, said the rules should be tightened to prevent the
withholding of generation by corporate traders. The loss to consumers in any
given hour can be in the millions of dollars, estimated Hildebrand,
vice-president of Optimum Energy Management Inc. in Calgary. With wholesale
power averaging $38 per megawatt-hour, the hourly value of exchange is about $250,000.
But if the hourly price rises to $380 per megawatt-hour, the value of trades in
that period and the wholesale cost of electricity to industrial consumers who
buy by the hour would approach $2.5 million. The traders nibble away at the
system to make larger profits, Consumers' Association lawyer Jim Wachowich
suggested. He agrees the rules need to be tightened.
"If the market can be manipulated, especially on the supply side, there ought to
be a big red flag there for the government."
Still, Hildebrand said "you can`t fault companies for making money if you
haven`t told them the behaviour is unacceptable."
At the heart of the issue is something called the "locking restatement" rule
that allows traders to supply less power to the grid than committed, sometimes
causing a shortfall and subsequent price spike. Each day, energy traders commit
to provide a certain supply of power for the next day. But at the last moment,
any of the firms may inform the power pool it cannot meet its obligation for
that hour. The resulting 11th-hour shortfall has the potential to cause a
soaring price spike, perhaps over a couple of hours.
"An analysis of these incidents demonstrated that the use of a locking
restatement during the hour of delivery does result in a distortion to the price
mainly due to the inability of the market to respond," the report concluded. The
report said "the locking restatement was frequently used in the year 2001 to
arbitrarily raise the pool price." But the report added "market conditions" in
2002 have reduced the number of incidents.
For multiple reasons, price spikes are common on the 17-month-old market
exchange. The average wholesale power price so far this year has been $38 per
megawatt-hour. But prices vary dramatically, ranging from $588.44 to $8.44 last
Trades on the pool exchange are valued at $5 billion a year, St. Amour said. But
most uses of the restatement rule are legitimate, he said.
The pool, and its affiliated Market Surveillance Administrator, monitor the
hourly trades, watching for "gaming." They also make unannounced visits to power
plants that claim technical problems. The power pool's investigators looked at
trades, including those of four big traders in the province, divisions of Epcor
Inc., Enmax Energy, TransCanada Pipe Lines and Engage Energy.
TransCanada, however, said the market is working as it should. As power prices
rise, companies are encouraged to increase supply, which in turn drives the
price down, said spokesman Glenn Herchak. Ken Willis, director of energy supply
at Enmax in Calgary, disagreed with the power pool study findings.
"The flavour of the report seems to indicate gaming and abusive rules, but this
is competitive behaviour within a set of rules that are out there."
Martin Merritt, vice-president of power at Engage, said the trading system is a
work in progress, a "shock absorber" which is more flexible than the old
regulated system. He noted that the $38 per megawatt-hour price is below the
cost of production even for coal-fired plants.
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