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How Donald Trump Is Raising Your Electric Bill

The candidate who sold himself as the champion of working people and small business is lining Wall Street's pockets as president.

opinion

Photo Illustration by The Daily Beast

The price of electricity will start rising soon, thanks to Donald Trump, who promised voters he would champion their interests against Wall Street, but instead is putting allies of Wall Street and utilities in control of electricity prices.

One of Trump’s nominees for the Federal Energy Regulatory Commission (FERC), holds Americans in such contempt that, two months ago, he accused those challenging utilities of waging “jihad.”

Trump signaled this betrayal of voters on his first working day in office, though you may not know this. While our biggest news organizations cover Trump’s Tweets thoroughly, coverage of FERC is at best low-watt.

On Jan. 23, Trump forced the resignation of Norman Bay as chairman of FERC, which regulates interstate electricity markets, interstate oil and natural gas pipelines, liquefied natural-gas facilities and even the level of water behind hydroelectric dams. Bay was the only commissioner inclined to support enforcement of rules designed to prevent price gouging by Wall Street electricity traders.

Watchdogs Who Don’t Watch

In Bay's place, Trump elevated Commissioner Cheryl LaFleur, a former electric utility CEO to FERC chair.

LaFleur’s past decisions show she is a sightless sheriff. Her favoritism for the industry was most apparent in her responses to petitions filed starting in 2014 by Pittsburgh utility lawyer Daniel Sponseller over a fleet of 17 New England power plants bought that year by Energy Capital Partners, a company formed by five former Wall Streeters.

Just weeks after buying the power plants, Energy Capital Partners withdrew a big baseload power plant known as Brayton Point from an annual electricity auction.

Electricity is partially priced via what's called the “capacity market.” Winning bidders get paid just to promise that their power plants will be available when needed to meet the demand for power. We don’t do that for groceries or cars on dealer lots because they are stable products that can await sellers. Electricity, by contrast, is created and destroyed in an instant.

Without Brayton Point, the New England capacity auction price tripled from about $800 million to $2.4 billion. Energy Capital Partners soon resold its fleet to Dynegy, a major electric generating company. Dynegy withheld Brayton Point from the next two auctions and prices increased even more. The three consecutive auctions cost New England electricity customers $3.8 billion in higher prices. Prices then fell in the fourth year.

Sponseller calculates that Energy Capital Partners and Dynegy made as much as $225 million in extra profits by withholding Brayton Point, which it scheduled for a 2017 closing. That was far more than what they are believed to have paid for the power plant, perhaps nine times as much. So buying Brayton Point just to close it was lucrative, provided FERC saw nothing wrong.

Alarmed by the auction price spikes and indications of a rigged market, six senators and 13 representatives wrote LaFleur two years ago asking for an investigation. A federal appeals court held that LaFleur’s claim that she could do nothing to inquire into the auction “seems questionable at best.” In my view her conduct warrants impeachment.

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LaFleur, then FERC acting chair, refused to investigate complaints by Sponseller and others. She basically told the 19 lawmakers to pound sand.

That’s the kind of arrogance Trump admires. His elevating LaFleur to FERC chair is no surprise, though it is a betrayal of voters.

Next, in early May Trump nominated to FERC two men known to be reliable friends of energy companies.

Rob Powelson is a Pennsylvania utility commissioner who, referring to protesters alleging FERC favoritism for pipeline companies, said in March, “The jihad has begun.”

While Powelson soon said his remarks were unwise, he still favors more fracking with few-to-no regulations to protect farms and drinking-water supplies.

Trump’s other pick is Neil Chatterjee, top energy adviser to Senator Mitch McConnell of Kentucky, the Senate majority leader. Chatterjee is of the burn-drill-frack school of fossil-fuel management that detests environmental regulations.

Senator Lisa Murkowski of Alaska, another ally of energy industries but not so much of their customers and the environment, gave both nominees an expedited and welcoming hearing last week before the Senate Energy and Natural Resources she chairs.

How Electricity Auctions Work

By law, FERC is supposed to apply the “just and reasonable” doctrine. This doctrine balances the interests of utility investors and utility customers, making sure both profits and prices are fair.

The existing electricity auction rules don’t meet the just-and-reasonable standard.

These markets were designed around 2000 by Enron, the now-defunct energy trading company that manipulated electricity prices in California by turning off power plants to create shortages. That made electricity spot prices soar.

Enron’s machinations brought public attention to how easily electricity auctions can be gamed. The Edison Electric Institute, which represents investor-owned electric utilities, warned in a 2001 report on auction rules that “without careful consideration for designs whose rules are complete, consistent, and without loopholes, energy markets will be less efficient and the objectives of the auction and the best intentions of regulators will not be fully realized.”

For more than a decade experience and experiments have shown that the electricity markets push prices up by design. Neither the George W. Bush or Obama administrations fixed this, but they also didn’t run for office promising to “drain the swamp” and campaigning against predations by Wall Street, while Trump did.

When poor design of electricity auctions favors electric power plant owners over customers Americans get price gouging. Economists describe jacking up prices this way with the obscuring term "rent-seeking."

The electricity industry poses two fundamental competition problems, both of which government can either resolve or, as Trump is doing, worsen.

The first is lack of competition. Electricity distribution is a natural monopoly. Who wants a dozen power lines running down their street or even back alley? The solution to this is regulation under the just-and-reasonable doctrine. FERC and state utility rate-setting boards act as a proxy for the market, setting rates close to those that a competitive market should produce.

Almost a century of experience shows that regulators favor robust utility profits, but at least an argument can be made that this ensures reliability of supply. In our digital era, when the first second of electric power interruption can cost society billions of dollars, reliability is also a virtue.

Over long periods of time electric power interruptions, though rare, cost each American about a dollar a day.

On the power-generation side, however, there is no natural monopoly. Under legal changes that began a quarter century ago, about half the states have competitive markets in which power-plant owners compete to sell juice.

Numerous auctions set competitive prices for periods ranging from a year down to a few minutes. These auctions use a single price, called a clearing price, in which the highest price needed to ensure enough power to meet demand is paid to every supplier.

In such auctions, nuclear power plants and baseload coal plants like Brayton Point are often bid at just one penny per unit of power because they run flat out around the clock and must unload their juice.

If the average of bids is, say, $10 but the last unit of power needed to supply the market is $100 then every power plant gets $100 per unit of electricity, even those bid at a penny.

Clearing price auctions work superbly when each owner is allowed a single power plant. But as with Energy Capital Partners, when buyers own a fleet they can strategically bid different plants in their fleet, or even withhold a power plant like Brayton Point, from an auction. That jacks up the clearing price. That is what both auction records and experiments show happens often.

In theory, these price spikes encourage new investors to build power plants. The idea is that investors see $100 payments for electricity that would be profitable when sold for $10 and figure that – by building another power plant – investors can get in on the action even if the added capacity lowers the clearing price to $50. That’s still a very fat profit.

But the clearing price theory as applied by FERC doesn't work as intended. The signal sent by high prices is not to build new power plants, but to close them to create more price spikes. That is what we saw with Brayton Point, as well as with closings of five nuclear power plants in the last five years.

Investors seeking big profits need only restrict the supply of power to make outrageous high profits. And, so long as sightless sheriffs like LaFleur are in charge, price gougers are free to stuff their bank accounts with money drained from millions of individual and business pockets.

Were Donald Trump actually the champion of working people and small business he sells himself as, he would have pushed LaFleur out and named new commissioners dedicated to auctions that set the most efficient prices possible for electricity.

Instead, Trump is the champion of Wall Street, and that means you will pay the price in your electricity bills now and for years to come.