It usually happens only during summer heat waves, but this year’s frigid winter is causing power prices to spike steeply -- something not typically seen by businesses and power suppliers providing electricity to customers at this time of year.
But in a decision last week by the Federal Energy Regulatory Commission, the agency granted a request by PJM Interconnection -- the largest operator of the country’s power grid -- to allow electricity suppliers to earn much more than they would be permitted to under normal circumstances.
In the convoluted world of energy regulation, the decision effectively means that not only would the last power plants called into service earn far more than they would typically earn, but also every previous energy supplier that was dispatched to keep the grid reliable.
The decision probably means higher profits for power suppliers and higher costs for businesses and consumers, particularly for those who have not locked into long-term energy contracts.
Most residential customers who have elected to stay with their incumbent utility would not be affected, although about 16 percent of customers who have switched to an alternative energy supplier could see their costs climb in the future, particularly if it costs the suppliers more to supply electricity this winter.
The rationale behind the decision by the federal agency is that cold temperatures have pushed natural gas prices much higher, an event that has greatly increased the cost of many power suppliers to provide electricity to maintain the reliability of the electric grid.
In response, the PJM Interconnection asked FERC to waive a requirement to cap what power companies earn on the electricity they supply to keep the lights on for businesses and residential consumers.
With the higher costs of natural gas, the grid operator argued some relief was needed in its petition to the federal agency.
“PJM states that this situation is untenable because it does not provide the affected generation an opportunity to recover their costs that are generating the energy that are required to offer into the PJM market,’’ the grid operator argued in a brief submitted to FERC.
PJM also argued in its filing that the exemption is limited in scope and time (the remainder of the winter season) and only applied to generation facilities with higher-than-normal fuel costs due to the frigid temperatures.
Consumer representatives, including the New Jersey Division of Rate Counsel, disputed that assessment. They argued the waiver granted by the federal agency is limited in scope and is necessary for all regions of PJM, which serves more than 50 million customers stretching from New Jersey and the rest of the eastern seaboard to Illinois. If granted, the proposal, would constitute to retroactive ratemaking, which would lead to higher rates for consumers without a regulatory proceeding, said Stefanie Brand, director of the division.
“Customers should not be charged increased prices for risks that generators consciously assumed by making the business,’’ according to the FERC brief.
That may well be the outcome, according to an energy analyst.
“In the context of other decisions by FERC, they are more disposed to efforts to allow higher wholesale prices in order to ensure reliability,’’ according to Paul Patterson, an energy analyst with Glenrock Associates in New York City. Higher wholesale prices generally translate to higher utility costs to consumers and businesses.
In comments to the agency, opponents, including the Maryland Public Service Commission, argued the costs allowed to the generators under the proposal would be “unjust and unreasonable.’’
But the federal agency found its decision on the requested waivers was limited in scope and only applied to a period through March, 31, 2014.