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The Biggest Billion Dollar Corporate Ripoff You Never Even Heard Of

Energy Deregulation Put Corporations In Charge Of Monopoly Prices

Rigged By Design: “Market” Price Is Absurdly Set Based On The HIGHEST BID

And now a word from our sponsors – “THE BGS CARTEL”

The Murphy BPU is preparing to conduct the annual power “auction” that determines the prices you will pay for energy. I’ve tried – unsuccessfully – to warn about this before:

6. The price of power is set based on the HIGHEST COST GENERATION SOURCE

When I first read about the PJM power auction, it was so absurd that I was sure that I was misunderstanding how the auction set the [wholesale] “market” price of power.

I don’t think the public has a clue about how the so called deregulated “free market” in energy actually works or how the so called competitive “BGS power auction” actually works. …

In a must read story, David Kay Johnston exposes how the auction markets are rigged by industry fraud.

But PSEG explains clearly how the auctions lead to high prices and consumer ripoff even when they work as designed and are not rigged:

“The price that each generator receives for the power it produces is not ordinarily established by its own bid. Wholesale markets operate on the principle of the “single market clearing price.” All generators are paid the same price based on the bid of the last unit that “cleared the market,” that is, the most expensive unit needed to meet demand. “

Did you get that? The price is set based on “the most expensive unit needed to meet demand. “ This is a statement of fact by PSE&G itself, not an accusation from me.

You won’t read about any of this in the standard puff piece from NJ Spotlight about the price outcome of the annual “Basic Generation Service” (BGS) power auction. That auction does not simulate a “competitive market”, it creates a cartel.

So I want to again explain how the BGS “auction” actually works, because it is exactly the opposite of what you think an auction is.

If government were SELLING at an auction, they obviously would seek the HIGHEST bidder.

In contrast, if government were BUYING a commodity, e.g. auctioning power, the “market” price would be set by the LOWEST bidder – with higher prices only as needed to meet the amount of power bid.

For a purely hypothetical example: if BPU were auctioning the monopoly privilege to supply 100 Megawatts (MW) of power, and the low bid came in at $120 per MW but for only 75 MW of capacity, BPU would then go to the next lowest bidder to obtain the additional increment of 20 MW, likely at a higher cost, lets stay $150 per MW. And a higher price yet ($200/MW) for the final increment of 5  MW to get to 100 MW of total capacity needed.

That’s the way a real “market” would work – consumers would buy the cheapest commodity first until the supply were exhausted and then move to the next higher priced supply.

The capacity weighted “market” price of power under this real auction would be $130 per MW.

[(75 X $120) + (20 X $150) + (5 X $200)]/100 =$130 per MW]

But that’s now how the BGS auction works. Just the opposite.

The HIGHEST BID sets the “market price” and all the other bids – including the lower and lowest bids – are paid uniformly at the HIGHEST BID PRICE (i.e. “single market clearing price.”).

In my hypothetical above, that would be $200 per MW (a price paid even to the corporation that bid $120!!!)

The difference between paying for energy at the lowest bid based weighted price ($130) versus the highest bid “single market clearing price“ ($200) is huge: it amounts to billions of dollars in consumer ripoffs that go straight to corporate windfall profits.

This is obviously absurd.

Check out how BPU obscures that absurdity – note especially how they define “market conditions” as the result of the BGS auction itself, not any real competitive “market”:

“Basic Generation Service (BGS)

Pursuant to the Electric Discount and Energy Competition Act of 1999 (Act), the local electric distribution companies (“EDCs”) are obligated to provide basic generation service (BGS) until the Board determines that it is no longer necessary.  BGS refers to the EDCs’ obligation to obtain and provide the supply of electricity for customers who do not switch to an alternative retail supplier, known as a Third Party Supplier.  The Act requires that power procured for BGS by a utility be purchased at prices consistent with market conditions.  The charges assessed to customers for BGS are regulated by NJBPU, and are based on the reasonable and prudent cost to the utility of providing the service, including the cost of power purchased at prices consistent with market conditions by the utility in the competitive wholesale marketplace, and related, capacity, ancillary and administrative costs as determined by the Board.

The auction itself was privatized and designed by a private corporation, not BPU regulators: (About US)

Optimal Auctions designs and administers valued-added expert auctions. Our team has developed the most advanced online auctions in the world to assist companies and regulators to realize the full potential of microeconomics, game theory, leading technology, and best business practices. We have administered over $105 billion in auctions in a variety of vertical markets including computer/high tech, energy, telecommunications, petrochemicals, pharmaceuticals, and natural resources.

This is what energy deregulation has done. This auction does not simulate market conditions it creates a cartel. The cartel is administered by a private corporation.

The corporations, via the HIGEST bid, determine the “market conditions” (i.e. the wholesale price).

They then build their profits and administrative overhead costs in addition to the auction wholesale price they themselves set. And that is what you pay per month. A RIPOFF!

The energy companies themselves note that billions of dollars are involved. And it looks like the energy corporations actually register bidders and administer the auction:

Each year since 2002, the four New Jersey Electric Distribution Companies (EDCs) – Public Service Electric and Gas Company (PSE&G), Jersey Central Power & Light Company (JCP&L), Atlantic City Electric Company (ACE), and Rockland Electric Company (RECO) – have procured several billion dollars of electric supply to serve their Basic Generation Service (BGS) customers through a statewide Auction Process held in February.

If you want an excellent breakdown of this massive billion dollar scam, listen to academic economist and Greek leader Yanis Varoufakis explain how they are now pulling the same kind of scam in the European Commission to respond to energy crisis of the loss of Russian gas. It is the best detailed explanation I’ve seen on how this auction actually works: WATCH.

Energy deregulation is a scam that has not brought lower prices and more efficient and cleaner energy – just the opposite.

Any real climate or renewable energy reform must begin with repeal of energy deregulation, followed by termination of the power of corporations, and providing for public ownership and control over this vital monopoly public utility.