NRG won’t ask Illinois for financial assistance: Crain’s Chicago Business

Exelon CEO Chris Crane

Crain’s reports that NRG, which bought four Illinois generation plants from Edison Mission/Midwest Generation out of BK, will not be asking Springfield for a bailout. In contrast, Exelon’s hands have been working busily a day shopping for legislators. Read the story here:

NRG won’t ask Illinois for financial assistance – Crain’s Chicago Business.

That bailout, incidentally, will not be funded from all that spare cash sitting idle in Springfield and just looking for a home (NOT). Its cost will be passed through to ratepayers. Under Exelon’s version of “competitive markets,” when electricity market prices are high the company and its shareholders reap the rewards; but when market prices fall, ratepayers must shoulder the downside of competition. Electricity CEOs refer to this type of market as “robust.”

If Illinois ratepayers stand by and let Chris Crane get a publicly-funded bailout for his “competitive” generation plants, they will have proved John Kass right: they are chumbolones.

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A Free Market Lesson for Exelon

Exelon CEO Chris Crane

In our last post, we mentioned the Invisible Hand, an idea brought forth by the patron saint of Free Markets, Adam Smith. As we pointed out, Exelon on its website extols the virtues of the Free Market and anathematizes the very notion of subsidies to players in it — except, of course, when Exelon itself is the intended recipient of that subsidy.

The most common fault among those who claim to be Adam Smith’s intellectual descendants is that they have never actually read his book.  So, with particular regard to Mr. Crane’s insistence that Exelon is entitled to a subsidy for its nuclear plants, we thought it would be worthwhile to go straight to the font of all Free Market Wisdom and see what Smith might have to say about demands such as Exelon’s. Of course, there weren’t any nuclear generating stations in Smith’s day, but that’s an objection that could be raised only by small minds. Smith’s importance and relevance to the present day lies in the principles he developed, not in whether there are still pin manufacturers in Yorkshire. Accordingly, we pass on this excerpt from that Revealed Word of Economics, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter 11, Of the Rent of Land:

His [i.e., the labourer’s, as one who lives by wages] employers constitute the third order, that of those who live by profit. It is the stock that is employed for the sake of profit, which puts into motion the greater part of the useful labour of every society. The plans and projects of the employers of stock regulate and direct all the most important operations of labour, and profit is the end proposed by all those plans and projects…. The interest of this third order, therefore, has not the same connection with the general interest of the society as that of the other two. Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects, than with regard to the latter. Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his [i.e., the country gentleman’s] generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order [i.e., the third order, that which lives by profit], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

(Emphasis added.)

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Exelon Still Pushing for Publicly Funded Bailout

 

Exelon CEO Chris Crane

As we said, despite Chris Crane’s claim that Exelon will not seek a bailout at the expense of Illinois taxpayers or ratepayers, that’s precisely what he’s doing.  Perhaps he’s taking begging lessons from Richard Fuld, who may have a lot of time on his hands these days.

At the end of July 2014, Exelon told investors that it expects to be compensated for the environmental and economic benefits that its nuclear plants provide in Illinois.  We can thus lay at Mr. Crane’s feet the fault of mendacity.

But Exelon’s scores even higher for hypocrisy. Here’s Exelon’s view of taxpayer and ratepayer subsidies from its website:

Competitive markets, not taxpayer or ratepayer subsidies, are the more efficient and least cost way to incent new generation when it is needed.  Subsidized plants are paid for by consumers who will bear the risks of these plants rather than shareholders by paying more for these plants than they could have obtained from the market.

Exelon begging for subsidies is like the fervent anti-abortion protester who unexpectedly (and inconveniently) finds herself “in nature’s way” and decides to get an abortion. Like Exelon, she licenses freely to herself that which she would forbid to all others. Memo to Mr. Crane: It’s time to update your website with this self-exemption from the rules of The Market.

Exelon’s lobbyists have been busy in Springfield, and on May 29, 2014 the General Assembly adopted House Resolution 1146 to pave the way for Exelon’s state-sponsored subsidy. Exelon covered a lot of its complaints in HR1146, such as:

• the “premature shutdown risk” affecting at least three of its nuclear stations if it doesn’t get more money somehow;
• the “failure of competitive wholesale energy markets to recognize nuclear power’s reliability and clean energy attributes”; and
• the loss of jobs that would attend any “premature shutdown” of these nukes.

We’ll have more to say about these in future posts, but for now it’s enough to know that the compensation Crane’s seeking in Springfield can only come from one place: Illinois ratepayers and taxpayers.

The “flawed” competitive wholesale electricity market that Crane has been complaining about looked just grand to Exelon back in 2002-04. Of course, back then not only were power prices much higher than they are now, it didn’t look like they’d ever get much lower. Fracking in the Marcellus Shale had not started yet, and the energy cognoscenti were universally of the opinion that the U.S. would, sooner rather than later, be a net importer of natural gas. This was a sweet set-up for Exelon. Natural gas generally set the marginal price of electricity, and that price was seen as upwardly mobile. But Exelon’s cost of generation at its nuke plants was not only essentially fixed, it was also much, much lower than the price of natural gas-fired generation. All they had to do was sit back and wait.

Exelon’s present tune is very different from the song it was singing when it joined PJM, whose market structure it praised as the model for the entire electric utility industry. Back in 2002, Exelon said that PJM was the best option for both Exelon and its customers, that it gave ready access to its primary wholesale energy trading partners in the east, where the company’s strongest interconnections lay, and that joining PJM would give ComEd’s customers a mature marketplace more quickly with real choices than if it were to join Midwest Independent System Operator (MISO).

“The PJM Interconnection has a strong presence in key eastern markets, and market structures already in place for the region that are similar to what FERC is proposing in its current standard market design. The company also has a long track record of successfully operating energy markets and is the model for the industry. We will join the PJM organization as soon as is practical.”

Pursuant to a FERC order, ComEd, in concert with other utilities (viz., FirstEnergy Corp. (Ohio), Ameren Corp., AEP, CMS (Michigan), Dayton Power & Light, Dominion Virginia Power and Illinois Power)  spent more than $70 million developing the wholesale market structures that it wanted. Rather than being “flawed,” Exelon and its utility partners called PJM a “robust electricity marketplace that is already up and running,” adding that  “…PJM … has already established the infrastructure, policies and business practices for operating a market.”

ComEd’s first receipt of transmission service from PJM in 2003, another step in integrating ComEd into PJM, “delighted” Exelon.  At that time, a PJM official said that “[W]ith this next step, ComEd and PJM continue to move forward toward bringing the benefits of a successful wholesale market to the consumers of Illinois, and no one at Exelon or ComEd piped up to contradict him and tell him how flawed their market really was.

The real explanation is much simpler than Crane would have the public and state agencies believe. If Exelon’s nukes are dying, it’s not because of the production tax credit (PTC), nor is it because wholesale electricity markets are “flawed.”  Rather, it’s because the price of natural gas, instead of rising, has fallen, and demand for electricity (apart from some unavoidable spikes such as that caused by the Polar Vortex) has also gone down.

If events had moved in the opposite direction, if fracking didn’t work, if the Lehman Brothers collapse and the Great Recession had not occurred, if the housing bubble were still inflating, electricity prices would undoubtedly have gone up instead of down. In that case, instead of complaining about alleged market flaws and the PTC, in the face of complaints about high electricity prices Crane would be grinning like the Cheshire Cat and lecturing Speaker Madigan, the Illinois Commerce Commission and the public on The Wisdom of Market, and how the judgments of its Invisible Hand are righteous all together. And, after all, this is what the state signed on for when it introduced competitive retail electricity markets.

HR 1146’s claim that the PJM wholesale electricity market fails to “recognize nuclear power for its reliability” is a canard. Reliability is the subject of PJM’s capacity auction, which is the main reason PJM calls that auction its Reliability Pricing Model. Exelon wants to elicit sympathy because its nuclear capacity didn’t clear the market in the capacity auction a few months ago, giving the impression that all that capacity will now go unsold. But it will be sold, and at higher prices than what it would have received in the capacity auction. Exelon’s shares actually went up on the news that its nuclear units didn’t clear the auction.

At the most fundamental level there is no difference between the bailouts of Wall Street banks (including AIG, though it’s technically an insurer rather than a bank) and Exelon’s sought-after bailout for its nuclear plants. Those plants are held by Exelon Generation, a private, for profit corporation. If times were good, and if Crane and his lobbyists weren’t t running around Springfield with their tin cups, they would hardly be shipping excess cash out to taxpayers and ratepayers. But when losses occur, that’s when Crane and other Free Market Fundamentalists run to the government for a taxpayer or ratepayer bailout.

Once again, all of this private corporation’s gains will have been privatized, and, if Exelon gets its way, its losses will be socialized.

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Exelon’s Illinois Strategy: Profits to Shareholders, Stick Losses to Ratepayers

Exelon CEO Chris Crane

Make no mistake: Despite CEO Chris Crane’s denial that Exelon is angling for a state bailout for his money-losing nuclear generating stations, shifting the costs and risks of Exelon’s struggling nuclear power business to ratepayers (and/or taxpayers) is precisely what Crane intends.

For proof one need not look further than Illinois General Assembly resolution HR1146, which bewails the failure of competitive wholesale markets to recognize the true value of Exelon’s carbon-free nuclear generation, and ordering the Illinois Commerce Commission, the Illinois Power Agency, DCEO and other state agencies to prepare reports for the upcoming legislative session on how to protect Exelon from the perils of the electricity market. [Memo to Mr. Crane: Look up the term “externalities.” It’s a popular one among economists.] Were he not seeking a state bailout, there would be no reason for Crane to take his complaints about wholesale electricity markets, over which the State of Illinois has no jurisdiction (16 U.S.C. 824), to Mike Madigan. The only conceivable reason Exelon would take its woes to Springfield and have the Illinois General Assembly pass HR1146 is to seek protection from the wholesale electricity market at the expense of Illinois ratepayers and/or taxpayers.

If Crane had legitimate complaints about “flawed wholesale markets,” he’d be devoting 100% of his efforts to getting FERC and PJM to cure the market flaws he keeps crying about. But Crane can fool Springfield into believing his “market flaws” kinderfibel, while at PJM and FERC he’d be laughed out of the conference room.

Of course, Exelon, under then-CEO John Rowe, blazed the trail by which formerly lumbering utilities like Commonwealth Edison spun their generation assets off into competitive market affiliates like Exelon Generation.  Rowe’s strategy between the late 1990’s and early 2000’s was to create a competitive retail electricity market, strip the power plants out of vertically-integrated ComEd (leaving it just a wires and delivery company), and put those generating assets to work in a for-profit entity that would then sell power in an open wholesale market. The conventional wisdom back then was that the price of natural gas would go up, raising electricity market prices because natural gas generally sets the electricity price at the margin. In Rowe’s brave new power world, Exelon stood to make more money from a nuclear fleet in a competitive wholesale electricity market than it would as an old-fashioned, regulated-rate-of-return public utility whose prospects for growth lay somewhere between slim and nil. And Exelon bent the world to its will.

The strategy was working fine prior to 2008-09. Exelon was selling its power in the same markets with the same structure as in place now, and Exelon was making money. When Exelon was making money, though, we never heard it complaining that the markets were flawed. Then-CEO John Rowe bestrode the electricity markets like a capitalist colossus, and Wall Street approved.

Then came the Great Recession and the advent of abundant domestic natural gas from fracking in the Marcellus shale. Rowe had placed big bets on nuclear stations in competitive power markets, but Crane assumed Rowe’s place at the electricity gaming table just as the croupier was raking away all of Exelon’s chips. Exelon had to cut its dividend by about 60% last year as Exelon’s shareholders watched the value of their holdings fall by two thirds.

All was not well in ComEdistan.

Crane and similarly situated power company CEOs wasted no time in implementing that time-honored strategy that has ever been a favorite of both Corporate America and Wall Street: Deflect blame onto others. But the success of this strategy chiefly depends on two factors, one of which is basic credibility: the blame shifting has to make sense. The second is that the attractiveness of the blame-shiftee is inversely proportional to the shiftee’s political clout, including the throw-weight of its lobbyists.

Judging matters by these criteria, Crane’s first choice of blame-shiftee, the production tax credit (PTC) for windpower, a 2.3 cents/kilowatt-hour credit, was inauspicious. Crane and his nuclear power peers lectured many a power conference audience on the evils of the PTC as a market-distorting wind energy subsidy, how it was wreaking havoc on nuclear baseload generation, and that it would cause the lights to go out.

This strategy was a loser for Crane because, except for Big Oil, no segment of the energy industry has received (and continues to receive) more lavish subsidies than nuclear power. First are the $58,000,000,000 in federal government loan guarantees that underwrote the construction of nuclear plants. If a nuke operator like Exelon can’t sell power profitably and defaults on its loans, Harry and Louise Taxpayer will get the bill. Then there’s that grand-daddy of subsidies, the federal Price-Anderson Act, which shifts security and accident risks away from the Exelons of the nation and onto the backs of – you guessed it! – Harry and Louise Taxpayer. There are other indirect subsidies, such as tax breaks on uranium mining, but we need not wander too far into the subsidy tall grass to make the point. The Union of Concerned Scientists determined that the value of all subsidies to nuclear power amounts to more than 7 cents/kilowatt-hour. That’s more than three times the amount of the PTC about which Crane and his nuclear CEO colleagues so loudly complain. In fact, it’s more than the average wholesale price for power between 1960 and 2008. As far as the basic credibility criterion is concerned, the PTC subsidy angle was not a good one because the subsidies the government extends to Crane’s nukes are more valuable than the power his nukes produce.

As Ricky Ricardo might have said, “‘splain to me again” who’s distorting the market?

And while the renewables industry doesn’t have anywhere near the campaign contribution treasure chest that Exelon has, it still has its own lobbyists, and they’ve leveled their own fire back at Crane.

The simple truth is that Exelon is trying to portray itself a public utility, and HR1146 is a crony capitalism measure fairly dripping with job-keeping tropes. (Because the measure was led by Madigan, though, the term “job creator” could not be used without imparting an undesirable Republican tinge to the measure.)

Exelon is a for-profit corporation whose earnings, after the payment of princely salaries to its executives (e.g., $17MM to Crane for 2013, even though the share price tanked), either go out as dividends to shareholders or get plowed back into the business to (hopefully) enhance the stock price and earn even more money for shareholders in the future. Exelon certainly didn’t share its bounty with either ratepayers or taxpayers when times were good in the wholesale markets. Now times are bad, and Crane has been paving the way for corporate welfare for Exelon so that it won’t have to close two or three of its unprofitable nuclear generating stations. Crane’s strategy is thus no different than that of the Wall Street Banksters, so gloriously on display during the financial crisis: Privatize gains, socialize losses. When Exelon makes money, Exelon gets to keep it. If Exelon loses money, all ratepayers and taxpayers must chip in to save Chris Crane’s job.

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JP Morgan’s Blythe Masters: Orange is the New Black

Ms. Masters testifies before a U.S. Congressional Committee in 2009

Blythe Masters, who headed up JP Morgan Global Commodities Group, of which JP Morgan Ventures Energy Corp. (JPMVEC) was a major part, is reported to be under investigation by the feds:

Blythe Masters Is Under Investigation By The Feds.

Masters and her group manipulated power markets in California and, to a lesser extent, Michigan. JPMVEC settled the charges with FERC for $410 million last year. So what was going on? Let’s just take one example of the manipulation strategies used by her group.

In addition to regular bilateral markets, the electricity market has a real time and day ahead market. Under the California Independent System Operator tariff rules in effect during her tenure, bidders in the day ahead market were paid for  “ramp” hours that day at their bid price for hours on each side of their bid. This is intended to reflect a power plant’s need to power up and then power down to supply electricity during the bid hours. JPMVEC knew that CAISO’s software for evaluating bids did so only one day at a time.

During the hours of midnight to 2:00 a.m., demand is very low, and market prices are very, very low. Most people are asleep.

JPMVEC bid -$30/MWh (yes, that’s right, negative thirty dollars — they’re paying CAISO to take their power) for the hour between 11:00 p.m. and midnight on Day 1, and then submitted a bid for $999/MWh for the wee  hours between midnight and 2:00 a.m. on Day 2. Because of its one-day-at-a-time software, CAISO took the midnight to 2:00 a.m. bids as ramp hours, and CAISO paid JPMVEC at its bid price of $999/MWh, even though the market price was just $12/MWh.

Blythe and her crew played this little game between April 1 and June 18, 2011, or about 78 days, and raked in a cool $20 million (net) off CAISO. That comes out to about $256,400 in pure profits every day. And that’s just one of the simpler of JPMVEC’s market schemes.

Like the song says, nice work if you can get it.  And people ask why the banksters are trading electricity. What a stupid question.

 

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Fitch Ratings Has Negative Outlook on Electricity Generation

Fitch Ratings recently published a research report on the utilities/power/gas sector that distinguishes credit outlooks based on business lines. Gas utilities have a positive outlook, electric utilities (regulated) a stable one, and competitive generators (gencos) negative.

Fitch points to the recent trend of declining per-capita energy consumption, which they expect to continue, if not accelerate. Fitch also sees erosion in electricity sales for the foreseeable future due to energy efficiency and demand side management programs fostered by federal and state energy policies, leading to continued ratings pressure on gencos. Read the summary of the report here:

FitchResearch.

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Exelon Seeks Corporate Welfare for Its Nuke Plants

Clinton Nuclear Plant

The Sparkspread earlier discussed one of ComEd’s main business objectives in the early 2000s, which it largely achieved: Strip the generating assets out of the regulated public utility, which would then become just a “wires” (i.e., transmission and distribution) business, by transferring them to an unregulated affiliate that could sell the power and energy in the open market.

Before 2000, when those generation assets were held by ComEd and subject to state regulatory limits, the utility was unable to take full advantage of higher prices in the wholesale electricity market. The Illinois Commerce Commission approved the transfer of ComEd’s nuclear generating stations to Exelon Genco, n/k/a Exelon Generation. ComEd didn’t get any cash out of that deal, but ComEd’s witnesses testified that the real benefit to ComEd was that it could lay off the entire risk of the generation side of the business on Exelon Generation:

While, as the [Illinois Commerce] Commission notes, the [t]ransfer [of the nuclear generating stations to Exelon Generation] will reduce the level of  “hard assets” on [ComEd’s] books, it is far more significant from a lender’s credit-assessment perspective that the [t]ransfer will greatly reduce ComEd’s generation-related default risk.” (Ill. C.C. Docket No. 00-0244,  Supplemental Direct Testimony of R. McDonald, pg. 4, lines 82-84).

The risks associated with competition are likely to make the default risk of a debt investment in a generation business greater than the default risk associated with a debt investment in a wires business (transmission and distribution). Ill. C.C. Docket No. 00-0244, Supplemental Direct Testimony of R. McDonald, pg. 5, lines 95-97.

In particular, the [credit rating] agencies’ general assessment is that companies electing to focus on generation will need higher cash flow coverages and stronger capitalization ratios (i.e., more equity) to maintain the same debt rating as the generation market becomes more competitive. Ill. C.C. Docket No. 00-0244, Supplemental Direct Testimony of R. McDonald, pg. 5, lines 107-110.

Exelon Generation, nuke plant operator, got the opportunity to make more money for its parent company, Exelon Corp. But as this testimony shows, Exelon Generation knew the job was dangerous when it took it. Selling power in a competitive market is riskier than getting a regulated rate of return on your assets, and that gave Exelon Generation a higher risk of default.

According to Crain’s Chicago Business, at a November 2013 meeting of the Edison Electric Institute in Orlando, Exelon CEO Chris Crane said that Exelon will close its Quad Cities and Clinton nuclear stations, both of which are money-losers in the current, long-running slump in electricity prices, if the price of power doesn’t go up enough to compensate it for running them. That makes perfect sense and demonstrates the market’s power for creative destruction.

What’s more troubling is the alternative that Exelon’s CEO offered as a way to keep Quad Cities and Clinton running. Exelon may try to push another ComEd bill through the Illinois General Assembly that would compel ratepayers to pay an above-market electricity price under a long-term contract with ComEd so that Exelon won’t have to close those two stations.

There’s a problem here. Exelon’s market-based plan from the early 2000s miscarried, principally because of the shale gas revolution and the Great Recession. The former increased supply, while the latter decreased demand. Econ 101 tells us what that does to the price of the commodity being sold.

Contrary to Mr. Crane’s assertions, the continued low price for electricity does not  represent a flaw in the market. Indeed, setting aside manipulation and other externalities, our era’s secular orthodoxy is that the market can’t be wrong because, well, it’s The Market. Its infallibility exceeds that of Pope Francis speaking ex cathedra.

As ComEd’s testimony from 2000 shows, in choosing to go into the power generating business Exelon Generation expressly and knowingly assumed the risk of debt default, a consequence far more grave than the need to close one or two nukes because they’re not profitable. It doesn’t suit Exelon’s CEO to complain about a wholesale electricity market of which his company was the primary author. Had electricity prices gone the other way, Mr. Crane would be defending that same market with equal vigor.

Exelon compounds its offense of questioning the market by suggesting that Illinois ratepayers subsidize its generation business by paying above-market prices under a long-term agreement with ComEd. This is corporate welfare of the first order.

Assuming that Crane does push to get this corporate welfare for Exelon Generation, he’ll find that there’s toothpaste spread all over Illinois that he’ll have to put back in the tube. The Illinois retail electricity market has been competitive for more than ten years. The  vast majority of nonresidential customers are already served under competitive supply contracts, and most of these are in customer classes already declared competitive, meaning that if they did migrate back to ComEd they’d be eligible only for hourly rate supply service. The benefit to Exelon Generation of their return to ComEd would therefore be precisely nil.

As for residential customers, the growth of municipal aggregation over the last two to three years has far exceeded anyone’s expectations when those provisions were written into the law, so much so that the Illinois Power Agency did no electricity supply procurement for ComEd for the 2013 planning year. That may change in the future as ComEd’s current supply contracts wind down, and new ComEd contracts begin to reflect current, lower market prices. But Exelon ought not to discount the determination of the current crop of municipal aggregation suppliers to hold on to their customers, and those suppliers will have access to the same low-price wholesale market.  So, assuming that Exelon and ComEd do eventually execute a long-term, above-market supply contract, there remains a substantial question as to whether the supply volume under that contract would be large enough to make any difference in the net revenues of Exelon Generation. Indeed, Crane’s corporate welfare quest carries within it the seed of its own destruction: The greater the corporate welfare Exelon seeks, the higher above market the proposed long-term contract price will be, and therefore the less likely that customers will migrate back to ComEd.

One suspects that Mr. Crane’s corporate welfare plea was not fully thought out.

But if Mr. Crane is serious about long-term, above-market contracts with ComEd, any legislative package will have to effect some limits, or even reversals, of Illinois’ current competitive retail market. Alternative retail electric suppliers should be watching Exelon like hawks over the next few months.

Apart from the upside-down economics of Mr. Crane’s corporate welfare plea, Exelon will confront another, far more significant obstacle: optics. We’ll be treated to the spectacle of Exelon seeking corporate welfare from the General Assembly within a few months of its vote to cut pensions to retired public employees, and even closer to Congress’s termination of support for the long-term unemployed. Retired schoolteachers in Illinois will not only get less money each month from their reduced pensions, but they will have to pay more of what they do get to ComEd so that its affiliate, Exelon Generation, may be spared the vicissitudes of the free market that Exelon itself ushered in.

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Entergy (Vermont Yankee) Has a Chief Executive Whiner Too

The Vermont Yankee Nuclear Generation Plant

Entergy announced yesterday that at the end of 2014 it will close its Vermont Yankee nuclear generating station. Explaining the decision, Entergy’s CEO Leo Denault blamed, among other things, “flaws in the design of the region’s electricity marketplace.”

Only a few weeks ago we talked about Chris Crane, Exelon’s Chief Executive Whiner, who was complaining about flawed markets in PJM, even though those markets are the same ones his predecessors lauded as “robust” only a few years ago. The Sparkspread predicted that other energy company CEOs would soon begin to repeat the term “flawed markets” like a mantra.

And then came Leo Denault from Entergy to prove us right.

Because electric generation companies are getting pounded in the open market, the “flawed market” will now be a trope in the postprandial speeches that Crane, Denault and other energy CEOs love so much. On the plus side, their audience, hovering in that blissful intermediate state between satiety and fatigue won’t hear most of it. But if they did they’d realize that the speaker’s hypocrisy is breathtaking.

Let’s not forget that it was the nuclear plant owners who pushed for deregulated energy markets as a way to maximize the value of their generating assets and avoid the stranded costs that came from a plant whose book value exceeded its market value. The nuke owners were the ones touting free markets for energy and consigning traditional rate-of-return regulation to the dustbin of history. (E.g., Lacy, B., Deregulation – Liberalized Life, Nuclear Engineering International, December 31, 2004, pg. 16). Denault’s predecessor as Entergy CEO, J. Wayne Leonard, had big plans to put Vermont Yankee and a few other nuke stations into a separate merchant power company to take advantage of the market that Denault now finds “flawed.” (Entergy to Create Merchant Nuclear Company, Platts Nucleonics Week, Vol. 48, No. 45, pg. 1, November 8, 2007).

What Crane and Denault are really whining about is the effect of low natural gas prices on nuke operators. Back in 2007, settlements on the Nymex prompt month natural gas contract averaged over $6.86/mmBtus, while for YTD 2013 that average is about $3.68.

That’s a big difference.

The simple truth is that a few years ago Exelon, Entergy and other energy companies saw an opportunity to strip the generation assets out of their regulated utilities and plunk them down into new merchant power companies that could sell the power in a free market for electricity. Those markets were just grand as long as they were making money.

But now that the natural gas glut has torn the bottom out of the electricity market, Chris Crane, Leo Denault and their cohorts can’t stop whining that those markets are “flawed.” They wanted competitive power markets, and they got them.

Memo to Chris and Leo: Not to worry. The effect of natural gas prices on your respective companies is merely one more example of the creative destruction that Schumpeter said was an integral part of the free market you have so long espoused. When you go belly up, someone at the 363 sale will pick the assets up on the cheap (relatively speaking), and make a go of it where you found “flawed markets.”

Flawed markets? I think not. Flawed CEOs, rather.

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J.P. Morgan Faces New Probe on Electricity Trades

Blythe Masters, Head of J.P. Morgan’s Commodities Trading

The Justice Department is investigating J.P. Morgan for unlawful manipulation of the electricity market in California and Michigan. This investigation grows out of the same facts that resulted in J.P. Morgan settling charges leveled by FERC three weeks ago for $410 Million. In that settlement J.P. Morgan neither admitted nor denied wrongdoing, but those were civil charges and civil penalties.

If Justice does bring charges, based on a review of the FERC settlement The Sparkspread’s prediction is that someone will become a guest of the feds.

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JP Morgan Settles Electricity Market Manipulation Case with FERC: $410MM

The Wall Street Journal reports that JP Morgan agreed Tuesday to pay $410 million to U.S. energy regulators to settle accusations that the banks’ traders manipulated electricity markets in California and the Midwest.

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