Potential for Abuse

Potential for Abuse

Not all Web-trading systems are alike. PJM has set up a multi-settlement market system that enables big end-users like Bethlehem Steel to buy power a full day ahead from generators or distributors. PJM acts most like the Nasdaq exchange, with PJM serving as the operator, handling settlements and collecting a fee for the service. ISO-NE and most other grids with Web trading systems aren't there yet: All of their trading is still just between producers—the companies that actually generate electricity—and distributors, companies that primarily buy power and handle the transmission and distribution to corporate end-users. Enron, on the other hand, participates in each power deal made over its online market; it buys and sells power in every trade that is transacted over its site.

Critics say regulation is needed to match the rapid development of these electronic marketplaces, which are now either hosting or transacting billions of dollars worth of deals. Michael Aguirre, a San Diego securities law attorney who has filed cases against Enron, Reliant and a number of other power companies on behalf of California ratepayers, says that current energy markets—particularly those that use the Internet—"resemble the state of the stock market before 1929."

Aguirre says the temptation to manipulate the system to make an extreme profit is great. Participants, he says, are sharing their price and load information, which means everyone knows what everyone else is going to do. That allows them to hold out for the highest price, instead of competing to be the low-cost provider. Add to that a kind of "daisy-chain" trading process that leaves the last holder of a contract getting top dollar for the power—and everyone else along the way getting their asking price—and you have a situation where the consumer gets burned. In the recent California energy crisis, he says, "We think there had to be collusion in the energy market trading."

And there are other hurdles that must be overcome—some political, some physical—before electricity will be as fungible as oil or coffee, or as easy to sell and deliver over the Web as books from Amazon.com Inc. With no transmission lines of consequence crossing the Rocky Mountains, for example, California has been limited to other Western states in its efforts to buy its way out of its power crunch, and those states are facing the same capacity constraints. "The current power infrastructure is as incompatible with the future as horse trails were to automobiles," says Stephen Gehl of the Electric Power Research Institute, a Silicon Valley-based think tank.

True enough, for all the Internet can offer, it can't provide the engineering needed to make the nation's electric grids suitable for the power trading ahead—solid state switches, sensors to monitor the system, communications links and computing capacity to solve the complex problems of trading. The cost of doing all of this will be huge, but it's not evident who will take the lead. (see Power Shortage) "You've got this tremendous increase in complexity with all the new generator companies throwing power under the grid and no software or hardware to redistribute it and handle it," says Columbia's Anderson. "It's like an air traffic control system without the Federal Aviation Administration up there running things. This is a gigantic systems integration problem without a leader."

The next big step: so-called "smart meters" that, with other new technology, would fully automate these markets. EPRI's Gehl suggests that as this new technology gets developed and installed at end-user companies, more and more power providers will begin offering variable pricing based on demand. Right now, he says, smart meters are costly and few are installed, and with demand for variable pricing still limited, many providers just don't offer it. Demand pricing, Gehl says, "is the first step toward the construction of a Net-powered, automatic system that completely revolutionizes the existing grid."

On the horizon? A national market for electric power, a prospect the Federal Energy Regulatory Commission has anticipated with the creation of a new regulatory section, the Office of Markets, Tariffs and Rates. Industry watchers agree that once all states have deregulated electric power, variable pricing based upon demand will become the norm. At that point, smart metering, with demand adjusted automatically through direct links to the Internet marketplace, will probably reduce peak demand levels—and prices—dramatically. And brownouts or blackouts, if not a thing of the past, will become much less likely.

Dave Lindorff has written for publications including The Atlantic Monthly and BusinessWeek magazine. He is author of Marketplace Medicine: The Rise of the For-Profit Hospital Chains. Comments on this story can be sent to editors@cioinsight.com.

This article was originally published on 07-01-2001
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