There is no nice way to say it. We have all been ripped off.
My name is Gary Vey. I probably shouldn't give my true name -- most authors would make one up, or use a fake pseudonym -- but this is about truth. I own ViewZone. I program the code, pay for the web space and edit all of the articles. I am the webmaster.
From 1999 through 2001 I was webmaster of a company called ISO-New England. The company is located in Holyoke, Massachusetts, a poor area that is about a two hour drive West of Boston. The company has about 400 employees. Most are honest and moral people with families who work hard for a living as programmers, engineers, accountants and office workers. The building is bland and set back from the highway. All that is visible to outsiders are a few dish antennae and some microwave repeaters on a small tower. The mundane appearance of this facility belies its importance to the electrical power system of America's Northeast.
Right now, you are sitting in front of a computer. If you are in America, the power coming through your wall outlet is one of the most reliable energy sources on the entire planet. Gone are the days when power interruptions were common or when unstable surges could zap your television set. This is no accident. The reliability of America's power system is a direct result of the interconnection of many power generators, located throughout the nation, who are connected together in a large grid.
If you are middle-aged, you likely remember the famous power blackout that plunged the Northeast into darkness on November 9, 1965. At the time, power stations were connected to a common grid by switching that was independently controlled by each generating station. When a problem occurred in upper New York state, the resulting drain of power had a domino effect on other generation stations that were connected to the same grid. Because each station had to independently disconnect from the grid, the entire system eventually suffered electrical shorts, equipment damage, and took almost 13 hours to regain operation.
This system vulnerability was improved when one main switching system was designed to control the many generation stations by remote control. If one particular generator had to shut down, other generators could pick up the slack, disconnect the defective equipment, and maintain the reliability of power almost instantaneously.
An electric generating station is expensive to build, and with the price of oil, gas and coal rising, they are also becoming expensive to run. Like water and clean air, electricity is vital to life. Businesses need it, homes need it, and almost every aspect of daily life depends on the reliability of electrical energy. In many regions, the local power system was owned by a municipality or local government. Often the state would run the power plants and they charged their customers just enough to cover the cost of the fuel needed to run the generator, to maintain and improve the power lines, and to plan for future power consumption needs of that region. This type of system kept the cost of electricity to a minimum and more or less ran at a "break even" cost. But this was soon to change.
In 1978 the government wanted to encourage small companies to get involved in the business of electrical energy generation. If you were alive then, you will recall that we suffered an oil embargo with Iran and there were long lines at the neighborhood gas pumps. Our dependence on petroleum products caused some people to install solar panels on their roof to heat their homes. Legislation, such as the Public Utility Regulation Policies Act of 1978, encouraged non-oil electric generation by mandating that power companies had to buy back electrical power generated by a home owner's solar panels! This had very little impact on the actual energy crisis but demonstrated the dedication of the government to encourage even the smallest efforts to keep America in electrical power.
The Energy Policy Act of 1992 further encouraged private companies to get involved in producing electrical energy and provided many incentives for electrical start-up companies. While a small electric company could just as easily sell power as a huge hydroelectric dam, the price for the power was still kept low and the consumer, you and I, were as worried about our 115 volts as were about the Sun rising the next morning. By 1998, during the Clinton presidency, power was still a great buy. The markets were by then sophisticated, with different price structures being offered for volume consumers, like large cities or factories, and with different rates for power delivered during peak hours and less expensive power delivered at off-peak hours. The price of electricity was still based on the cost of fuel but the consumption was regulated by encouraging high power users to consume electricity when the demand on the entire system was low, and the price was substantially reduced. Then, in December of 1998, the Federal Energy Regulatory Commission changed everything.
I have never been able to determine what person, or group of people, decided that electrical power should be traded as freely as coffee or bananas, but someone in some boardroom decided to deregulate America's electrical system. They decided to do away with setting the price of electricity at a "break even" rate and proposed that it should be sold and priced based on supply and demand, in the free marketplace.
Words like "free market" and "free trade" sound great. In fact, Americans love anything that is free. We value free-dom, our free-space, free-range chickens, free gifts and free love. Hardly anyone paid attention to the concept of a "free market electrical system" when it was proposed, and on May 1st, 1999, America had its "free market" for electricity. As everyone would soon learn, it was anything but free.
I worked as the webmaster of the company that switches and monitors the generation and consumption of power in America's Northeast. When the free marketplace was implemented, this company was also responsible for posting the power requirements, taking bids from generators to produce the power, and then accepting the lowest bids for actually producing the power. In theory, this all sounds great. The lowest bid gets to sell the power while the highest bids do not. Over time, expensive power plants would realize that the inexpensive plants were selling more power and they would be forced to wither, become more efficient or get out of the energy business. Consumers, theoretically, would benefit by having the most inexpensive power coming to their homes and businesses, reducing their electric bills while benefiting from a stimulated energy market which would encourage hundreds of new companies to build efficient power plants. But there was a problem.
To have a seat in the power buying and selling game, you needed to have a certificate that cost several thousand dollars, plus you had to have either a reliable generation facility (if you were selling electricity) or a substantial cash reserve (if you intended to be a buyer). But many generating plants were full of engineers, unfamiliar with the marketplace and bidding structure, and so these companies often used agents to sit in for them. Often these agents would represent a variety of generators. Likewise, the buyers of electrical power could represent a big city, a large factory, or any number of consumer groups. These "power brokers" traded power over the internet, on encrypted lines, and could buy and sell electricity either in real-time, the next day, or even the next month.
Shortly after the market opened for business on May 1st, something odd happened. Prices for electricity began to rise suddenly and dramatically. In fact, the prices rose so high that they were effectively limited only by the values programmed into the system and would, in theory, have increased more had the programmers imagined a number higher than $9,999 for a unit that usually sold for about twenty bucks. Something had obviously gone wrong -- but what?
I was not directly involved in the investigation and so cannot comment on the problem. While the daily rates never went that high again, they did rather continually rise over the subsequent months, doubling and tripling from their pre-"free market" rates. My own electric bill at home jumped from $22 a month to almost $65, despite no increase in use. The slower increases were easier to take and there was little public outcry. But that summer, in both New England and in California, a heat wave caused power shortages and rolling blackouts reminiscent of the one in 1965. What was going on? Consumers were silent about their huge electric bills and, instead, were happy just to have the power available to run air conditioners and watch their nightly television shows.
At some point in the summer, I was asked to accompany some workers to New York City to see a typical trading floor where the power brokers set the price for electricity in the Northeast. We went to Times Square, perhaps the most electric environment in the world. Amidst the blinking and flashing billboards we entered a small door that opened up to a huge marble hall. Taking an elevator, we were soon in the middle of a large open room, about the size of a football field, filled with computer monitors, telephones and men with white shirts. We squeezed our way through the homogenous rows until we came to the desks of the Morgan Stanley Dean Witter brokers.
The people manning these terminals were like the people I worked with -- good people, with families and dreams. As they described their daily jobs, a sinister plot began to unfold before my eyes and ears.
Because electrical power can be purchased weeks in advance, it is possible to buy power for a particular day at a rate that is based on the estimated supply and demand. This rate is sometimes high, if it is in the summer, but even then it is a reasonable rate. After all, it is well enough in the future and details about consumption and availability are unknown.
I listened as one of the brokers told of how the group typically picked a day, mid-week and about 3 or 4 weeks into the future. Once the day was determined, the group systematically purchased all of the available electrical power being offered for that period in a particular region of the country. Next, other workers bought large blocks of power in adjacent regions. As the target date drew near, companies like the one for which I worked would predict the power needed to supply the region in question and see what power remained available to buy. Now here is the problem.
Because the brokers had already purchased the electrical power in the target region, plus some adjacent regions, there appeared to be a shortage of power needed to supply the minimum requirements for the homes and businesses of that region. A call was the placed for bids to produce additional electricity and, because the region was in a pinch to prevent a blackout, it was now a "sellers market."
Brokers, like the one I visited, were now in a position to sell the power back to the target region for highly elevated rates, bringing millions of dollars in profit to their firm and its investors. This profit was reflected in the variable cost of electricity and passed on to you and I in our monthly electric bills. So much for a "free market."
In this scheme of things, the rich get richer and the rest of us get the shaft. In order to buy the enormous quantities of electricity in a target region, investment firms must have huge cash reserves, often in the billions of dollars. It becomes a privileged game which draws cash from the public like a dry sponge.
By telling you this, I am placing myself in jeopardy. Big money has long arms, and often these arms are made of brushed metal, well oiled, and smell of gunpowder. But you have the right to know.
How much money is made by these methods? While I worked at this company we had a kind of "urban legend" involving a small diesel generating plant that had just come on line. The owner had invested millions of his own dollars with the hope that, over many years, he would regain his investment and establish a solid company. In the summer of 2000 he was accidentally caught up in one of these schemes and submitted what he thought was a good bid to produce electricity during a feared shortage. Here's what happened.
In any block of time that power is sold, many bids are taken to meet the demand for power consumption. These bids are submitted in secret and the generators of electricity hope that their bid is high enough to make a profit but low enough to get accepted. After all of the bids are reviewed and the generation plants are selected, a single rate is established for everyone chosen to produce or buy electrical power for that time block. Oddly, the rate is set at the highest (not the lowest) rate that was accepted.
The small diesel generation producer submitted a modest bid, but his bid was selected along with the brokers who were demanding inflated prices. The result was that he made so much money from one single day of production that he sold his plant, retired, and rumor had him baking in the sun in Jamaica!
Want to see the figures for yourself? They are a matter of public record. Let me suggest the following report. This is a list of prices set for electricity by the new deregulated sheme beginning on the date the system was implemented, May 1, 1999. Note the column "Price" at the beginning and end, December of 2001. Notice the occasional high prices in the column? Notice the gradual increase over time? This was a system, remember, designed to REDUCE the cost of electricity to you and I. Enough said?
Should you be outraged? Of course. Similar facts will likely emerge when the ENRON company is investigated but the political ramifications of these disclosures will likely force the focus on scapegoat personalities instead of the current regulations that permit this activity. It is likely that the wealthy recipients of our cash will sacrifice whomever and whatever is necessary to protect this wealth building system.
Perhaps I will wake up tomorrow to a plethora of law suits -- or maybe I will not wake up. But you have been told the truth. Now change things.