Dec 20 - Knight Ridder/Tribune Business News - Peter J. Howe The Boston Globe

A San Diego energy conglomerate has reaped more than $70 million in profits from Boston-area electric consumers this year by exploiting flaws in the deregulated wholesale power markets, Attorney General Thomas F. Reilly said yesterday.

Reilly, who represents Massachusetts consumers in electric rate cases, said the moves by Sempra Energy aren't illegal. But the attorney general, a likely Democratic candidate for governor next year, urged the organization that runs New England's power grid and wholesale markets to close loopholes to prevent continued market manipulation. For an average household, Reilly said, Sempra's tactics are adding $2.50 a month to electric bills that have soared by 30 percent or more this fall.

Sempra declined requests for comment yesterday.

Ellen M. Foley, a spokeswoman for ISO-New England, the Holyoke organization that runs the region's power grid, said it has "done everything within its jurisdiction to address this issue."

If Reilly "wants further action being taken, he should file a formal complaint" with the Federal Energy Regulatory Commission, which oversees wholesale power generation, she said.

The key issue behind the dispute is the lack of high-voltage transmission lines to bring electricity into metropolitan Boston and Essex County and the region's resulting heavy reliance on the Mystic power plant in Everett to stave off blackouts.

Sempra acts as the marketing agent for the Everett plant. The facility is owned by a consortium of banks that took it over last year when former owner Exelon Corp. walked away from its troubled investment and dumped the plant, which had hundreds of millions of dollars in construction cost overruns, on its creditors. The Everett facility can produce up to 2,250 megawatts of electricity, enough to serve 1.7 million average homes.

Reilly aides said Sempra found several ways to exploit the Boston area's huge reliance on the Everett plant to jack up prices it is paid for electricity generated there.

"They know they're going to have to be turned on, so they're basically dictating the terms to maximize the revenues they get," said Joseph W. Rogers, head of the utilities bureau in the attorney general's office.

One way Sempra bolstered profits, Rogers said, is to demand that, if grid managers say one of the Everett generating units is needed to maintain reliable electric supplies, a second companion unit must also be paid to run. Also, Sempra has insisted that if the Everett units are ordered to start up, the company must be paid to operate for several hours, even during hours the units are not needed for reliable service, Rogers said.

Under the deregulated wholesale electric market New England adopted in 1997, power plant owners compete based on price for contracts to produce power every hour of the day. ISO New England selects plants to run, starting with the cheapest, then taking increasingly expensive plants until it has enough power to meet the demand.

But in areas such as Greater Boston where supplies are constrained and some plants, like those in Everett, must be operated to prevent blackouts, ISO New England can and regularly does ignore price competition and pays a premium to plants needed for reliability. Reilly's argument is that by "unfairly manipulating the wholesale market rules," Sempra has been able to inflate the premium it collects for the Everett plant's electricity "to unreasonable levels" totaling at least $70 million over the last year.

Much of that has been paid by customers of electric utility NStar who live in Boston and suburbs to the north of the city, the area most dependent on the Everett power plant.

NStar spokeswoman Caroline Allen said, "We hope ISO-New England steps in to stop this unfair exercise of power, especially at a time when rising global energy prices are already a burden for our customers."