Why Should Delaware Care?
Electricity prices in Delaware are set to spike because of a strange series of events that began with a botched energy auction and ended with a federal court ruling. Judges decided that power plants will be able to keep a $100 million windfall that ultimately will come from households in the state and the Eastern Shore of Maryland. That error will drive up electricity prices for much of southern Delaware.
Electricity rates for tens of thousands of households in Delaware are set to rise after a federal appeals court ruled recently that the results of a flawed energy auction could stand.
The December 2022 auction was intended to ensure a consistent supply of electricity in the region in future years. But, because of a curious string of events that are still not entirely clear to the public, it instead produced abnormally high wholesale electricity prices for Delaware and the Eastern Shore of Maryland.
The lofty prices are likely to cost utility companies in the region of $100 million more than they would have paid otherwise over the next year, according to federal regulators whose decision in 2023 to amend the auction’s prices was overturned in March by judges at the Third Circuit Court of Appeals in Philadelphia.
As a result, the average price for household electricity is also set to increase – even as the exact amounts may not yet be certain.
Impact will differ
The bulk electricity auction was held by PJM, one of 10 different regional transmission organizations nationwide that ensure enough electricity is available to consumers and the sole provider for Delaware.
Within the PJM network, the organization breaks out six subregions where the cost of power varies due to differing supply and demand needs. The subregion known as DP&L South, covering all of Delaware below the C&D Canal, was impacted by the auction error.
Rony Baltazar-Lopez, a spokesman for the Office of the Delaware Public Advocate, said in an email that state regulators expect to see a $7-a-month increase for the average customer of the region’s largest utility, Delmarva Power, as a result of the court’s decision and of a previously approved $2.34 increase.
But a spokesman for Delmarva Power – which serves most of New Castle County, as well as parts of Kent and Sussex counties – indicated that the state’s estimate could be accurate but only “if we implemented these changes.”
Such an increase for Delmarva Power customers would add to two price bumps that took effect last summer, which collectively caused rates to jump more than $7 for the average household. State regulators later reversed a portion of that increase, and Delmarva customers will see refunds in their bill this summer as a result, according to a company spokesman.
Increases for municipalities outside of Delmarva Power’s sphere are also likely, as a result of the appeals court ruling.
Last month, the city council in Seaford approved a $5.72 increase for monthly power bills at homes using 1,000 kilowatt hours – roughly the average amount used by a household.
The measure passed despite a similar rate increase four months earlier that sparked vocal opposition from residents in the city, according to a report from WBOC. Seaford Mayor Matthew MacCoy, who took office in April, appeared to be conscious of public outcry during the vote in May to approve the latest increase, noting that “discussing raising rates is never a fun conversation to have.”
“But we’re dealing with this in real time,” MacCoy said during the council meeting.
While the 2022 auction increased wholesale prices for the calendar year starting June 1, there is at least one Delaware electricity utility that says it is not raising rates immediately.
Rob Book, president and CEO of the Delaware Electricity Cooperative, said his utility is a member of a regional energy cooperative – which extends from Pennsylvania to Virginia – that is large enough to absorb in the near-term the increase that is hitting just Delaware and the Eastern Shore, locally.
Still, Book characterized the price spike as a “heavy load” and estimated it to be sending wholesale costs in Delaware up by about 50%.
A flawed projection
The price spike follows a yearlong fight that had federal regulators decrying its impact on “real people,” and judges deciding ultimately that they could not take those impacts into account.
In December 2022, PJM held an auction with wind farms, coal plants and power generators to buy the electrons that would eventually flow to businesses and houses in the region.
The auction had a strict set of parameters that were in place to help determine the prices. Among those was a projection for the amount of supply and demand that would be needed in Delaware and Maryland’s Eastern Shore during the 2024/2025 calendar year.
“Real people — the consumers in the Delmarva zone — may pay in excess of $100 million more than necessary because of this operational outcome.”
FERC Commissioner Mark christie
But, that projection was flawed, PJM would later state in court documents – because it appeared to underestimate the supply of electricity to the region.
When PJM realized the mistake, it tried to revise the electricity prices that producers had been able to acquire in the auction.
By early 2023, it received permission to do so from regulators at the Federal Energy Regulatory Commission, or FERC. Those regulators stated unambiguously then that they believed the error needed to be corrected to protect consumers.
In a February 2023 press release, FERC officials said that “in no universe would the results” of the auction be considered “just and reasonable.”
“Real people — the consumers in the Delmarva zone — may pay in excess of $100 million more than necessary because of this operational outcome,” regulators said in the press release.
But, power generators – likely with their eye on that same extra $100 million – disagreed. Last August, a consortium of electricity generating companies and industry groups challenged the decision to amend the auction with a petition filed with the Third Circuit Court of Appeals in Philadelphia.
Ultimately, the federal judges sided with the power plants.
Supporting precedent
Resting on dense legal language, the judges said in their March decision that amending the results of the previous auction violated what they called the “filed rate doctrine” as it “nullified a legal consequence attached to a past action.”
The judges further said that “equities play no role” in the decision, even as it could “produce a harsh result.”
The ruling was a surprise for at least one official who works in the Delaware energy industry. Chris Simms, owner of Smart Utility Management, called the judges’ decision unprecedented because it overturned federal regulators so “late in the process,” causing towns and utilities to scramble.
“Nobody would have expected it to be overturned,” said Simms, who serves as a consultant for municipal utilities, including the city of Seaford.
Simms noted that PJM appears to be changing its rules for future auctions in order to avoid a repeat of the drama. He noted that the error that caused the botched auction appears to be related to the amount of estimated energy supply that was submitted to PJM for the local Delaware region.
“I think they submitted the information correctly. It’s just that the fundamental calculation of the clearing price produced an unintended result,” he said.
In a statement, a PJM spokesman said the error that occurred during the 2022 auction was caused by certain new electricity generators that did not participate in the auction, “causing a mismatch between anticipated and actual supply.”
PJM did not disclose what power plants failed to “offer into the auction.”
“Unfortunately, the United States Court of Appeals for the Third Circuit vacated the FERC order so PJM was required to clear the auction pursuant to that court directive,” the PJM statement said.
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