Decision expected on Iberdrola deal

Iberdrola already runs a wind farm in Lewis County, east of Lake Ontario, and the company has proposed 10 additional wind farms throughout upstate, including three Rochester-area facilities that could generate 258 megawatts of electricity, potentially powering more than 70,000 homes yearly.

But if Iberdrola is also allowed to own RG&E and NYSEG, the company will control the distribution of electricity as well as its generation -- a dual role that the Public Service Commission has opposed for more than 10 years on the principle that such "vertical integration" is anti-competitive.

Iberdrola has said it will walk away from the Energy East deal if forced to give up ownership of the wind farms, which it claims are not competitive generators because of the variable nature of wind power.

That variable nature also means Iberdrola could not control market prices, the company argued. Yet the idea of price manipulation by wind farms is not far-fetched to some.

"Once you have the energy and transmission, there are any number of clever things you can do," said Robert McCullough, managing partner of McCullough Research of Portland, Ore. "The (PSC) staff is entirely correct."

One tactic is to withhold power when demand is high, driving up the price. But how is the price set?

Forty-five percent of electricity is sold on the day-ahead market and 5 percent is sold on the separate real-time, or instant, market, according to spokesman Kenneth Klapp of the New York Independent System Operator, the state grid's operator. (The other 50 percent is based on contractual agreements.)

For the 50 percent of energy that's subject to market fluctuations, the Independent System Operator uses an industry standard known as the uniform clearing price system. Basically, the price goes up based on demand. When demand is satisfied, higher bids fail.

But final prices tend to reflect the last, highest bid, and Iberdrola would have motive to keep prices high through tactics such as withholding power, critics have told the PSC staff.

Iberdrola countered that wind farms aren't known to set going-rate electricity prices anywhere in the world. Sellers take what they can get, according to Pedro Azagra, Iberdrola director of corporate development. The only reason U.S. wind farms make money is usually because of subsidies from the state, according to Azagra.

The other major concern is that Iberdrola could interfere with generation plants and wind turbine companies seeking to connect to the grid in RG&E and NYSEG territory.

Iberdrola said there are substantial penalties, including fines and forfeiture of profits, to deter such illegal behavior.

But McCullough, who testified to the U.S. Senate about corrupt energy titan Enron Corp., said market surveillance by the state grid operator and U.S. Federal Energy Regulatory Commission is likely to be spotty and cannot prevent all abuses.

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