Transcript Slide 1

Energy Bar Association
Market Approaches in Energy
Sonny Popowsky
Consumer Advocate of Pennsylvania
December 3, 2009
Washington, DC
PA Office of Consumer Advocate
555 Walnut Street
Forum Place, 5th Floor
Harrisburg, PA 17101-1923
(717) 783-5048 Telephone
[email protected] www.oca.state.pa.us
118053
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Regulation and Competition
Alfred Kahn from The Economics of
Regulation: Principles and Institutions (1988):
“The ‘central institutional issue of public utility
regulation’ remains … finding the best
possible mix of inevitably imperfect regulation
and inevitably imperfect competition.”
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Retail Competition
What Were We Thinking?
• After the federal Energy Policy Act of 1992 laid
the groundwork for greater competition in the
wholesale electric generation industry, several
states, starting with California and then
Pennsylvania, began to consider the possible
benefits of retail competition.
• Pennsylvania passed its landmark electric
restructuring law in 1996.
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Why Did We Restructure The Electric
Industry in Pennsylvania?
• Electric rates were higher in Pennsylvania than in
most of the country.
• Rates for utilities in places like Philadelphia and
Pittsburgh were higher than rates in the rest of
Pennsylvania, and were indeed among the
highest in the United States.
• The differences in rates were largely due to
differences in the embedded cost of generation,
and generation was no longer considered to be a
natural monopoly.
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What Did We Think Would Happen?
• Competition would drive down wholesale electric
generation costs and that would drive down retail
generation rates.
• Competition would therefore “strand” existing utility
generation investments. That is, market prices would
not cover the high costs of utility generating plants
that were built under the protection of regulation.
Pennsylvania utilities therefore were permitted to
recover billions of dollars of stranded costs.
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PA Final Stranded Cost Allowances
PECO
$5.26 Billion
PPL
$2.97 Billion
Duquesne
$1.33 Billion
Met Ed
$1.00 Billion
West Penn
$670 Million
Penelec
$429 Million
Penn Power
$224 Million
TOTAL (Major Utilities)
$11.88 Billion
But Just in Case…
• Just in case the predictions of significant retail competition
and lower electricity prices didn’t come true, the
Pennsylvania electric restructuring legislation included
retail rate caps that prevented the utilities from charging
higher generation rates than they had been charging prior
to restructuring.
• The rate caps were a defense against over-charging by the
utilities. That is, the utilities should not be allowed to
charge stranded costs (resulting from expected lower
market prices) at the same time they were charging higher
market prices for their generation.
• When stranded cost recovery ends for each utility in
Pennsylvania, the corresponding rate caps end.
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What Actually Happened?
• The actual price of generation was higher than the
anticipated market prices that were used to estimate
stranded costs. Much of the increase in wholesale
generation prices resulted from unanticipated
increases in the cost of fossil fuels, particularly natural
gas.
• When combined with the “single market clearing price”
methodology used by PJM, in which all units
dispatched in a particular period are paid the price bid
by the highest cost marginal unit operating in that
period, the increase in natural gas and other fossil fuel
prices has had a dramatic effect on wholesale prices.
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Projections of PJM Energy Prices Used by PPL to Estimate
Stranded Costs vs. Actual (Nominal $ per mwh)
Year
PPL Estimate
PJM Load Wtd. Avg. LMP
1999
$
22
$
34 .07
2000
$
23
$
30.72
2001
$
24
$
36.65
2002
$
24
$
31.58
2003
$
25
$
41.23
2004
$
26
$
44.34
2005
$
26
$
63.46
2006
$
27
$
53.35
2007
$
29
$
61.66
2008
$
30
$
71.13
2009
$
31
$
42.48 (January - June)
2010
$
32
2011
$
32
2012
$
33
2013
$
35
2014
$
35
2015
$
36
2016
$
37
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Results of New Jersey Generation Auctions
3-Year Bids (¢ per kwh)
2004
2005
2006
2007
2008
2009
PSEG
5.515
6.541
10.251
9.888
11.150
10.372
Rockland
5.597
7.179
11.114
10.999 12.049
11.270
Atlantic
Electric
5.513
6.648
10.399
9.959
11.650
10.536
JCPL
5.478
6.570
10.044
9.964
11.409
10.351
Source: http://www.bgs-auction.com/bgs.auction.prev.asp
95548.ppt
What About Retail Shopping for
Residential Customers?
• In areas of Pennsylvania where customers are still
protected by generation rate caps, there are currently
few or no residential customers who are being served
by alternative electric generation suppliers. In areas
where rate caps have expired, as of October 2009,
20.2% of Duquesne residential customers, and 13.9%
of Penn Power residential customers were being served
by alternative suppliers.
• Even when rate caps have ended and rates have gone
up substantially in surrounding states like Maryland
and New Jersey, there has been very little residential
competition and very little switching by residential
customers.
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Maryland Residential Shopping
As of September 2009
Total Residential
Customers
Residential Customers
Served By Competitive
Suppliers
Allegheny Power
218,055
1550
Baltimore Gas &
Electric
1,111,206
41,139
173,443
2,012
478,284
37,679
1,980,988
82,380 (4.2%)
Delmarva Power
& Light
Potomac Electric
Power
Statewide Total
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New Jersey Residential Shopping
As of September 2009
Total Residential
Customers
Residential Customers
Served By Competitive
Suppliers
PSEG
1,818,397
46
Rockland
63,235
5
Atlantic Electric
480,873
71
JCPL
968,511
91
Statewide Total
3,331,016
213
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What About Industrial Customers?
Carlisle Tire & Wheel
According to the Carlisle PA Sentinel of July 22, 2009:
• “Not even a last-ditch phone call from Gov. Ed Rendell could convince
Carlisle Tire & Wheel executives to continue manufacturing in Carlisle.”
• “One factor that tipped the scales in favor of Tennessee is the Tennessee
Valley Authority … According to the Nashville Area Chamber of Commerce,
the TVA ‘offers substantial credits on power bills…to companies expanding
in the Tennessee Valley.’”
• “In contrast, the impending electricity deregulation has Pennsylvania
businesses scrambling to find ways to keep power costs from rising too
dramatically.”
• “’We don’t have that same ability to offer that as Tennessee does,’ [the
Governor’s spokesman] said of the power costs.”
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What About New Generation?
PJM Reliability Pricing Model (RPM)
• In order to provide incentives for new generation capacity,
PJM established a new capacity market called the Reliability
Pricing Model (RPM). The question is whether RPM
overcompensates existing generators, while providing
inadequate incentives for new generation.
• New Jersey 2008 Energy Master Plan: “RPM does not target
new plants, but instead spreads capacity payments
amongst all new and existing plants… The first five years of
RPM’s capacity prices will cost New Jersey customers more
than $7 billion – more than enough to fund the
construction of several new power plants outright.
Unfortunately, that money is being spread amongst all
capacity resources, with only a sliver reaching new power
plants or demand response.”
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What Now?
“Unscrambling the Omelet”
• While some restructured states – like Virginia – have returned to
full regulation, other states – like Maryland – are considering a
hybrid approach, including requiring utilities to enter into long-term
contracts for new generation.
• Maryland Public Service Commission December 2008 Report to the
Maryland General Assembly: While not “seeking to unscramble the
omelet” by recommending a full re-regulation of all previously
divested power plants, “the Commission believes that the public
interest compels some re-regulation of Maryland’s electricity
markets – or, put another way, that the public interest is not served
by de-regulation that requires the Commission to wait passively for
market forces to deliver a reliable supply of electricity at reasonable
rates.”
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What About Pennsylvania?
• In 2008, Governor Rendell signed legislation that
maintains Pennsylvania’s competitive generation
framework, but places greater emphasis on the
utilities’ obligation to provide least cost service to
“default service” customers, that is, the great majority
of customers, particularly residential customers, who
do not switch to competitive generation suppliers.
• Under the 2008 law, after rate caps expire, our utilities
must secure a “prudent mix of contracts … on a longterm, short term, and spot market basis” that will
provide “adequate and reliable service” at “the least
cost to customers over time.”
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One Last Point: Interplay of Markets
and Climate Change Legislation
• In restructured states, in which electric generation rates are based
on marginal market clearing prices, the initial costs to consumers of
a cap and trade program for carbon emissions will be far higher
than the costs of such a program to consumers in regulated states
where electric generation rates are based on the cost of service.
• That is because when carbon-emitting units set the market clearing
price in restructured markets, the cost of carbon allowances will be
included in the price paid to all operating generating units, including
nuclear units that have no carbon compliance costs.
• Based on an assumed $20 per ton CO2 allowance price, a report by
Synapse Energy Economics estimates that PJM nuclear units with
market-based rates will receive over $2.6 billion of increased annual
revenue through cap and trade even though they incur no carbon
compliance costs.
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Adding Insult to Injury: Free
Allowances to “Merchant Coal” Plants
• The Waxman/Markey legislation passed in the House
adopted a proposal made by EEI that free allowances be
allocated to “merchant coal” plants, based on 50% of their
base year emissions. See, Testimony of Jeffry Sterba, House
Hearing of April 23, 2009, at page 12.
• The basis for the EEI proposal was that “in most
unregulated markets the market price of electricity is
determined by natural gas, and natural gas emits
approximately 50% of the carbon from coal.”
• The free allocation of allowances for 50% of emissions
would allow merchant coal plants to recover “the portion
of their increased costs that is not recovered through
market prices.”
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Merchant Coal Allocation
• The Markey/Waxman legislation allows
merchant coal plants to recover their “cost” of
compliance, while allowing merchant nuclear
plants to charge “market” prices that include
the market value of allowances, even though
the nuclear units incur no compliance costs.
• In other words, unregulated generators will
charge the higher of cost or market.
• What is the principled argument for that?
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Conclusion
• We continue to seek “the best possible mix of
inevitably imperfect regulation and inevitably
imperfect competition.”
• But charging consumers the higher of cost or
market is not an acceptable option.
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