Saturday, April 21, 2018

Crafters of Pa.’s Deregulation Law Look Back After 20 Years

By Peter Key

HERSHEY, Pa. — One of the hoariest clichés about legislating is that there are two things no one wants to see get made: laws and sausage.

But on Friday, participants in drafting the bill that brought competitive power generation to Pennsylvania reminisced about the experience as enthusiastically as if they were biting into Lebanon bologna.

The people doing the reminiscing were on one of the panels in a two-day celebration of the 1996 Electricity Generation Customer Choice and Competition Act’s 20th anniversary, which made the Keystone State one of the first in the nation to embrace retail choice.

The conference was put on by the consulting firm of John Hanger, one of the architects of the state’s introduction of competition as a member of the Pennsylvania Public Utility Commission.

John Hanger, one of the architects of Pennsylvania Electric Deregulation

Hanger | ©RTO Insider

Joining Hanger on the panel were former state Sen. David Brightbill, who helped craft the law; Sonny Popowsky, Pennsylvania’s long-time consumer advocate, now retired; and former PUC and FERC Commissioner Nora Mead Brownell, who helped implement the law.

Brightbill remembered how Hanger helped lay the groundwork for the law, which had strong support from energy-intensive industrial customers.

Popowsky said one thing that people tried but failed to get into the law was a provision requiring utilities to divest their generation assets or put them in separate companies. That, he said, turned out to be moot, as the utilities chose to do that anyway.

So that all the parties that would be affected by the law could have a say in crafting it, they agreed to press for only what they needed to be in it, not what they wanted to be in it, the panelists recalled. Even so, at the last minute, someone brought up possible amendments, causing great consternation for Hanger because the law had been put together so carefully that he was convinced any changes to it would cause it to fall apart.

Impact

So what’s been the impact of Pennsylvania’s restructuring?

A study funded by the University of Pennsylvania’s Kleinman Center for Energy Policy — and authored by Hanger and Christina Simeone, the center’s director of policy and external affairs — concluded that the law allowed consumers to benefit from the reduced power prices caused by the natural gas boom.

From 1996 to 2014, output from natural gas-fired generation in Pennsylvania grew 26% while output from coal-fired generation dropped 17%.

pennsylvania electric deregulation

Report Co-Author Simeone | © RTO Insider

The report found that the retail price of electricity in Pennsylvania fell from 15% above the national average prior to deregulation to 0.1% below the national average last year.

Had Pennsylvania not changed the law, the report also pointed out, consumers might still be paying power rates based on valuations assigned to power plants by the PUC, rather than rates based on the market cost of generating power. Under that scenario, electricity consumers would have seen much less benefit from low natural gas prices, while coal-fired and nuclear-powered generation plants that were valued decades ago wouldn’t be the drag on their owners’ profits that they are today.

By introducing competition, the law has allowed low natural gas prices to flow through to consumers, Hanger said. “That’s what we wanted to accomplish.”

Although the restructuring law was passed in 1996, most consumers wouldn’t have much incentive to shop for power providers for another 15 years. That was because the utilities agreed to have their distribution subsidiaries cap the rates at which those subsidiaries offered power in exchange for being allowed to recover some of their “stranded costs” — the difference between their generation plants’ book value before deregulation and their market value after. Different utilities had their caps come off at different times, but all were gone by the start of 2011.

Since the rate caps have come off, the electric distribution companies (EDCs) have remained default power providers for customers who don’t want to shop for a generation provider, buying power on the wholesale market and reselling it at no profit to those customers.

Shoppers vs. Default Customers

The report looked at how power customers that shopped for a generation provider did compared to those that continued as default customers. It concluded that retail electricity rates for commercial and industrial customers that shopped for power were generally lower than the same rates for commercial and industrial customers that bought power from their distribution company.

But the report found that the reverse was true for residential customers, with rates for those who shopped for power being higher than the rates for those who bought it from their distribution company.

results of pennsylvania electric deregulation

Bundled bills for residential customers of Duquesne Light, PECO Energy and Penn Power were 16 to 21% lower in 2016 than inflation-adjusted bills for 1996. Ratepayers in some other EDCs saw bills rise as distribution rate increases exceeded generation and transmission savings. Chart shows monthly bill for customer using 500 kWh. | A Case Study of Electric Competition Results in Pennsylvania, Kleinman Center for Energy Policy

Despite that, Popowsky, the former consumer advocate, said that residential consumers have benefited from the law because even the default prices offered by the distribution utilities are the result of competition among generation providers. “One hundred percent [of consumers] are getting competitive generation,” he said.

The study found that residential distribution rates prices for all but one EDC increased faster than inflation from 1996 through 2016, with the increases exceeding generation and transmission savings for some utilities. Distribution rates remain under cost-of-service regulation by the PUC.

Having distribution utilities serve as default power providers for customers that don’t want to shop for a generation provider has proved controversial. There were calls to eliminate having distribution companies serve as default power providers and forcing all electricity customers to shop for generation providers. But the proposals lost favor after the 2014 polar vortex, when many customers who chose competitive suppliers — unaware they were paying spot prices — got socked with huge bills.

The report said it couldn’t conclude why default residential rates were lower than power-shopping residential rates. Competitive suppliers, it said, argue that they provide additional attributes — such as renewable power, discounts and incentives — for which consumers are willing to pay a premium. Default service supporters, the report said, argue that higher retail supplier costs and greater volatility make rates for shoppers higher than default rates.

While residential customers’ savings have been less than those seen by commercial and industrial customers, the Retail Energy Supply Association said that is because residential customers have been less likely to shop.

The report found that 22 to 46% of residential customers are shopping for power suppliers, depending on their distribution company. In contrast, 30 to 50% of commercial customers and more than 80% of industrial customers abandoned their distribution companies.

“The appropriate comparison for residential benefits is to examine available competitive offers that not all consumers take advantage of,” RESA said in a press release. “The lowest-available 12-month fixed-price offers represent more than $314 million in potential annual savings to consumers if all remaining customers switched to these offers.”

RESA called for Pennsylvania to do more to promote competition. It also said the state should consider removing regulated utilities from providing default service, leaving them to focus only on distribution and transmission. “This approach has worked well in Texas, the state widely recognized to have the most robust competitive electricity market,” the group said.

Other Studies

There’s no shortage of opinions on whether competition has been a good thing for consumers.

A 2015 study by the University of California Berkeley concluded that competition had improved power plant efficiency and grid coordination but that falling gas prices had a bigger impact on rates.

A study released in February by the Electric Markets Research Foundation concluded that retail choice has done little for retail consumers. The foundation, whose website does not disclose its funders, has ties to Hunton and Williams, a D.C. law firm that has led utility challenges to EPA clean air regulations. Its 2013 and 2014 tax returns listed its president as Bruce Edelston, a former Southern Co. official who rejoined the company in March as vice president of energy policy.

Research by the Pennsylvania Utility Law Project found that customers enrolled in low-income assistance programs paid more on average with competitive power suppliers than they would had they stayed with their utility’s standard offer. “Competitive markets are bad for poor people,” PULP Executive Director Patrick M. Cicero told The Philadelphia Inquirer.

Renewed Questioning

The 20th anniversary comes at a time of renewed questioning of electric regulation.

Pennsylvania followed shortly behind California in enacting competition, the beginning of a wave that would sweep over almost half of the nation.

California’s 2000-2001 energy crisis, and revelations that Enron and other power traders had manipulated the market, brought that wave to a halt. At the peak of the movement, 22 states and D.C. had or were moving toward competitive generation markets. That number is now 14 states and the district.

At least three competitive states — New York, Ohio and Illinois — have approved or are considering subsidies for fossil and nuclear generators losing money because of cheap natural gas and renewables. Utilities in Ohio are also pushing a partial return to regulation.

Constellation Energy CEO Joseph Nigro made a pitch for nuclear subsidies in a keynote address on the second day of the conference. Constellation is a subsidiary of Exelon, owner of the country’s largest fleet of nuclear power plants.

In addition to promoting the environmental benefits of nuclear power, Nigro talked about how Constellation, Exelon’s competitive energy subsidiary, is responding to consumers’ demands for adaptability, reliability and sustainability.

“We believe that a culture of innovation must exist at every level of the company,” he said.

Nuclear subsidies also came up in another panel discussion on several recent Supreme Court rulings on jurisdictional fights between state and federal regulators.

One of the decisions discussed was the court’s Hughes v. Talen ruling that a Maryland program designed to subsidize new generation facilities infringed on FERC jurisdiction.

That ruling should enable opponents of New York’s nuclear subsidies to prevail in their federal court suit, said Abe Silverman, a counsel for NRG Energy, one of the plaintiffs. (See Federal Suit Challenges NY Nuclear Subsidies.)

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