Issue No. 3 – August 4, 2021

Published

The Electricity Reality Report provides readers like you with news and timely analysis on policies, markets, and technology trends that affect our nation’s ability to power American homes and businesses with reliable low cost energy.

In today’s issue:

  • FERC Commissioner Neil Chatterjee gives a ringing endorsement to competition in markets for electricity at a recent think tank forum.
  • Momentum increases for an RTO in the West.
  • 19 stakeholder organizations ask Congress to direct Energy Department to provide assistance for RTOs.
  • Left and right policy institutes, consumers and businesses call for an independent GAO study on the “impact of RTOs on consumer bills.”
  • Atlanta Journal-Constitution shows how a monopoly electricity provider can benefit by billions of dollars from its own mistakes.
  • An instructive fiasco in Mississippi and a scandal involving a monopoly power company in Ohio.
  • The EIA says that non-fossil fuels set a record last year despite the pandemic. Competitive wholesale electricity markets played a major role in the growth.

‘I’m a Big Believer in Markets’

Neil Chatterjee, who has served for the last four years as a commissioner of the Federal Energy Regulatory Commission (FERC) and was chairman in 2017 and 2020, gave a ringing endorsement of competition in markets for electricity in the keynote address at an American Enterprise Institute (AEI) web event July 22.

“I am a big believer in markets,” he said in response to a question about how to assure the reliability of the grid. The commissioner continued:

I believe that our multi-decade experiment in competitive wholesale markets here in the U.S. has led to benefits for consumers in the sense that costs continue to decline, benefits to the economy in that we are able to consistently delivery reliable and affordable power, and it has also led to benefits for the environment.

I am actually really proud that the U.S. power sector continues to squeeze out carbon and lower emissions…. This is happening in the absence of some kind of legislative cap and trade and in the absence of command and control…. It is happening because markets and consumers are driving it. This is something we should all be proud of.

At the event titled, “Efficient organization of electricity markets: Costs, reliability, and cross-subsidies,” Chatterjeee began his prepared remarks by saying that the “energy landscape is evolving at a pace we have never seen before” and that FERC is facing “some of the most complex issues” in history. His own “regulatory philosophy,” he said, “has been to prioritize reliability, to provide stakeholders with as much certainty and stability as possible, to break down barriers to entry, and leverage the power of competition through our wholesale markets.”

The former chairman said that he has “been vocal about my support for RTOs [regional transmission organizations] and ISOs [independent system operators] and all the benefits provided to consumers in large part because of the power of competitive markets. That said, I respect the authority of my state counterparts both inside and outside the RTO and ISO regions to choose the traditional, vertically integrated model.”

Still, there was little doubt that Chatterjee is looking to competitive markets to drive costs lower, increase reliability, and “accelerate the development” of clean energy technologies.

After Chatterjee spoke, other panelists, representing a range of views, made shorter presentations. They included Nora Mead Brownell, who served as a FERC commissioner from 2001 to 2006 and is now an energy consultant; Beth Garza, a senior fellow with the R Street Institute’s Energy and Environmental Policy Team and former director of the Electric Reliability Council of Texas (ERCOT) Independent Market Montior; Raymond Gifford, a Denver-based former public utilities commission chair and ex-president of the Progress & Freedom Foundation; and Tricia Pridemore, chair of the Georgia Public Service Commission.

A major topic of discussion was the failed response of Texas utilities to record-cold temperatures in February. As Chatterjee put it, “Everyone viewed it according to their own ideological lens.” That was certainly true of the panelists. Ben Zycher, the AEI fellow who moderated the event, pointed out that when it had its own problems because of heat, rather than cold, California imported power from Arizona and neighboring states. Texas, by contrast, was not interconnected with other sources of power.

Arizona Joins Colorado, Nevada, and Oregon In Exploring Membership in a New Western RTO

The heat and wildfires in the West are only adding momentum to the drive for an organized market in that part of the country – a new RTO. Currently six complete Western states and most of the area of four others are not covered.

Arizona has now joined Colorado, Nevada, and Oregon “in exploring membership” in a new Western RTO, as reported in RTO Insider on July 25. The chair of the Arizona Corporation Commission, Lea Marquez Peterson asked for a new proceeding to explore the merits “of mandatory or voluntary participation in regional transmission organizations” by Arizona Public Service, Tucson Electric Power, and other utilities.

Currently seven RTOs are in operation around the country, covering 60% of the U.S. population. RTOs are defined by the U.S. Energy Information Administration as “independent, membership-based, non-profit organizations that ensure reliability and optimize supply and demand bids for wholesale U.S. power.” They were developed in the 1990s in response to FERC’s policy to “encourage competitive generation through requiring open access to transmission.”

Following a call from a bipartisan group of former FERC commissioners, whose letter we discussed in our last newsletter, Richard Glick, the current chair, also voiced his support. “I believe there needs to be an RTO in the West,” he said. “I think the time has come for it.” He added, “This commission has been very deferential and will continue to be deferential to the region. But, at the same time, I think those discussions need to move forward instead of working incrementally.”

 Commissioner Allison Clements said, “The effects of climate change on the electricity system require a recognition by all stakeholders of the magnitude of the challenge. It also requires a willingness to open our thinking to collaborative, bold steps going forward.”

Speaking at FERC’s July meeting, Clements added, “While it won’t help us get through this summer, I agree that a Western RTO – designed by Westerners for Westerners – goes a long way toward addressing the needs in the decades to come.”

 A Utility Dive article last month pointed out that at the June FERC meeting, Chairman Glick had similarly called for the West to “finish the job” of creating an RTO and echoed Clements’s “sentiments after the [July] meeting.”

Stakeholders Ask Congress to Give RTO Assistance to States

In a July 21 letter to congressional leaders, 19 stakeholders – from the National Association of State Energy Officials to the Union of Concerned Scientists – recounted the progress being made in several states toward joining or expanding RTOs. Specifically, the letter cited Nevada and Colorado, which enacted laws to establish a clear path for a Western RTO; Oregon, whose legislature directed its Department of Energy to study the development of an RTO for the state; and North Carolina, which, in a move similar to that of South Carolina, is “considering legislation to study restructuring [the state’s] wholesale electricity market.”

States that are considering RTOs, now and in the future need help from the federal government, says the letter, and the stakeholders asked congressional leaders to support “increased coordination” with the Department of Energy’s Office of Electricity (DOE-OE). “Now is the time,” said the letter, “for Congress to ensure that the benefits of an interconnected regional grid, as well as organized wholesale electricity markets, can be realized in all parts of the country.”

Specifically, the stakeholders asked the DOE-OE to provide regulatory development assistance related to RTO and ISO formation, including market governance, planning and policy. They also asked for technical capacity and help studying “the costs and benefits to consumers and the financial and operations of joining an RTO and ISO,” including sophisticated economic modeling.

The stakeholders also wrote:

We support the reauthorization and robust funding of the State Energy Program (SEP), which provides essential funding and technical assistance to States, territories, and the District of Columbia to enhance energy security, advance state-led energy initiatives, and maximize the benefits of decreasing energy waste. Specifically, we support efforts to make electricity transmission and distribution system planning a mandatory feature of the SEP.

GAO Study Requested to Find Impact of RTOs on Consumer Bills and Reliability

In a separate earlier letter, another group of stakeholders – this time ranging from Public Citizen on the left to Heritage Action for America on the right – asked the chairmen and ranking members of the House and Senate Committees responsible for U.S. energy policies to direct the Government Accountability Office (GAO) or other independent oversight organization to undertake a study of actual RTO costs and benefits to consumers.

While there is “substantial evidence that RTOs reduce production costs,” analysis is incomplete, said the letter, and “it [is] more important than ever that policymakers investigate the impacts of wholesale market policies on retail customers now.”

The groups signing the July 8 letter included “a number of America’s largest industrial consumers of electricity, as well as residential customers and public policy research organizations.” Among the signers were the Electricity Consumers Resource Council, the Louisiana Energy Users Group, and the Industrial Energy Consumers of Pennsylvania.

They said they were “concerned that federal regulators have not initiated an independent, empirical study to safeguard a basic element of modern society – reliable and affordable electricity…. We need regulators who base their policy decisions on objective data and real-world impacts rather than assumptions by advocates.”

The signers want the study to look at “how existing RTO market structures have impacted the cost of electricity to retail consumers,” as well as the reliability impacts of whole market structure, “and, if resources allow, develop a set of best practices regarding RTO expansion.”

The letter called the decision more than two decades ago by FERC to open competitive markets at the wholesale level a “bold and unprecedented experiment at electricity regulation.” But the revolution seems to have stalled, and “at the wholesale level, the electricity industry finds itself in a state of limbo.”

Now, “without guidance from federal regulators, states and regions are independently exploring the impacts of RTOs,” and “battles over wholesale competition are taking place across the country, principally between incumbent utilities and a growing chorus of consumers who want more choice, better access to new technologies, or less exposure to ratepayer risks associated with monopoly utilities.”

The RTO debate features “assertions by both sides” that “can and should be examined objectively using real-world data.” That information should be gathered and analyzed by an independent organization like the GAO. This is not a partisan issue, says the signers. “It is a matter of good governance, regulatory oversight, and, ultimately, the economic health of the nation.”

Vogtle Nuclear Plant Shows How Cost Overruns ‘Could Represent a Huge Financial Windfall’ for Georgia Power

Vertically integrated monopoly utilities, often benefiting from a tight relationship with elected regulators, can not only force rate-paying consumers and businesses to shoulder the cost of the utilities’ own mistakes – but can also profit from those mistakes. Take the case of the expansion of the Vogtle nuclear plant by Georgia Power, whose parent is utility giant Southern Co.

An Atlanta Journal Constitution article by Matt Kempner last month pointed out that massive Vogtle cost overruns, now estimated at $5 billion, “could represent a huge financial windfall” for Georgia Power. “That’s because the electric utility’s profit from the sprawling project is tied largely to how much it spends, not whether it stays within budget.”

Originally, wrote Kempner, the utility expected to earn $7.4 billion on the project. “But because costs have soared by billions of dollars, those profits could rise to $12.6 billion over the decades-long life of the two new reactors under construction,” according to testimony by state independent monitors and Public Service Commission staff.

Wrote Kempner:

“The company’s customers are already paying a fee in monthly bills for a portion of Vogtle financing costs and company profits on the project. It’s estimated that [the] average residential Georgia Power customer will have paid over $850 in such fees before the project is completed. Then their bills are expected to rise higher to cover all ‘prudent’ and ‘reasonable’ construction costs and company profits that rise with those costs.”

In an Augusta Chronicle opinion piece, Jordan McGillis, deputy director of policy at the Institute for Energy Research, a Washington-based think tank, noted that Georgia Power’s share of the costs of the Vogtle nuclear plant expansion have ballooned from $6.1 billion to $11.1 billion.

“Anti-nuclear activists,” he wrote on July 22, “have seized on the Vogtle fiasco as an indication that the technology itself is cost-prohibitive. But a more discerning reading of Vogtle’s history doesn’t call for an indictment of nuclear energy; it calls for an indictment of the cronyist utility regulation model that plagues Georgia” – and, he adds, about two dozen other states.

McGillis adds, “With its proven ability to convince the Public Service Commission of the need to bake capital costs into the base rate for customers, Georgia Power is incentivized to opt for projects, like nuclear, that are capital intensive.”

He writes that there is a solution: “the careful introduction of market competition that will reacquaint utilities like Georgia Power with the interests of their customers.”

A Clean-Coal Collapse in Mississippi and a Nuclear Scandal in Ohio

The Vogtle mess is one of many that have plagued monopoly utilities – and their ratepayers. McGillis cites the Kemper coal-driven power plant in Mississippi as another example. Kemper was billed as a “clean coal” facility, a first-of-its-kind carbon capture project. It was supposed to be in service in May 2014 at a cost of $2.4 billion, but by June 2017, the price tag had increased to $7.5 billion. The next year, the state’s public service regulator approved a settlement reducing the capital costs that Southern Co. could collect from ratepayers and required that Mississippi Power run Kemper on natural gas only.

In another case, in April 2018, FirstEnergy Solutions filed for bankruptcy after unsuccessfully pursuing bailouts from Ohio’s Public Utilities Commission since 2014 as well as a nuclear subsidy from the state legislature. The company said, having amassed $4.5 billion in debt, it would shut down its Ohio nuclear plants because they weren’t profitable.

But in a tale of monopoly-utility cronyism that is all-too-familiar, FirstEnergy Corp., the parent of FirstEnergy Solutions, announced on July 22 of this year that it reached an agreement with the U.S. Attorney’s Office for the Southern District of Ohio to pay $230 million in a settlement after allegations that the company had bribed Ohio officials to ensure passage of a ratepayer-funded bailout.

FirstEnergy Corp., which fired its CEO, had to admit, according to Utility Dive, “that company executives paid money to public officials in return for official action” – an admission that “has led to stakeholders raising questions about utility dark-money and political spending.”

The company admitted in a statement that “FirstEnergy Corp. used the 501(c)(4) corporate form as a mechanism to conceal payments for the benefit of public officials and in return for official action. FirstEnergy Corp. used 501(c)(4) entities in this way because the law does not require disclosure of donors to a 501(c)(4) and there is no ceiling that limits the amount of expenditures that can be paid to a 501(c)(4) entity for the purpose of influencing the legislative process.”

Utility Dive reported that “although some states have laws to prevent utilities from making direct campaign contributions to elected regulators, utilities can ‘get around it through executive contributions, employee contributions, trade associations and major business ties,’” according to Daniel Tait, research and communications manager for the Energy and Policy Institute.

Non-Fossil Fuel Sources Accounted for More Than One-Fifth of U.S. Energy Consumption in 2020

Non-fossil sources accounted for 21% of U.S. energy consumption in 2020, the Energy Information Administration (EIA) reported last month. That’s the highest proportion in more than a century – since the time when wood was the dominant energy source.

“Non-fossil” is a category that includes biofuels, nuclear, wind, solar, geothermal, and hydroelectricity.

In an opinion piece in Newsweek on July 22, Richard Kauzlarich, co-director of the Center for Energy Science and Policy, drew a connection between competitive electricity markets and the rise of non-fossil energy. He wrote:

Fighting climate change requires competitive markets operating at scale. That is where RTOs and ISOs come in. Typically, RTOs and ISOs dispatch energy across several states, enabling them to integrate renewable resources with variable output, including solar and wind while lowering emissions. In fact, the former FERC Commissioners cited that “more than 80 percent of renewable generation has been deployed in the organized market regions, and emissions are falling faster in such regions.” The competitive market model creates incentives to adapt to technological trends and customer preferences, including more renewables.

Kauzlarich pointed to the PJM Interconnection RTO, which operates in all or parts of 13 states, as a paragon of success. “PJM [which stands for Pennsylvania, Jersey, and Maryland] saw carbon emissions drop 39 percent between 2005 and 2020 because of more efficient technologies.” He also highlighted that “New York’s competitive market experienced a 52 percent reduction in carbon emissions over the past two decades as price signals encouraged efficiency.”

The EIA data shows that, mainly because of the COVID-19 pandemic, energy consumption overall in the U.S. declined in 2020 to 93 quadrillion British thermal units (or quads), a drop of 7 quads from the year before – the largest annual decrease on record. By contrast, renewable energy consumption actually increased slightly. Coal consumption, which has fallen by half since its peak in 2005, now stands at its lowest level in 116 years, according to the EIA, which noted that “reduced use in the electric power sector has driven much of this decline.”

Petroleum consumption also peaked in 2005 and remains well below its highest levels while natural gas declined slightly in 2020 and is now almost at a par with petroleum at 32 quads of consumption.

The latest data, published by the EIA in July, show that the U.S. produced 1 quad of renewables such as wind between January and April of this year – the same level as coal production. In addition, the U.S. produced 0.6 quads of nuclear. Those 1.6 non-fossil quads compare with 2.5 quads of crude oil and 2.9 quads of natural gas.

A project of the Pacific Research Institute, the Electricity Reality Report provides news and analysis on policies, markets, and technology trends that affect our nation’s ability to power American homes and businesses with reliable low cost energy.

For more information, visit www.electricityrealityreport.org/

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