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:
- Hurricane Ida proves that reliability needs to be the prime value, and competitive wholesale markets are the best way to achieve it, says a variety of experts.
- Louisiana power monopoly failed to provide promised back-up after the storm.
- Exelon wants state and federal bailouts for nuclear plants deemed profitable by independent monitor.
- In a possible model for other states, regulators won’t quickly approve Georgia Power’s expense claims for troubled Vogtle nuclear project.
- West Virginia corporate and union leaders explain benefits of competitive energy markets to Sen. Joe Manchin and other leaders in the state.
- Enthusiasm for a Western RTO increases as Oregon prepares a report.
Hurricane Ida Shows Why Reliability Is Job One
Charlie Melancon is certainly prescient. The former Congressman from Louisiana, who also served 16 years in the state legislature and was a member of the Cabinet of Gov. John Bel Edwards, wrote an opinion piece for the trade publication Power Magazine two months ago that argued that reliability must be the starting point for effective electricity generation and distribution.
Congressman Melancon, a Democrat and former House Energy and Commerce Committee member, hails from Napoleonville (pop. 660) in Southeast Louisiana, an area that was devastated by Hurricane Ida, a Category 4 storm that made landfall in the state on Aug. 29. In his pre-Ida piece, Congressman Melancon noted the “unprecedented outages that hit Texas and California,” and wrote that, two years before those events, “the Department of Energy estimated the annual costs of power outages for businesses was about $150 billion.” Congressman Melancon also talked about the dangers faced by his own state. His message was that electricity “has become a Rubik’s cube for power companies, regulators, and consumers.” In other words, it’s complicated. He continued:
Anyone who ever tried to move the sides and rows of a Rubik’s cube without a strategy knows what a frustrating exercise it is. Puzzle aces recommend a “white cross” or “daisy” pattern to get started. Sticking with this strategy, even amateurs can flip their way to a cube with six uniformly colored faces.
In the electric power puzzle, the “white cross” is reliability. If the Federal Energy Regulatory Commission (FERC) can get that element right from the get-go, the patchwork of private and public companies that operate the nation’s power grid and its related infrastructure can more readily incorporate strategies to address climate change without saddling ratepayers or taxpayers with soaring costs.
The comments of Congressman Melancon were echoed by another former Congressman, a non-Louisianian, Democrat Rick Boucher, who served as chairman of the House Energy and Commerce Committee’s panel on energy and air quality. Boucher began his July 29 opinion piece in Utility Dive by writing, “It’s understandable that most electricity consumers don’t think about reliability until the lights go out.”
Congressman Boucher cited a 2013 study he co-chaired for the Bipartisan Policy Center. “Our report,” he wrote, “found that the U.S. electric power sector will experience a profound transition over the course of a decade, creating implications for the cost, reliability and environmental impacts of electricity. That prediction has proven to be true as we have experienced more extreme weather events and as electricity generated by renewables constitutes a growing portion of our energy mix.”
As a Virginian, Congressman Boucher pointed to his state’s participation in the PJM, a regional transmission organization that coordinates the movement of competitive wholesale electricity in all or part of 13 states and the District of Columbia. Congressman Boucher cited the Texas cold-weather power disaster of February and wrote:
Unlike Texas’ isolated grid, the PJM…is highly connected with surrounding power systems and supervises a capacity market to meet unexpected levels of demand. We can count on sufficient power during emergencies because among other safeguards PJM secures power three years in advance of expected need.
In the PJM market, competition ensures that suppliers that fail to operate as expected during severe weather conditions will face financial penalties or loss of business. This reality creates a strong incentive to perform reliably even during the most extreme weather circumstances.
Markets breed reliability. In a keynote address at an American Enterprise Institute (AEI) virtual event July 22, Neil Chatterjee, a former chairman of the Federal Energy Regulatory Commission (FERC), put it well. He praised “our multi-decade experiment in competitive wholesale markets here in the U.S.” for being “able to consistently deliver reliable and affordable power.”
Chatterjee departed his post as a FERC commissioner at the end of last month, and President Biden has not named his successor yet, “a delay that’s anguishing Rep. Sean Casten (D-Ill), who has been pushing legislation to put FERC at the center of greening American energy,” according to Politico. “We don’t have a lot of time and I’m not going to lie to you, I am troubled by the fact that we don’t even know who the nominee is yet.” Last month, 493 groups on the left of the political spectrum sent a letter to President Biden asking him to nominate an environmental justice champion to the Commission.
Why Did Entergy Fail the Reliability Test in Louisiana?
When it came to reliability after the hurricane, Entergy, the monopoly electricity utility in Louisiana, failed dramatically. Ten days after Ida came ashore, 312,000 residential and business customers in Louisiana, representing 15% of the state. The majority of customers in New Orleans lacked power for more than a week, and the company is projecting that parts of Southeast Louisiana won’t have electricity until the end of the month.
Entergy was the focus of a firestorm two years ago with the disclosure that paid actors appeared before the City Council “to testify in support of the company’s proposed New Orleans East power plant.” (Entergy said that it was not aware a consultant had hired the actors.)
The plant was eventually approved by the City Council, and, as is common with capital improvements of this type, the public foots the bill – in this case about $6 a month over the next 30 years. Powered by natural gas, the new plant was supposed to provide back-up power during disasters like hurricanes. But, in the case of Ida, it didn’t.
“This was an outage that was never supposed to happen,” wrote Ivan Penn in the Times on Aug. 30. Entergy had pledged “it would help keep the lights on — even during hot summer days and big storms.” According to the Times, Susan Guidry, the sole member of the City Council who voted against the Entergy plant…
said she had worried that a storm like Ida could wreak havoc on her city and its energy system. She had wanted the city and utility to consider other options. But she said her fellow Council members and the utility had ignored those warnings. “They said that they had dealt with that problem,” Ms. Guidry said. “The bottom line is they should have instead been upgrading their transmission.”
No doubt there are many lessons to be learned from Hurricane Ida, whose remnants also brought death and destruction to the Northeast (in New Jersey, which was hit by Ida four days after Louisiana and where more people died, all but 0.02% of customers had their power back by Sept. 7). But it is clear that an emphasis on ensuring reliable electricity through competitive markets would have alleviated some of the problems facing Louisiana. The relatively poor reliability record of monopoly utilities is a natural result of vertical integration in the Southeast United States, where competition among power providers for electricity generation is sorely lacking
Exelon Seeks Bailouts for Profitable Nuclear Plants
Unfortunately, it’s an old story. Monopoly electricity utilities, insulated from the kind of market discipline other businesses face, make mistakes and, not only do their customers suffer, as the people of Louisiana are doing right now, but others must pay as well.
Take the case of Chicago-based Exelon, one of the largest utilities in the U.S., with a market capitalization of $48 billion. The company is trying to arrange a bailout, both at the state and federal level, for two nuclear power plants – Byron and Dresden. Byron Generating Station is among the ten largest nuclear facilities in the country.
On Sept. 1, an Exelon spokesman threatened a shutdown with dire consequences if the Illinois House failed to ratify a Senate-passed bill providing $694 million in ratepayer subsidies. Said Exelon’s Paul Adams:
If Byron and Dresden close, air pollution will immediately increase by the equivalent of adding 4.4 million cars to the road as fossil plants ramp up production to replace their carbon-free energy.
While we currently have no choice but to continue preparing for their premature retirement, we have established off-ramps that will allow us to reverse that decision if lawmakers pass legislation with enough time for us to safely refuel the plants.
Exelon also enlisted help from Rep. Adam Kinzinger, whose district includes both plants. The Republican Congressman asked President Biden in an Aug. 23 letter “to consider using powers under the Defense Production Act (DPA) or the Federal Power Act (FPA) to keep the plants open until federal or state subsidy programs can make them economically viable. Copies were sent to Energy Secretary Jennifer Granholm and other top officials.”
But the fact is that both Illinois plants are profitable, according to analysis by the Independent Market Monitor (IMM), included in testimony June 24 by the Electric Power Supply Association before the Senate Energy and Natural Resources Committee. “The IMM goes further,” says the testimony, “to find that no nuclear resources are at-risk of retirement in the PJM region,” which includes Illinois. “Byron is operating at a budget surplus of $77.5 million excluding subsidies,” said the testimony, “and Dresden is operating at a budget surplus of $83.7 million per year.”
The infrastructure legislation that passed the U.S. Senate last month includes $6 billion for a four-year credit program for nuclear plants at risk of closure. But Exelon contends that the funds won’t be enough to keep Byron and Dresden operating after November. “While we remain encouraged by growing support in Congress to preserve nuclear energy to help combat climate change, the provisions currently under consideration in the Senate infrastructure bill do not provide the policy and funding certainty we need,” said Adams, quoted in a Bloomberg report on Aug. 2.
Exelon’s credibility has suffered. On July 16, 2020, the company’s subsidiary in Illinois agreed to pay a $200 million fine and enter into a three-year deferred-prosecution agreement with the U.S. Justice Department in a bribery case. Last month, “Illinois regulators…opened an investigation into whether customers of Commonwealth Edison (ComEd) were charged for any costs associated with [the] bribery scandal the utility admitted to last year,” according to Utility Dive.
The publication also reported that David Kolata, executive director of the Citizens Utility Board in Illinois, claimed “that ComEd customers may have wound up paying hundreds of millions more than they would have had to otherwise as a result of the company’s lobbying campaign, which helped push through the Legislature a new ‘formula’ system for setting rates that made it much easier for ComEd to win approval from regulators for customer rate increases.”
Given all of these dynamics, why would the federal government provide subsidies to Exelon after the company entered into a deferred prosecution agreement with the federal government? In fact, why would government provide subsidies to any shareholder-owned business – especially one that is shown to be profitable?
Georgia Regulators Won’t Guarantee Ratepayers Will Foot the Bill for Vogtle Plant Overruns
Meanwhile, the saga of another monopoly and its nuclear plant is reaching an instructive resolution. In the third edition of our newsletter, we cited the case of the expansion of the Vogtle nuclear plant by Georgia Power, a subsidiary of giant Southern Co., as a lesson in “how vertically integrated 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.”
An Atlanta Journal Constitution article in July 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.”
An independent monitor estimated in June that the second of two new Vogtle reactors won’t be completed until mid-2023 – with $2 billion in additional costs.
State regulators seem to have finally had enough. The Georgia Power Commission says it “won’t agree that any expenses above a $7.3 billion cap imposed in 2017 are ‘reasonable’ until the end of the project” – rather than verifying expenses, and requiring them to be shouldered by ratepayers, on a semi-annual basis.
According to report by WJXT News:
The move reduces Georgia Power’s legal protections when its share of construction costs is already projected to be $9.2 billion, with another $3.2 billion in financing costs. Southern Environmental Law Center attorney Kurt Ebersbach, a critic of the Vogtle project, said the agreement does “the right thing.”
“The usual practice has been for Georgia Power to get advance assurances of cost recovery basically whenever they ask for it,” Ebersbach wrote in an email. “It’s good that more of that apparently is not going to happen.”
Still, the agreement between the commission and Georgia Power does state: “This stipulation in no way limits or prohibits Georgia Power from bringing expenditures above $7.3 billion to the commission for verification approval or for inclusion in (customer) rate base at a later time.”
The burden of risks, nevertheless, has shifted to a significant degree. It does not automatically fall to ratepayers. This is precisely the sort of idea that other power commissions may consider adopting as well.
In Appeal to Officials Like Manchin, West Virginia Leaders Extol Benefits of Competitive Energy Marketplace
We earlier mentioned PJM, the RTO that serves 13 states and DC. In recent opinion pieces in West Virginia newspapers, a power industry executive and a union leader explained the benefits of wholesale electric markets to Democratic Senator, Joe Manchin, and other state officials.
“America was built on competition and the marketplace,” wrote Steve Nelson, CEO of Longview Power, a clean-coal plant in Maidsville, West Virginia, that provides power throughout the PJM Interconnection. “PJM takes the best parts of that competitive market structure and adds in a safety net, which guarantees the ability to dispatch at a certain level. Severe penalties are applied to those who may not meet the requirements and timeframes.”
The Longview Power project cost $2 billion, the largest private investment ever made in the state, and employs 150.
Writing in the Dominion Post, which has served north-central West Virginia since 1864, Nelson noted that PJM “ensures that power providers are properly weatherized so that they can meet demand when called upon.” He continued:
Had this type of system been in place in Texas earlier this year, the blackouts experienced there during the freeze would have been a lot less likely. Intermittent resources in Texas have been incentivized through subsidies and thus have flourished with little regard to power reserves also needed during extreme events, such as last winter’s headline-grabbing cold snap.
In a separate article in the Charleston Gazette Mail, Steve White, director of the Affiliated Construction Trades, which represents 20,000 union workers, explained:
Prior to competitive wholesale generation, power plants were exclusively part of vertically integrated utilities, which produced the electricity and sold it in a regulated monopoly system that worked well for many years. However, as those original utility power plants began to age out and new ones were needed, the value of competitive wholesale generation became much more attractive. Additionally, new technology for all fuel types made these units more efficient and, thereby, lowered costs for everyone.
White added, “While West Virginia still exports more electricity into the PJM than we need, every year, that margin decreases as older utility-based power plants in the state have exceeded their useful life and been mothballed.” He noted that “neighboring states, such as Pennsylvania and Ohio, have been adding numerous new wholesale power stations that flow into the PJM Interconnect, and those states get the benefits of billions of dollars of construction and the operational jobs.”
Like Nelson, he urged West Virginia officials – both in the state and, like Manchin, in Washington – to recognize the benefits of the competitive wholesale power system and to help it thrive.
Oregon Revs Up Efforts Toward a Western RTO
As we reported previously, momentum is building in the West to establish one or more RTOs. Public officials in Arizona, Colorado, and Nevada are all exploring the concept, and Oregon is taking major steps.
The state’s Department of Energy is seeking feedback and will hold webinars this month and next on how to implement Senate Bill 589, which requires a report outlining the “benefits, opportunities and challenges posed by development or expansion of a regional transmission organization” (RTO) in the state.
The department has appointed an advisory committee to help guide the process, which calls for a draft report by Dec. 31. The committee includes representatives from the state’s two investor-owned utilities, consumer-owned utilities, independent power producers, the legislature, the governor’s office, union and environmental groups.
A questionnaire seeks input from stakeholders, with responses due Sept. 13 and the committee holding its first meeting a week later. One key issue is market design. For example, should Oregon seek a full RTO for the West or multiple smaller RTOs?
In May, Nevada lawmakers passed a sweeping energy bill that included a provision requiring the state’s transmission owners to join an RTO by 2030. Colorado followed suit with a similar bill in June, and in July, the Arizona Corporation Commission asked to establish a new proceeding to investigate the “question of mandatory or voluntary participation in regional transmission organizations” by the state’s utilities, said a report in RTO Insider.
There are currently seven RTOs operating around the country, covering 60% of the U.S. population. The main gaps are in the Southeast and the West, but interest in the West is accelerating, both in the region and in Washington. Richard Glick, the FERC chairman, said recently, “I believe there needs to be an RTO in the West. 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.” According to a July report in E&E News, the Southwest Power Pool, which serves parts of such states as Arkansas, Oklahoma, and Texas, is considering a move westward.
Earlier attempts to extend California’s market to other parts of the West stalled, but Western states are now seeing the potential gains – including environmental and financial ones. A study funded by the U.S. Department of Energy found that the benefits of a Western RTO could reach $2 billion per year by 2030. The biggest winners, said the study, would be Washington state, California, and Oregon.