The utility sector is changing and electric cooperatives are working with the state legislature to study what that means for co-op members.
Illustration by Adam Niklewicz
It was this time of year, early February, in 1637, and a mini-financial disaster was about to strike. Thousands of tulips were months from sprouting out of the thawing Netherlands soil. Meanwhile, speculators were holding a routine tulip auction in the city of Haarlem in the northern part of the country.
Farmers, tradesmen and artisans had created in a few short years a speculative market for the then-rare flower, a status symbol for the upper class. By that winter, futures contracts for the bulbs were sometimes trading at 10 times a craftsman’s annual salary. But on February 3, no traders showed up to the auction. The market collapse began immediately, and by May the blooms were worthless.
Tulip mania was one of the first known market bubbles. It grew quickly and burst even faster. Though it had little effect on the greater Dutch economy, it created folklore that did make an impact. The financial mechanisms and social lessons are still studied and it’s a story that is still being told. Even the notorious Gordon Gekko from Wall Street tells a protégé about tulip mania in the film’s 2010 sequel.
Recent events in the energy industry have brought South Carolina into a set of circumstances that may be of similar historical significance one day. It makes me wonder how those events, and our reaction to them, will be recounted hundreds of years from now. How will historians say we responded to the failed construction of two nuclear reactors? To changes with the state-owned utility Santee Cooper? To the emerging renewable energy market and new technologies? How will future ratepayers across the state be affected by our actions today?
It will take longer than a tulip’s life for these questions to be answered, but the seeds of our responses are being planted now. A study committee has been proposed in both the South Carolina House and the Senate to investigate the restructuring of the state’s energy market. Common sense says it’s a good idea to understand alternate paths and it’s a bad idea to be ignorant of your options. We think this committee’s efforts can yield positive results and we look forward to participating in its work.
With a few notable exceptions, the state’s utilities have operated pretty well under our current structure for over a century. Our rates are below the national average and our reliability is above average. South Carolina’s cooperatives, however, do not wish to ignore potential options, and we are open to exploring changes that will benefit our members.
As a consumer of electricity, you may rank reviewing the industry’s market structure below weeding your garden on your list of fun things to do. But as a cooperative owner and member, you can benefit from understanding the challenges and choices facing your cooperative. That’s why, over the coming months, I will be outlining where we’ve been planted, how we might be uprooted, and where we might flourish again.
In South Carolina, our energy market structure is commonly referred to as a cost-of-service model. The state grants utilities monopoly rights to serve specific territories and the utilities must provide reliable and affordable power to everyone in their assigned territory. Investor-owned utilities are regulated by the Public Service Commission and guaranteed a return on investments through the rates charged to their consumers, while each cooperative’s member-elected board approves their rates. In the 20th century, this model was common throughout the nation. Electric utilities were the rare economic sector where competition would increase costs. Infrastructure was too large an investment to be duplicated, and utilities needed centralized power plants to take advantage of the economies of scale.
The way electricity is generated, sold and used is changing dramatically, and the dynamics have shifted for the costs of the fuels we use to generate electricity. Natural gas prices, once volatile and high, remain low. Renewable energy costs, once high, continue to drop. These shifts, along with environmental regulations, have forced many power plants that burn coal—once the most affordable, dependable generators—to retire early. Nuclear power generators are the most expensive to build, even though their operating fuel costs are low. The demand for electricity, meanwhile, has flattened for the first time in modern history. Consumers have become generators—think solar panels—and emerging technologies such as battery storage promise to continue this trend of disruption.
Many states have moved away from the traditional structure toward a model in which energy generators compete within the wholesale market. Depending on the region of the country, these wholesale markets are independently managed by Regional Transmission Organizations (RTO) or Independent System Operators (ISO). The RTOs and ISOs are umbrella organizations that bring all public utility transmission systems within a region under common control and provide a fair and efficient wholesale energy exchange that is not wholly dependent upon government regulation.
Central Electric Power Cooperative, the wholesale aggregator for South Carolina’s electric cooperatives, announced in December it has joined PJM Interconnection. Headquartered in Pennsylvania, PJM is an RTO that provides power supply and coordinates the movement of wholesale electricity in 13 Mid-Atlantic states and the District of Columbia. Central’s current relationship with PJM does not include the buying or selling of energy—Central will instead use PJM’s support in its power supply planning—but the relationship will give South Carolina cooperatives an opportunity to see whether an RTO could benefit our members.
Six other RTOs or ISOs now operate in the United States. There are California ISO (CAISO), the Electric Reliability Council of Texas (ERCOT), and the Southwest Power Pool (SPP), which administers parts of Texas, Oklahoma, Kansas, Nebraska and the Dakotas. Geographically, the largest is the Midcontinent ISO (MISO), whose territory touches 11 states from Louisiana to Michigan to Montana. The Northeast is served by New York ISO (NYISO) and New England IS (ISO-NE).
While the rest of the West and Southeast continue to operate under the traditional regulated monopoly model, there have been efforts to restructure our state’s energy market in the past. In 2000, Carolina Power and Light, Duke Energy and SCE&G filed with the Federal Energy Regulatory Commission (FERC) to establish GridSouth Transco. Despite FERC’s approval of the organization, its implementation was suspended months before operation began in 2002. Other RTO attempts were rejected by FERC or never got off the ground.
For South Carolina, it could be an ideal time to study and understand what options best protect South Carolina energy consumers. Recent events and market forces have disrupted our industry. New technologies and innovations are guaranteed to impact our future. Now, we have an opportunity to investigate new paths forward and to make crucial decisions that will benefit ratepayers. And as cooperatives, we are uniquely equipped to adapt to change if change is needed.
The tulip mania traders were caught up in a socio-economic phenomenon and fell victim to its inevitable crash. They may not have had the information they needed, or they may have been too focused on the profits of the moment to care. We don’t have to go back 380 years or cross the Atlantic to learn valuable lessons about how best to move forward. In next month’s column, I’ll discuss states such as California, Texas and Ohio where restructuring and deregulation have created definite winners and losers in their markets. We and the legislature’s study committee can benefit from their experiences.
Mike Couick is President and CEO of The Electric Cooperatives of South Carolina.
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Related Stories
This is the first in a series of columns on utility deregulation. For additional columns, see:
Questioning deregulation—Lawmakers will need to ask some hard questions before attempting to alter South Carolina’s electricity market.
Market forces and deregulation—In the new energy economy, both consumers and suppliers will find themselves in non-traditional roles.