Questioning deregulation

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My staff will tell you I ask them a lot of questions. If you’re kind, you might say that I’m an inquisitive person.  Another way of saying it, however, is that my staff is being “Mike-romanaged.”

Either way you look at it, I find asking questions, especially the right ones, to be the best start to any new initiative.

The General Assembly will be asking questions as it considers tasking a joint study committee to look into restructuring the state’s energy market—a process in which the cooperatives plan to participate. Any conclusions drawn from this investigation should start with the crucial questions at a high level. While we’re up there, let’s look at how other states encountered these questions when they restructured their energy markets.

Deregulation, wholesale or retail?

Generally, a deregulated competitive market exists at two levels: wholesale and retail. The wholesale market includes the bulk purchase and sale of electricity among energy producers and energy distributors. That market must exist first within a Regional Transmission Organization (RTO) or an Independent Service Operator (ISO) before retail deregulation—allowing consumers to choose from whom they want to buy their power—could ever take place.

Texas, California and Ohio were three of the first states in the nation to deregulate their energy markets. They took different approaches initially, but all three found the need to go back and enact new policies as their experiences yielded new questions.

California deliberated restructuring throughout the 1990s, finally yielding to stakeholder pressure to fully deregulate (both wholesale and retail) in 1998. Errors in their market designs and restrictions on pricing and generator contracts contributed to a California energy crisis. High demand exceeded energy supply, and prices spiked, costing ratepayers tens of billions of dollars. There were blackouts, and the state’s largest investor-owned utility, Pacific Gas and Electric (PG&E), went into bankruptcy. In response, California re-regulated its retail market in 2001, then later opened competition back up for non-residential consumers and municipal aggregation, which are programs that allow local governments to procure power on behalf of their residents. The wholesale market was left open, however, and is still managed today by their independent system operator, CAISO.

Texas is seen by many as the gold standard of open energy markets, with some of the lowest rates in the nation. It didn’t begin that way. In 1995 the Texas legislature required utilities to provide independent generators access to transmission to support wholesale competition. Seven years later, the Texas electricity market was opened to retail competition. Even with the benefit of lessons learned from California, Texas ratepayers were still saddled with costs associated with the transition. After Texas securitized the divestment of the utilities’ generation assets, ratepayers were left with $9.5 billion in stranded costs. In the first 10 years, customers in restructured parts of the state faced higher rates than those who were served by regulated utilities (like Texas cooperatives).

When Ohio restructured retail electricity in 1999, it wasn’t just following the national trend. It was also trying to take advantage of low natural gas prices and the recently deregulated wholesale market. The state’s large industrial sector also pressed for deregulation. The legislation provided a five-year development period that required a residential rate reduction and freeze. But as that period came to a close, there were still a limited number of choices in the market, especially in rural areas, and growing concerns that an immediate shift to market-based rates would create a sticker shock for consumers. A second restructuring bill in 2008 stimulated more choices in the retail market while also making it easier for utilities to collect distribution charges.

What factors other than market forces affect what we pay for power?

As Texas saw in its first 10 years of deregulation, competition wasn’t a magic potion. In the last decade, ratepayers have benefitted from the drop in natural gas prices as well as the abundance of wind energy in the state. An argument could be made that these advantages have been realized primarily in the wholesale market and then passed down to retail customers.

California focused on resource adequacy, energy efficiency and decarbonization in responding to its early deregulation failures. While that has created some of the highest rates in the nation, it has also reduced the amount of power the average Californian consumes. In 2016, their average monthly bill was $31.90 less than the average Texan’s.

 In South Carolina, cheaper fuel options are limited. We have aging nuclear plants and an abundance of coal-fired generation. Because gas is cheaper and cleaner, coal is no longer the preferred source of fuel that it once was. We don’t sit on top of a natural gas shale like Ohio and Pennsylvania do, nor are we anywhere close. A new transmission network would have to be built to get natural gas-fueled energy to the homes and businesses in South Carolina. That could cost more than building new generation.

The experiences of other states have yielded this reality: There is a certain amount of investment inherent in energy generation and delivery, and you can’t compete away the real costs of those investments. Someone must pay for them. For example, some states have required utilities to divest generation facilities to participate in the open wholesale market. That creates stranded costs, such as in Texas, and those costs are passed down to the ratepayers.

The elements and factors that are the primary influencers on our market now may not have the same significance in our near future. New ones inevitably come along and take their place. Everyone in our industry is trying to anticipate the role battery storage will play in the energy economy. Batteries paired with solar-generated energy may be our next game-changer. Shouldn’t a restructuring of the energy market account for that?

What are the goals of restructuring our energy market?

The easy answer here is to lower rates, right? But for whom? The move toward deregulation in Texas and Ohio was influenced by their industrial sectors, but it ended up costing residential ratepayers comparatively.

Clean energy and decarbonization? An admirable and perhaps necessary priority, but is it achievable at this stage? The wind doesn’t blow here as it does in the Midwest, and we don’t have the hydropower assets of the Northwest. Renewable energy can and should be a part of our region’s generation mix, but it shouldn’t be debilitating for residential ratepayers.

As cooperatives, our priorities have always been safe and reliable power at an affordable price. In the past, meeting the energy demands of our members has meant forecasting loads

30 years in the future and securing generation accordingly. Is that still the world in which we need to live?

The most powerful market force is public policy. While the term deregulation seems to step away from government influence, in reality it is just the construction of a new set of rules.

Those rules, and the incentives they create, serve the same function in a deregulated market as the regulator serves in a traditionally regulated market. How you structure those rules and the incentives they create in a deregulated market is just as important as picking a regulator who can understand and apply laws in a regulated one.

Ultimately, it’s the state legislatures that structure these new markets with new laws. Some have found they needed to step back in to try to fix the situation with more restructuring and more regulation when things didn’t go as planned. That is a particularly inefficient form of micromanagement. And the best way to avoid it is by asking the right questions at the very beginning. The ones posed here are fundamental, but they are not the only ones we need to ask. I’ll have more in next month’s column.

Mike Couick is President and CEO of The Electric Cooperatives of South Carolina.

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Related Stories

This is the second in a series of columns on utility deregulation. For additional columns, see:

Overpriced tulips and our energy future—The utility sector is changing and electric cooperatives are working with the state legislature to study what that means for co-op members.

Market forces and deregulation—In the new energy economy, both consumers and suppliers will find themselves in non-traditional roles.