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Who’s Afraid of an Energy Market Reform Study Bill?

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Diane Cherry's picture
Principal Diane Cherry Consulting, LLC

Diane Cherry is a woman owned small business providing clean energy consulting services for local government, clean energy companies, non-profits and educational institutions. Her projects and...

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  • Jul 19, 2021
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** Co-wrote this blog with Chris Carmody, Executive Directive, Carolinas Clean Energy Business Association **

 

One Utility’s Quest to Hold Onto ‘Government Guaranteed Profits’

The last two weeks have seen significant debate about omnibus energy legislation House Bill 951, but unusual drama has centered around Rep. Larry Strickland’s House Bill 611. The bill directs the NC Utilities Commission to study how state electric utilities could become more cost effective, efficient, and customer friendly. The NC Utilities Commission would engage technical experts and a diverse stakeholder advisory group (including utilities) to consider where competition and reorganization could improve electric services. Neighboring South Carolina passed a very similar law last year. The support for the South Carolina utility reform law was almost unanimous among its Republican led House, Senate, and Governor’s office.

With billions of dollars at stake in House Bill 951, front groups funded by Duke Energy took the unprecedented step of attacking Rep. Strickland and other HB 611 sponsors in their home districts with paid advertising. This struck many observers as a strange overreaction on the part of the government regulated monopoly: HB 611 hadn’t even received a formal committee hearing. 

Duke executives may have had flashbacks to the dramatic failure of the company’s Senate Bill 559 from the 2019-2020 legislative session, which called for the enabling of broad multi year rate making. Rep. Strickland’s 2019 version of his study bill helped opponents defeat Duke’s multiyear ratemaking push.

Duke Energy and other government regulated monopoly members of the Edison Electric Institute have used power outages in Texas and California to justify any change they want to impose and to avoid scrutiny of their own failures. Despite this red herring, North Carolina residents of all political stripes understand that competition produces lower costs and better results than monopolies. According to an August 2020 survey of 600 frequent North Carolina voters conducted by veteran pollster Paul Shumaker:

  • 66 percent of those surveyed favored allowing private sector generation companies (independent power producers) to build generation facilities and sell electricity directly to consumers.
  • 70 percent of those surveyed favored allowing independent power producers to use new technology to store intermittent energy (solar and wind) and dispatch it to compete with government regulated monopoly generation.
  • 80 percent of those surveyed favored allowing private sector power generation companies to compete against each other and utilities to provide electricity based on price and reliability. 

Given overwhelming public support for competition in the Tarheel state, why is Duke Energy so afraid of a study bill in North Carolina? What would the findings of a study mean for the economy and citizens of both North and South Carolina? The answer is simple: Business and residential ratepayers would realize massive savings if government regulated electric monopolies were reformed and subject to competition on a level playing field. 

The Carolinas’ Energy Landscape

North Carolina and South Carolina share many similar characteristics. Their geography and climate, for example, mirror each other in terms of heat, storm impacts, and the Atlantic and mountains of their east and west borders. The states share major highways, and are served by the same electric transmission lines controlled largely by Duke Energy. Their energy economies are inextricably linked. North Carolina is a net energy importer from South Carolina, which supplies much of the energy for both states in the form of nuclear power.

Both states have a vested interest in ensuring their energy systems use safe technologies and serve their customers reliably. Their economies are both energy-intensive: North Carolinians consume 5,260 btu per dollar of GDP (GDP sits at $497.3 billion), while South Carolinians consume 8,070 btu per dollar (GDP at $207.2 billion). The significant manufacturing and industrial sectors account for nearly 21 (NC) and 32 (SC) percent of energy consumed. North Carolina ranked as the fifth-largest manufacturing state in America as of 2019, with production in the machinery, food and beverage, steel, and chemical industries. South Carolina has seen manufacturing growth of eighteen percent over the past decade, the second-largest growth in the Southeast. The state’s industrial focus is dominated by automotive manufacturing.

Cost Concerns

The two states’ intense demand makes energy costs paramount to powering their economies, especially when manufacturing depends on energy 24/7.  Smaller-scale and residential customers have also dealt with focusing events hitting their bottom line. Settlements stemming from Duke Energy’s significant Dan River coal ash spill in 2014, as well as additional issues from other unlined coal ash basins, entail billions in recovery and cleanup. North Carolina ratepayers will be on the hook to pay for the utility’s mess—around 75 percent of the projected $4 billion in costs through 2030.

South Carolina utility customers have also grappled with explosive energy cost issues in the past few years with the failure of the pricey VC Sumner nuclear project. The expected total project cost grew over more than a decade of planning and construction, projecting to $25 billion in the long term. After sinking around $9 billion into the project, the two smaller power companies involved in the project scrapped the unfinished reactors. Nearly two-thirds of South Carolina’s utility customers have and will continue to pay billions for the abandoned facility – which will never generate a kilowatt of electricity.

Given these factors and others, customers have seen steadily increasing costs, all while energy consumption has remained relatively steady. If Duke Energy’s 2020 Integrated Resource Plan (IRP) is any indication, customers should expect continued rate increases. The Duke IRP — which has been rejected by the South Carolina Public Service Commission and is being scrutinized by the NC Utilities Commission — shows plans for its expensive coal fleet retirement. However, instead of converting to renewables, which are now lowest cost fuels, the IRP shows nearly 10 GW of planned new natural gas. 

Many plants likely will not operate through their full useful lifespan. Renewables will continue to become cheaper and more necessary under policy changes, and ratepayers will be stuck paying the price for obsolete assets. Industry and manufacturing customers will particularly suffer given their 24/7 energy requirements. As the cost burden grows, North and South Carolina will face industry loss as companies move to regions with more competitive electricity costs.

The Market Reform Movement

There is strong support in both Carolinas for electricity market reform. Whether that means an energy exchange market, imbalance market, or regional transmission organization (RTO)  is yet to be determined. However, many legislators and business leaders in both South and North Carolina agree that a competitive wholesale market would yield dramatically lower energy prices and better customer experiences. This sentiment is part of a national rethinking of whether the government monopoly utility approach from a century ago makes sense today.  This month, nine former federal regulators wrote a letter urging the Federal Energy Regulatory Commission (FERC) to expand organized, wholesale power markets in the United States. The letter argued that as we move toward more intense grid decarbonization, it is the perfect time to shift toward a “well-structured organized power markets in all regions of the country.” 

Independent studies, such as modeling by Vibrant Clean Energy, have shown the immense potential for savings should we restructure. For example, an RTO in the Southeast would save $384 billion by 2050, create 285,000 full time jobs, reduce emissions by 37 percent, and provide energy transparency across the region. Another report from The Brattle Group noted that customers in North Carolina alone would save $600 million annually if Duke Energy joined an RTO like PJM Interconnection.

North Carolinians of all political stripes understand that competition on a level playing field yields the best results. 

‘Government Guaranteed Profits’

As Professor Leah Stokes notes in her book Short Circuiting Policy, monopoly electric utility “arrangements set up in the early 1900’s are still largely in place today.” She also points out that utilities “also receive government guaranteed profits” and therefore have no incentive to serve customers better or  less expensively. 

It should come as no surprise that North Carolina has experienced significant pushback against reform by Duke Energy. While there are legitimate questions about how to execute a market transition, those benefiting from the current guaranteed utility profit system have been sure to leverage even irrelevant uncertainties in their favor.

Despite the oversized role of government regulated monopolies in electoral politics, both Carolinas have pursued study bills to thoroughly examine new market possibilities from a ratepayer point of view. In South Carolina, major spending disasters such as VC Sumner spurred SC Senators Tom Davis and Wes Climer to initiate a bill that creates an energy reform committee. Passed in late 2020, the SC study runs through 2022 and seeks answers around which market structure best improves consumer affordability. Last week, state Representative Murrell Smith and bill sponsor Senator Tom Davis, co-chaired the kick off study committee meeting, during which several legislators expressed their strong support of electric market reform.

North Carolina, though similar in its utility market structure to South Carolina, has not had as much success moving toward reform. State Representative Larry Strickland introduced his latest utility reform legislation in April of this year with bipartisan support. His bill would allow for a combination of experts and stakeholders to support the NC Utilities Commission in determining the best means of market reform and provide guidelines for a well designed transition. However, the bill hasn’t moved since its introduction. In late May, Duke Energy opposed action on House Bill 611, calling it “counterproductive” and  saying they “do not see the need for a study at this time.” As noted above, the utility also launched negative ads through a front group which attacked the bill and falsely claimed it would raise rates for consumers.

A very similar stakeholder proposal emerged in 2020 as part of Governor Roy Cooper’s clean energy plan. Governor Cooper’s Executive Order 80 created a diverse, two-year stakeholder process involving representatives from utilities and employers to environmentalists and legislators of both parties. The products of this process included recommendations and draft legislation for a NC Utilities Commission examination of how well designed competition could lower electricity prices for North Carolinians.

As Electricity Costs Go, So Goes Our Future

The cost, reliability, and safety of electrical energy is critical to the economic future of both Carolinas. In a dynamic, capitalist economy, market competition can bring improvements to the price and quality of virtually any good or service. Whether North Carolina is allowed to study what works and what doesn’t in electrical service — and whether we are allowed to adapt to 21st century cost saving measures — will determine whether the Carolinas’ economies grow or stagnate. 

Discussions
Matt Chester's picture
Matt Chester on Jul 19, 2021

Lots of stakeholders with a lot to gain with the status quo-- and are willing to exert their heavy influence on the system to keep it that way.

Thanks for sharing and breaking down these details, Diane. Do other states/regions offer any clues as to the best path forward? 

Diane Cherry's picture
Diane Cherry on Jul 19, 2021

I wish I knew of a couple. But only reporting on what we are seeing here in the Southeast. The regulatory compact means the regulatory capture is alive and well unfortunately.

Bob Meinetz's picture
Bob Meinetz on Jul 19, 2021

Diane, in the U.S. the owners of electricity transmission fall into two different categories: private entities, usually investor-owned utilites (IOUs), or a municipalities. Both are monopolies - their customers have no freedom of choice, and without it there is no competition.

So despite public perceptions to the contrary, and numerous attempts to give the appearance of competition, there is no competition in public electricity, nor any of the corresponding benefits therefrom.
These "energy market reform bills", written by politicians with little understanding of the history, physics, or economics of utility electricity, raise the philosophical question, "How does one reform a market that doesn't exist?". As a rule, market reform bills only succeed in driving up the cost of electricity by allowing middlemen - "community choice aggregators", or other entities - to sell the exact same product to everyone in a utility's service area, packaged in different ways. That's right: the people paying extra for "100% solar energy", or "60% wind energy" are being delivered exactly the same product as those who pay half the price for a basic plan. Consumers are paying more, and receiving nothing of value in return.

"66 percent of those surveyed favored allowing private sector generation companies (independent power producers) to build generation facilities and sell electricity directly to consumers."

How will that work? Will "private sector generation companies" put up their own power poles and string wires to my home? Are they really independent if they're buying electricity from my utility, then taking a cut and selling it back to me? Or if the utility is buying their electricity, then adding a markup for distribution, is there any difference to the way it worked before - except higher prices?

Of course not. As a consumer I'm going to have to side with Duke Energy - it sounds like this "energy transition" is a total scam.

Michael Keller's picture
Michael Keller on Jul 26, 2021

Bob has a point. 

Attempts to have a open market in electricity inevitably drive up the cost to consumers, with contrived market mechanisms the culprit. The only winner in such an arena are financial firms.

Best approach is for the state to regulate the producers and distributors and abandon the whole idea of market driven prices. Profits are less but the consumer is not hit with $9000/ mWh contrived prices.

Even better approach is municipal power because the customers have a direct say so on how the operations are conducted. However, that is tough to pull off in areas already served by private power.

Bottom line, admit the obvious: electrical production and supply is a monopoly that needs to be regulated by the states.

Bob Meinetz's picture
Bob Meinetz on Jul 26, 2021

Agree with most of the points you make, Michael, but the problem with regulating utilities by state public utility commissions has been a consistent one: monopoly influence in state government.

California's PUC is rife with fossil fuel influence. In 2015 oil and gas surpassed healthcare to become the #1 source of influence peddling in Sacramento, and with commissioners appointed by the governor and approved by state legislators, the industry's grip on energy policy is a foregone conclusion.

From 1935-2005 U.S. electrical utilities were regulated by the Securities and Exchange Commission, which had the power to audit their books at the time of their choosing and summarily weed out conflicts of interest. That it's the best way to provide affordable power for the most people is apparently a lesson we'll have to learn again. It can't happen soon enough.

Diane Cherry's picture
Diane Cherry on Jul 26, 2021

Reading the comments from the last couple of folks, private sector competition benefits ratepayers and everyone else alike. NC has one of the most energy intensive economies in the country and Duke Energy's IRP, coal ash costs, and grid modernization will add 50 percent to ratepayers over 10 years. Manufacturing will be driven out from those increases. In addition, as we get more and more datacenters (Google/FB, etc.) who have 24/7 energy and corporate sustainability goals, why should they be unable to procure that because we don't allow third party sales. 

Bob Meinetz's picture
Bob Meinetz on Jul 27, 2021

"In addition, as we get more and more datacenters (Google/FB, etc.) who have 24/7 energy and corporate sustainability goals, why should they be unable to procure that because we don't allow third party sales."

Unfortunately there is nothing to be gained by ratepayers from inserting third-party sellers in electricity distributed by a monopoly utility. The electricity is no better and no worse than what you were buying before - just more expensive.
Few customers are aware the vendors selling "50% solar electricity" plans are selling the exact same product as a standard plan. Though the vendor might be buying renewable energy certificates (RECs), they may or may not have any effect on the user's carbon impact, depending on when she is consuming electricity (a customer with a "100% solar" plan would never be able to use electricity at night!).
Moreover, RECs are often sold to fossil fuel producers to meet renewable energy portfolio requirements. In this arrangement, two energy generators are allowed to take credit for the same clean energy, artificially "double-counting" its clean energy value.
A competitive, free market in clean electricity requires two essentials: 1) freedom of choice on the part of the consumer, and 2) an accurate assessment of the product being sold. Third-party sellers (at least in California) are completely unregulated - in fact, many purchase their electricity from the same utility that provided your electricity before they existed, then sell it back to you at a markup.
How could a market where I have no real choice of what I'm buying, and have no knowledge of what I'm buying, possibly benefit me?

Michael Keller's picture
Michael Keller on Jul 28, 2021

I agree with Bob. Inserting 3rd party middlemen adds additional costs and reduces reliability. The middlemen have no obligation to provide energy, unlike regulated utilities (and municipal power).

There is not much of a consumer remedy if the 3rd party simply increases prices, with few meaningful restraints, during high demand periods. A properly regulated utility has to spread costs out.

Incidentally, the entire idea of demand driven prices is an artificial contrivance in the monopolistic electricity markets, with conniving financial firms the recipients of undue profits. Anybody remember Enron?

As far as California is concerned, the place is hopelessly corrupt, just like many 3rd world countries. In the case of California, the corruption is officially sanctioned by an unrestrained ruling party that is bankrolled by firms and organizations trying to gain an advantage. Ordinarily, the ballot box is the check-and-balance, but in California, you have rigged one party rule. Absolute power corrupts absolutely.

Bob Meinetz's picture
Bob Meinetz on Jul 29, 2021

Good points all, Michael.

Governor Gavin Newsom appoints all commissioners of our Public Utilities Commission and California Energy Commission, and the Board of Governors of our "independent" system operator (CAISO). His financial connections to foreign natural gas interests (Indonesian company Pertamina, others) are legendary.

When our grid comes crashing down - again - it will be long overdue.

Diane Cherry's picture
Diane Cherry on Jul 30, 2021

Market reform makes sense - look at the state of Colorado - all competitive procurement, prices low, 60% RENEWABLE by 2030 – based on competition.

Bob Meinetz's picture
Bob Meinetz on Aug 13, 2021

"Market reform makes sense - look at the state of Colorado - all competitive procurement, prices low, 60% RENEWABLE by 2030 – based on competition."

Diane, of course it's impossible to know in 2021 whether a promise that Colorado electricity will "60% RENEWABLE" by 2030 will, or can, be kept. Maybe you can understand my skepticism if, in my experience, not one promise for renewables for the year 19XX, or 20XX, has ever been kept.

Over time, you realize that despite improvements in solar panel  and wind turbine technology, despite lower costs, the physics of harvesting energy from the sun and wind remain unchanged: compared to the amount of energy we consume every day, there just isn't that much to work with. You begin to understand that solar panels and wind turbines could be 100% efficient, they could be free, and there's no amount of market reform that could make it make sense.

If you go to a gravel quarry, you'll see a lot of rocks. And it's a fact - even rocks have a small amount of moisture trapped inside. With enough money, equipment, energy, and time, we could probably harvest enough water from the rocks in that quarry to grow a garden of tomatoes. But why?

Joe Deely's picture
Joe Deely on Aug 16, 2021

Diane,

Colorado has done a good job over the last decade - tripling renewable share from 10% to 30% of generation.

I think the 60% by 2030 is definitely achievable - renewables should fall within a 50-70% range by then.

So far in 2021 - wind generation in Colorado is up 20% YTD. Good progress.  There is enormous potential for both wind and solar in Colorado. Looking forward to seeing how the chart below changes over this decade.

 

Diane Cherry's picture
Thank Diane for the Post!
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