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Industry speakers call for new competitive market construct that better meets clean energy policy goals

DATELINE, Hershey, Pa. – ‘Growing the power business and cutting carbon emissions’ was the theme of the Third Annual Regional Executive Energy Summit in Hershey, Pa., Nov. 8-9, sponsored by the University of Pennsylvania’s Kleinman Center for Energy Policy. The agenda and discussion, spearheaded by former Pennsylvania regulator John Hanger, had its finger on the pulse of the regulatory Gordian Knot that is hindering the progression of the electric industry’s necessary evolution from a 19th century monopoly-regulated paradigm to a clean-energy future in which regulatory barriers to innovation are removed and competition fosters economic, innovative and cleaner resources and service providers.

Gordon van Welie, president and CEO of ISO New England, warned that the U.S. risks repeating the mistakes of Germany, which failed to adequately price the environmental cost of carbon emissions while shutting down nuclear generation and making a big commitment to renewable energy, which resulted in the unintended consequence of higher carbon-emitting coal-fired generation.

Andy Ott, president of PJM Interconnection, which operates the nation’s largest competitive wholesale power market, agreed. Germany wanted to get to zero carbon emissions and went in the opposite direction, he said.

The New England market that van Wylie oversees is Ground Zero in the retrenchment away from the economic and environmental gains that competitive electricity markets provided, as state policy makers rush to embrace mandates for specific resources, such as offshore wind energy and Canadian hydropower.

Because the federal government is not adopting policies providing a price on carbon emissions, states are ratcheting up renewable portfolio standards and out-of-market power purchase agreements for favored clean energy resources, which “create a whole set of unintended consequences,” van Wylie said.

“We’re starting to see the system crack in New England,” said Abraham Silverman, NRG’s vice president and deputy general counsel. The region is on track to mandate the procurement of some $400 million in out-of-market resources by the 2023-2024 timeframe, he noted.

Dan Dolan, president of the New England Power Generators Association, summarized the threat to New England’s competitive market gains in a column published by Utility Dive Sept. 5. “State-subsidized contracts for thousands of megawatts of new resources are hitting the competitive market and are set to exceed 60 percent of all electricity consumed in New England over the next several years,” Dolan wrote.

As New England states authorize long-term out-of-market contracts to meet clean-energy policy mandates, power generation resources are increasingly unable to recover their costs in the market, Dolan noted.

“On the current trajectory, the state of the New England electricity market will rapidly worsen, requiring further out-of-market actions to adequately compensate generators in order to preserve grid reliability. State subsidies will beget reliability subsidies, driving consumer costs ever higher and doing away with future market-based investments for new or existing power generation,” Dolan wrote. “If immediate action is not taken to address the accelerating cycle of out-of-market activity, the remarkable benefits New England consumers have reaped from competition will be upended, requiring a return to consumers bearing the costs of resource investments.”

ISO New England’s Van Wylie, speaking in Hershey, summarized the competitive gains at risk, noting that in the past 20 years New England’s electricity costs have declined by 50 percent as consumers have not been financially at risk for resource investment decisions in the region’s competitive wholesale electricity market. That enormous economic value was accompanied by a tremendous reduction in harmful emissions, van Wylie noted. But those gains are being put at risk as state policy makers seek further environmental gains through out-of-market mandates.

Van Wylie noted that 20 years ago all resources in New England were built with consumers guaranteeing the financial risk of the investment. Under competition, the region went to 95 percent of generation resources being provided by merchant generators dependent on returns from the market, rather than guaranteed returns from captive consumers. Now the region is “whipsawing back” as it is on track to have between 50 percent and 60 percent of resources from state-mandated out-of-market power purchase agreements, he said.

Speakers at the conference in Hershey called for a new regulatory paradigm that preserves competitive markets as a driver of clean energy and consumer value.

“We need a new framework. We need a system that internalizes environmental costs,” said Kathleen Barron, senior vice president for regulatory affairs and policy at Exelon Corp.

Consumers are “at risk” in the absence of a market structure that meets the  zero-carbon energy goals of state policy makers, Silverman said, calling for commoditizing environmental costs within the existing markets so “entrepreneurs can come in and solve the problem.”

Panel discussion participants disagreed as to whether congressional action is necessary before the Federal Energy Regulatory Commission-regulated organized wholesale power markets can begin internalizing the cost of carbon emissions. Ott and van Wylie, the heads of two prominent FERC-regulated competitive markets, said no. But Barron, who prior to joining Exelon was deputy general counsel at FERC, disagreed.

“FERC has the legal authority within its existing statute to say rates are not just and reasonable without pricing this externality,” Barron said. “We need a new framework. We need a system that internalizes environmental costs,” she said.

NRG’s Silverman, also a FERC alum, agreed. “We need to have the states, the RTOs and FERC on common ground,” he said, calling for FERC to adopt a rule providing that “part of a just and reasonable rate” includes the pricing of environmental externalities.

In addition to problems plaguing the competitive wholesale markets, the discussion in Hershey also addressed lingering retail market-design problems preventing greater customer value and clean energy gains. In particular, speakers cited the need for consolidated supplier billing and an end to utility default service as a price comparison to competitive supply.

Leah Gibbons, director of regulatory affairs at NRG Energy, summarized the frustrations of competitive retail suppliers. The incumbent utility controls the wires, manages customer billing and therefore the supplier’s interface with its customer, and has access to all customer information in the market, Gibbons noted. Further, she noted the utility in response to state mandates for energy efficiency can recoup its costs from captive customers through wires charges, something competitive suppliers can’t do.

The problems that persist in competitive retail power markets are because “a real full unbundling” of utility rates did not occur, Gibbons said. She noted that in New Jersey, one utility’s billing system doesn’t even list the name of the competitive supplier, instead listing the commodity charge as being from a “third-party supplier.”

She called for consolidated supplier billing, so competitive retail suppliers can control the billing interface with the customer. She also called for ending the utility’s role as a default service provider, or at the least making default service “a last resort, not a first resort.”

Competitive electricity suppliers can disrupt the electricity sector just as Uber did transportation, and Blockbuster-killer Netflix did for home entertainment, but there needs to be “a level playing field,” said Manu Asthana, president, North American Home, Direct Energy. Suppliers should not be required to compete against a utility default price that doesn’t offer a proper benchmark for comparison, he said. Asthana also echoed NRG’s concerns about the lack of consolidated billing and utility control of customer data. “I want to have a relationship with the customer so I can improve their life in some way,” he said.

The growing concerns among regulators in competitive states about the prices provided by competitive suppliers are a result of the “inefficient construct” in competitive states, Gibbons said. “We need to start addressing these underlying issues.”

But state officials appeared to be on different pages when it comes to reforming retail electricity markets.

“We view the competitive market as the best driver of innovation,” said John Fiastro, director of government affairs and communications at the Maryland Energy Administration. “We need a fundamental shift in the market,” he said.

But Tanya McCloskey, Pennsylvania’s consumer advocate, faulted competitive suppliers for not doing a better job of policing “false and misleading” marketing by suppliers and their contracted marketing firms. “Energy is not like any other product,” she said, calling electricity “an essential service.”

“Food is an essential product but we don’t set the price of food,” Direct’s Asthana noted.