The following is a guest post from Michael Overturf, President and CEO of DC Public Power, a nonprofit pushing for a public utility in Washington. If you are interested in submitting a guest post, please review these guidelines.
The recent flare-up in discussions whether over deregulated electricity markets work or not is predictably the result of complaints by those on the losing end of that market. Capitalism, as the old adage has it, is great on the way up, but socialism is great on the way down. As recently as 2007, during boom times, Tyler Slocum of Public Citizen was decrying deregulation as pigs-at-the-trough of supposedly avaricious power generators.
Today’s losers are the very same: traditionally integrated generator & distribution utilities that have found themselves at the pointy end of the shale gas pricing stick. The companies include companies like Exelon Generation, AEP, and DTE. Specifically, Gerry Anderson, the CEO of DTE, a utility primarily based in Michigan, penned an opinion article in Utility Dive — on his and the behalf of his “many of his fellow CEOs” behalf — claiming that electricity market deregulation has failed, and by implication, they all need to be re-regulated.
Presumably what he means is that we need to come home again, and all will be forgiven. Here’s the way that is artfully expressed: “The rules in deregulated markets need to be addressed quickly to ensure that the industry can continue to provide reliable electricity with a diverse, increasingly cleaner portfolio of generation resources.”
Anderson penned his opinion in reaction to an article written by Utility Dive Editor Gavin Bade on how utilities are seeking organized market reforms (read: reregulation) to save baseload power. DTE has, as have others, shuttered 6 baseload coal power plants, because, as AEP CEO Nick Akins put it, “[t]hese markets are driven by short-term solutions”.
In other words, profiteers and quick hitters are at work ruining the baseload generation business.
Anderson uses a simple, hard-hitting graphic to prove that deregulation has failed. The chart, repeated below, shows a comparison of the kilowatt-hour price between regulated and deregulated states. It clearly shows the teenage craziness of pricing in deregulated markets. Clearly, everyone is being hurt by deregulation.
How do they say? Lies, damn lies, and statistics?
Note that he lists the Compound Annual Growth Rate (CAGR) of 3% for both groups of states, claiming prices in deregulated market prices have not grown faster than regulated markets. Furthermore, and also conveniently left unsaid, deregulation did not take off until 2008-2010.
See that dip in pricing in the deregulated line in 2008? That’s deregulation kicking in. But Anderson decries the volatility created by such a market response. Anderson believes that the deregulated states were looking to deregulation to bring down electricity prices, and that the underlying structural hurdles in those states are keeping prices higher, ergo, deregulation has failed.
Is this, in fact, the case? Electricity consumers are often divided into broad categories of residential, commercial, and industrial consumers. Industrial users only amount to a few thousand in the U.S., but consume 34% of all the energy in the country, and provide a lot of jobs. Consider the following graphs, all reflecting data from the EIA-826 and 861 reports from the US Energy Information Administration.
Industrial consumers have benefited from deregulation by enjoying a 25% lower CAGR between January 2001 and April 2016 than their peers in regulated States. Structural problems remain: see those two acyclical price spikes in 2014 and 2015? These were brought about by underinvestment in natural gas infrastructure, most importantly in New England.
Blocking access to better pricing is a choice by the people in that area (the so-called “NIMBY” effect), not a feature of market deregulation. Commercial consumers in deregulated States also fare better, while Residential consumers have only a slight advantage. Perhaps this is what Anderson had in mind – about a third of the total market.
Even so, in all cases the CAGR of electricity unit pricing is lower in deregulated states than it is in regulated states. Gerry Anderson is simply counterfactual in his finding.
What is not lower is the cost of distribution. Anderson’s colleague Chris Crane of Exelon, for example, is buying up distribution utilities with guaranteed income so to shift revenues from competitive to regulated markets. The pressure to overinvest will be enormous because of the continued low cost of capital vs guaranteed utility returns. In a twist of irony, Exelon’s flight for safety is driving up prices in deregulated states, sure to cause more calls for regulation.
Finally, the forces putting price pressure on DTE and the other companies are the very same forces that created diversity and cleaner energy as a whole to begin with. Diversity and cleaner energy have never been a defining feature of regulated monopolies. Gas-fired generation is the new baseload supply, as the PJM Independent Market Monitor has recently reported , as it is a better fit with intermittent renewables, lower in dispatch cost, and in compliance with emissions regulation.
Oh yes, and it supports the global competitiveness of American business that’s not over invested in uncompetitive generation. It’s probably cold comfort to Anderson and his colleagues, but the substitution threat to natural gas baseload is already taking shape in the distance. In 15 or 25 years, it’ll be them seeking refuge with the regulators.
 PJM Market Monitor SOM 2015, Planned Generation and Retirements, page 52: “A significant 1
shift in the distribution of unit types within the PJM footprint continues as natural gas fired units
enter the queue and steam units [i.e., Coal] retire. While only 2,007.0 MW of coal fired steam
capacity are currently in the queue, 60,717.7 MW of gas fired capacity are in the queue. "