The following is a contributed article by Brien J. Sheahan, the former chairman and CEO of the Illinois Commerce Commission.
With the annual rate of inflation reaching 9.1% in June, the highest in 41 years, consumers are being hammered by unsustainable price increases for staples like food, housing, furniture, gasoline, airfare, and cars and trucks; driven largely by pandemic related labor, supply chain issues, fiscal policy, and a protracted war in eastern Europe.
Utility costs have also increased significantly, in fact, the most since 2006. But, unlike core inflation, the headline grabbing increases in electricity costs are, for the most part, the result of policy choices made by so-called ‘restructured’ states like California, Illinois, New York and Texas and regional wholesale power markets where in the late 1990s competition was touted as a boon for consumers.
Unlike states with traditional utility regulation where prices and investments are made under the watchful eye of a public utility commission (PUC), in restructured states massive administrative bureaucracies called regional transmission organizations (RTOs) and independent system operators (ISOs) oversee the electrical market. These RTOs and ISOs are controlled by the utility infrastructure owners themselves and serve as the arbiters of cost and investment.
Instead of the promise of lower prices from competition, the storyline emanating today from these “competitive” markets — PJM in the mid-Atlantic, the Midcontinent ISO (MISO) in the Midwest, the Electric Reliability Council of Texas (ERCOT), and California ISO in the Golden State, among others — is policy failure, catastrophic system failures, blackouts, brownouts, and higher prices (more than 4,000% in MISO’s case).
Last year “competitive” retail electric customers in Illinois paid more than $300 million more than utility default customers and over the past ten years the customers intended to benefit the most from competition have paid almost $1 billion more than they could have. Also, calling these RTOs/ISOs “markets” is, at best, a stretch, because they resemble complex bureaucracies more than what most people consider a market.
Restructuring has not only produced higher prices but also lower reliability. The primary reason for these failures is highly complex administrative “markets” that favor the interests of generators over customers. For example, the rules for PJM’s auctions are more than 4,000 pages and remain in a constant state of change. More critically, these markets have not produced lower overall prices for consumers and are utterly failing to adapt to accelerating technology, consumer preferences, and a changing climate. Worst of all, like Texas and California, they are struggling to keep the lights on, resulting in serious consequences for customers and their communities.
These are not only “market,” or administrative failures, but often rest squarely on state policy decisions that result in less reliable and affordable electricity.
In California, the Cal ISO’s problems are exacerbated by state policies that incentivize over-investment in renewables while shuttering nuclear, coal and natural gas without accounting for the gaps created by intermittency. Ignoring the reality that long-duration utility-scale battery storage is in its infancy does not help keep the lights on.
Another concern is that California’s grid is linked to other states, but when the entire West Coast is hit with increasingly severe and frequent heat waves, neighboring states simply don’t have any excess power to sell to California. The result is rolling blackouts.
In the Midwest, MISO’s problem is slightly different. State policies to force the retirement of coal plants, limit emissions (and therefore generation) from existing plants, and banning of gas plants after 2045, are conspiring to artificially restrict capacity. Just this summer, those policies resulted in a 4,620% increase in electricity prices in MISO’s annual capacity Planning Resource Auction. The irony is that instead of a smooth rational transition to less carbon intensive generation, Illinois’ environmental and climate policy will result in astronomically higher prices for downstate consumers, less reliability (MISO has warned that rolling brownouts and blackouts are a real possibility), and importation of coal generated power from neighboring states—if it is available at all. This week the Illinois Commerce Commission ordered staff to examine whether it makes sense to remain in MISO.
On the flip side, PJM, the mid-Atlantic RTO, has just the opposite problem of MISO: an oversupply of power and a failure to address constraints which prevent that energy from being fed to where it is needed on the grid. Indeed, PJM has instituted a two-year moratorium on any additional renewable power from being developed simply because they cannot manage it. This inefficiency will result in higher costs for consumers, unnecessary complexity, and less reliability.
Or consider Texas, which to avoid the pitfalls of federal oversight, and theoretically, maximize the benefit of market forces, opted to develop its own grid, and a radical version of wholesale and retail competition independent of Federal Energy Regulatory Commission jurisdiction. The woeful shortcomings of ERCOT’s market construct have manifested themselves in recent years in disastrous blackouts during severe weather events, billions of dollars of negative economic impact, higher electricity costs, millions of its citizens left in the cold, and hundreds of deaths. The hard lessons of Winter Storm Uri are going unlearned, as the Texas grid teeters on the brink of disaster again this summer.
After a quarter century, the evidence is accumulating that our experiment with electricity restructuring is failing. These so-called “markets,” where electricity is bought and sold under Byzantine and constantly changing rules, are designed to reward capital which creates winners and losers. Unfortunately, since the average ratepayer is often the least involved in this financial arrangement, they tend to be the losers – suffering from unreliable and unaffordable electricity. Not surprisingly, the defunct and disgraced energy trading company Enron was a leader in the movement to restructure.
Finally, while the vertically integrated utility construct (which both generates, distributes, and sells electricity) overseen by a public utility commission, attorneys general, and consumer advocates is almost 125 years old, its foundation continues to be compelling — to produce for customers the safest, most reliable electricity, at the lowest cost possible with accountability to state policymakers and ratepayers.
This highly regulated model, which operates in 26 states, has integrated resource planning processes and economic regulations to ensure transparent, rational, efficient provision of electricity. Indeed, the case is growing stronger that states where electricity is regulated by a PUC offer the smoothest integration of new technology like renewables, battery storage, and electric vehicle infrastructure in a manner that is beneficial to ratepayers and maintains the integrity of the grid.