It is no surprise to hear the U.S. coal industry has been under a lot of stress over the last decade or two, nor to learn that West Virginia has seen some of the biggest stresses. In West Virginia coal output has fallen from its peak level of 25 years ago and employment in the sector is down to under 13,000 workers, just 1/10th of peak employment reached in 1948.
A few years ago I wrote a report with Patrick O’Reilly, then working at West Virginia University, describing the West Virginia consumer’s interest in switching to retail electric competition. The report, published in January 2019, noted that once-low regulated electricity rates in West Virginia were rapidly approaching the national average.
West Virginia once had one of the lowest residential power prices in the nation, while Texas fell in the middle of the pack. As of the end of 2016, residential prices in Texas averaged below those in West Virginia. These price trends emerged despite Texas’s steadily growing economy and West Virginia’s slow decline in population over the period shown.
While average prices in the reformed states are still higher today than in regulated states, they started higher – often because of state taxes, regulations, and other factors that affected the cost of doing business. For the Top 10 reform states, inflation-adjusted prices are just over 1 cent per kWh higher on average when compared to prices in 2001 (about 9 percent higher). In regulated states, on the other hand, comparable prices are up over 1.5 cents per kWh since 2001 (about 15 percent higher). West Virginia prices started lower than the national average but rose faster. West Virginia prices rose nearly 3 cents per kWh, and were nearly 36 percent higher in 2017 than they were in 2001.
State politics work almost exclusively to the benefit of, first, coal owners and producers, secondly, coal miners and other workers, and more distantly to the benefit of others who work in communities surrounding coal production. Protecting the interests of electric power consumers is purportedly the job of the West Virginia PSC, but the PSC has chosen to side with coal producers instead.
Maybe had consumers in West Virginia given careful consideration to the reform option in 2019 they would now have a plan to respond to a regulatory commission clearly captured by industry.
We may want to separate Texas from the other “choice” states for a few reasons.
1. A significant number of customers in the state remain served by monopolies: all utilities outside of the ERCOT wholesale market remained traditional monopolies, and municipal utilities and co-ops within ERCOT were allowed to remain monopolies as well. (These utilities could choose to allow competition. So far just one co-op in ERCOT has enabled competition. The municipal utilities in Lubbock, Texas, joined ERCOT in 2021 and intends to allow competition beginning in late 2023.) So in a chart with blue = choice and red = monopoly, Texas is purple.
2. Texas implemented retail choice differently than most other states. Some retail electric policy advocates say Texas implement reforms better than most other choice states. Some reasons for the claim: Wholesale and retail markets are better integrated in Texas; the residual regulated “wires” businesses are entirely separate from any businesses owning electric generation or selling retail power in Texas; and retailers bill their customers in Texas, not the legacy regulated wires utility.
3. In addition, unlike almost every other state that seriously considered reforms, Texas power prices were near the national average when it began implementing the reforms.
And if we look at inflation-adjusted average prices in Texas relative to other retail choice states and to monopoly states, the prices look a bit different too.
In these posts I am not making claims about causal relationships, I am only observing differences in average prices. But these simple averages are a good place to start asking questions. Questions like: Why are prices in most retail choice states higher? Why did prices in Texas go up faster than most from 2001 to 2008, then fall faster than others from 2009 to 2022? How could Wall Street Journal reports look at EIA data and think that Texas consumers would have been better off sticking entirely with monopoly utilities?
Advocates of retail electric choice hear two kinds of arguments over and over. First: reliability of the power grid is threatened by retail reforms. Second: consumers pay more in states with retail choice when compared to states with monopoly utilities. In this post I want to explore the second argument.
It is true, on average consumers pay more in states with electric choice. The question to ask: “Why?”
The chart below summarizes the data. Using data from EIA’s Electricity Data Browser I categorized states as either “retail choice” or “monopoly,” then took a simple average of state average prices in each category. To smooth out the month-based variability I took a 12-month rolling average for each category. In addition, the prices were adjusted for inflation so the averages reflect 2022 dollar values.
Some choices may be controversial. Similar analysis sometimes puts California, Oregon, Montana, Michigan, and Virginia in the “retail choice” category. Each of these states started down the path to reform in the late 1990s, but all subsequently backed out in whole or in part. Many of these states have allowed a few larger customers to keep competitive suppliers, but others are locked into their monopoly supplier. In my view these states lack real customer choice.
The obvious feature: on average prices are higher in states allowing customers to choose. This feature of the data is what led the Wall Street Journal to publish a pair of stories claiming consumers in retail choice states paid billions of dollars extra (WSJ mistaken view on Texas, and the bad analysis for all choice states). The main problem with the WSJ analysis is in the baseline they chose for comparison: the average price of states that stuck with monopoly. (More on flaws in the analysis here.)
Notice the starting points of both lines: in 2001 average prices in retail choice states were about 3.8¢ kWh higher than monopoly states. This higher price is also in EIA data before 2001, but not yet accessible via the very handy Electricity Data Browser. Generally speaking, these higher than average rates represent past regulatory choices in those states and differences in the general cost of doing business in different states. States that reformed to allow retail electric choice mostly passed laws between 1997 and 2001, and began implementing their reforms two or three years later. In many cases rate caps or other transition mechanisms applied for another 5 to 8 years, so the full effect of the reforms were not in place until after 2008 or 2009.
These higher-than-average prices cannot be attributed to state decisions to reform retail power markets since the higher-than-average prices existed before the states reformed. Only if prices tended to increase in choice states relative to monopoly states after retail choice policies were fully implemented, then maybe one would have reason to blame the policies for higher prices.
A non-energy example may make this point clearer. Rents in New York City and San Francisco are much higher than rents in Houston or Miami. New York City and San Francisco also have rent control laws. Can I conclude that cities with rent control laws have higher prices than cities without them? Yes. Can I conclude that rent control laws cause cities to have higher prices? No.
Should I assume that without rent control laws the prices in New York City and San Francisco would be similar to Houston and Miami. No, that would be ridiculous. But that is, in effect, what the WSJ reporters did to come up with their clickbait headlines.
States with retail power choice have higher-than-average prices, but you cannot conclude that retail power choice policies have caused the higher-than-average prices based on this kind of simple comparison.
I’m lying to my programmable thermostat, a Honeywell Home wifi-enabled smart programmable model. I want to quit, but I have to do it to get what I want. Am I wrong?
Here is what I mean. I buy electric power from my local electric monopoly on a time-of-use rate. From 3 PM to 6 PM on weekdays during July and August the price I pay is about 4X the offpeak rate. (May, June, Sept, and Oct the peak is about 3X the offpeak rate.)
It makes sense to shift power consumption, particularly for the largest energy consuming device in most Arizona homes: the air conditioner. After the thermostat was installed the first order of business was setting the schedule. This is when the lying started.
You see, my thermostat has a handy programming interface that aims to make it simple for consumers to use. You tell it what temperatures you want when you wake up, while you are away during the day, when you return in the evening, and while you sleep. It does the rest!
Which would be great except there is no way to tell it to shift load away from my TOU peak rate period. So, as the image shows, I am telling the thermostat I wake at midnight, leave the house at 2:45 PM, return at 3:00 PM, and go to sleep at 7:30 PM. None of those things are true, but I trick the thermostat into saving me money.
I’m estimating that I save about a $1 every weekday by pre-cooling the house before 3 PM and then letting the temperature rise (to about my limit at 83F). Actually I save a bit more than $1/weekday in July and August and a bit less in the other months from May to October. By the end of October I expect to have saved enough to cover the price of the thermostat.
The chart below shows my average July energy use per hour during weekdays, but excluding July 11. On July 11 the local utility called an “energy conservation event,” and I’m enrolled in a program that lets them temporarily reprogram my thermostat to save energy when the grid is stressed. Turns out that they do what I am trying to do, though maybe they are a little better at it than I am.
I’d like to do even better. The red line in the chart represents my July average. Notice the V-shape indicating that energy use bounces back steadily. The blue line is the performance on July 11 when the local utility was in control. They achieved more of a U-shape, delaying most of the recovery until after the peak rate ended.
Either I need to tell better and more elaborate lies to my thermostat, or it and me learn how to communicate better together and I can finally tell it the truth.
The truth might not set me free, but it might allow me to boost my energy savings another 20 or 30 percent. I’d like that.
Been a bit of a crazy week in Texas electric power markets. I’m writing this on Friday, July 15, 2022–the week is not over yet–but maybe things have settled down for the next few days. On Wednesday the wholesale price in ERCOT hit its $5,000 cap on the energy price for a while in the afternoon. At the same time prices in bordering power systems ranged between $75 and $125 per MWh.
On Thursday afternoon the price in ERCOT was about $50 MWh while neighboring prices were all over $100. In fact, most of the time power prices are a little cheaper in Texas. There are currently a few small High Voltage Direct Current (HVDC) connections between ERCOT and its neighbors, but these HVDC interties are not readily available for commercial use and are too small to capture all of the potential gains from trading across the regions.
Connecting ERCOT with neighbors has been proposed before, a few times, and gets shut down in Austin by two groups (A) folks worried about loss of Texas jurisdiction over a Texas interstate market, and (B) industry consumers who believe they benefit from trapping low cost wind and solar power output in state. High-cost power generators actually do benefit from blocking interties.
(A) is a real concern, there are benefits from regulation in Austin rather than Washington DC. Among other things, ERCOT serves as an alternative “experiment” in RTO design that can serve as contrast to the other US RTOs which are all regulated by FERC in Washington DC. Oversight by a single agency cannot help but dampen some reasonable exploration of possibilities simply because the experts there will hold views about the best ways things should be done. In any case, the two most promising intertie projects both secured rulings from FERC saying the projects would not upset existing jurisdiction over ERCOT. Still, political opposition delayed and in at least one case halted development.
(B) is just wrong headed. Interties will yield lower average prices and less volatile prices in ERCOT. It doesn’t take a detailed analysis to demonstrate the point: just look at the picture and then imaging how things would change if, say, 5 GW of power could be brought in through four or five interties spread around the state. Not too hard to imagine prices in ERCOT would have nearer $1,000 than $5,000 MWh on Wednesday (and, yes, prices in neighboring areas would have been higher, but because surrounding areas are connected through the rest of the country prices in those areas might have climbed from $120 to something like $150. On Thursday power flows could have gone the other way, maybe pushing ERCOT prices from $50 to $100 while bring down neighboring prices from $120 to $110 or so.
The price changes are all guestimates. With a commercial power market model it would be easy enough to do quality estimates. (For a large fee, I can have one done! Contact me!) In fact the regulatory documents filed surround the Tres Amigas power state and the Southern Cross transmission project likely both contain this kind of analysis. While they would be out of date, they would provide some sense of the scale of benefits.
In addition, Texas has a lot of land suitable for wind and solar power generation. The ability to produce and ship that power out of state would further boost the state’s position as an energy development powerhouse. At the present we are getting into more frequent wind-on-wind competition leading to curtailment of clean energy. We are a likely soon to see some solar-on-solar competition, too.
Finally, during extreme conditions, both in Summer peaks and Winter peaks, interconnections can be lifesaving. No one needs to be reminded that people died in Texas during Winter Storm Uri because of the days long outages suffered by some consumers. Even with a handful of added interties it is likely ERCOT would have suffered outages during the February 2021 winter storm. However, the amount of load shedding would have been smaller and easier to rotate across consumers, with lifesaving results.
The ERCOT market is become more volatile and prices are higher than they would otherwise be because influential market participants and parochial interests in Austin have frustrated efforts to link up. The Southern Spirit transmission project–I think it is an adaptation of the Southern Cross project–continues to work its way through commercial and regulatory hoops. ERCOT needs it and a handful more reaching north and west.
The Arizona Corporation Commission regulates privately-owned electric utilities in the state (and more, here is their self-description). Many states have their regulators appointed, but in Arizona the ACC commissioners are elected in state-wide races. Two positions are open in the November election. Recently the three Republican candidates appeared in an informal debate hosted by Arizona PBS.
About midway into the program the candidates were asked whether retail electric power should be opened to competition. The discussion begins at the 31:24 mark. Below I mostly summarize some key points, though I cannot help but to interject when necessary.
Candidate Kim Owens replied, “No, it is very clear. … We tried it, it did not work.” As part of her answer she claimed that “in every state, in every year” consumers ended up paying more (referencing the fundamentally unsound analysis published by the Wall Street Journal in 2021.) She reiterates this “always, everywhere worse” claim multiple times.
This is a false claim, but not necessarily one that even reasonably informed people would know is false. (Some discussion and links here.) If Owens wasn’t competing for a position of power over electric consumers and producers in Arizona she could be forgiven for not knowing. However, she is competing for a position of power; she is morally obligated to become better informed.
Candidate Nick Myers responded, “Unknown,” adding that the court case that paused implementation of retail competition in Arizona required the ACC to take additional steps before competition could begin. Those additional steps were never taken. Myers disputed Owens’s remark about Texas, citing a Baker Institute report (but he appears to be confusing this report on competition and prices with a second report on Winter Storm Uri). Myers said that until additional conversations are had over competition in Arizona we do not know whether retail competition can work here.
Candidate Kevin Thompson began by suggesting Republicans tend to favor free markets whether for energy or anything else, and he is always going to lean toward customer choice. He then explained why he thinks California’s failed experiment does not apply (it was wholesale competition that failed, but retail competition under discussion in AZ) and Texas’s winter storm failures do not apply (FERC’s report shows retail competition in Texas was not to blame, other policy choices caused the problems).
Then the candidates began a, um, let’s call it a “more interactive discussion.” Owens said Texas prices during the storm hit the maximum of “$9,000 kWh” (actually it was $9,000 MWh, so she is off by a factor of 1,000; it is an easy thing for a non-specialist to confuse, but again, Owens wants to be one of the power elite). “They kept the lights on, but it was a pretty price that they paid,” she concluded.
Of course, they (ERCOT) did not keep the lights on for everyone. Importantly for the discussion, it was shareholders of competitive power suppliers in Texas who paid most of that “pretty price” but customers of monopoly utilities in Texas will be paying that “pretty price” through bill adders for many years to come. The outrageous power bills Owens mentioned befell the roughly 0.5% of retail customers who signed up for a type of market-rate power contract that cannot be offered in Arizona (as per that 2004 court case and the Arizona state constitution).
Myers next pointed out the kWh vs MWh hour distinction, suggesting Owens is inexperienced, and Owens retorted, “Did someone get a $16,000 electricity bill?” She’s made opposing competition a theme of her campaign. The interactive discussion continues.
Myers noted, as I injected above, that very few customers made a very deliberate choice to accept a pure wholesale rate and take on the risks that come with it, and he added such rates cannot be offered in Arizona. Thompson jumped in to say the $9,000 MWh price was in the wholesale market, it was not a bill that retail customers paid. He is totally missing her point about customers of Griddy, some of whom received outsized electric bills (though the company did not collect on these bills after the storm).
Thompson said, “deregulation–well, not deregulation–customer choice is a such a complex issue, and that’s why we need to have stakeholder meetings.” I heartily approve of the term “customer choice” over the misnomer “deregulation” or the aspirational term “electric competition.” Consider that no candidate for the Arizona Corporation Commission has ever proposed not regulating the sale of electric power in the state. (Is there a Libertarian Party candidate?) The alternative up for discussion is whether or not some sort of regulated market might be better than the current regulated monopoly approach. Regulated vs. regulated, not regulated vs. deregulated.
Owens reports she is the only candidate that has committed against allowing competition in the state. There is a bit of back and forth about the law passed a few months back that repealed the remaining pro-competition parts of the state’s 1998 law. All candidates agreed that the law was passed and they would uphold that law. Owens said the opposition to the law came from the big environmental groups who want to push through the Green New Deal. <Insert eyeroll emoji here.>
The topic shifts to water utilities about the 43:15 mark, yielding just under 12 minutes of discussion on the possibility of retail electric competition. Just 12? It felt much longer. It seems like there is a “time flies when you are having fun” joke to be made here, but I can’t come up with one.
Of course these are just the three Republican candidates. Two of them will survive the Republican Primary and land on the general election ballot in November. There they will face two Democratic candidates: incumbent Sandra Kennedy and newcomer Laura Kuby. There is, in fact, a Libertarian candidate: Nathan Madden is running a write-in campaign.
There are two positions to be elected this fall, so the Republican primary features competition while the Democrats managed to avoid competition in the primary. There is probably a joke to be made here, too. I guess watching candidates engage in debate has drained the humor out of me.
The Libertarian slate is either half full or half empty, depending on how you look at it.
This paper began because I did not really understand something about Renewable Portfolio Standard (RPS) policies. As I use to tell my students, one of the best ways to learn something is by explaining it to someone else. If you do that explaining in writing, that enhances the effect. One view in the climate/clean energy/transition policy space is that the way to achieve 80 percent or 100 percent clean energy is just to keep ramping up RPS policies (and make then nationwide, and expand to include all zero-carbon power). That approach did not seem politically sustainable to me.
As RPS creep up from 5 or 10 percent to 30 or 40 or 50 percent, the quantity-over-quality approach leads to greater price volatility and reliability worries. Such developments may not be serious threats to either wholesale power markets or the electric grid–financial hedges can handle wholesale price volatility, and grid operators are pretty good at what they do–but they would create political problems for the policies. (The recent NERC summer assessment and subsequent political murmurings in Washington, DC and other state capitals may be relevant, though no one is pointing fingers at RPS policies specifically.)
Fortunately there is an easy fix: change the rules to require hourly REC matching instead of annual REC matching, at least for a large part of the RPS obligation. To explain the point I’ll have to first explain a bit about how RPS laws work.
Most RPS laws use a compliance system based on Renewable Energy Credits (RECs). Assume electric retailers are obligated by their state government to procure RECs equivalent to 10 percent of its annual sales of power. Typically RECs need only match the year of the retail power sale that created the obligation, meaning a REC generated in January could be used to satisfy an obligation incurred in December.
It is the mismatch allowed by RPS rules that gives rise to a “quantity-over-quality” problem. Quantity-over-quality incentives leads to investment in wind power wherever it is windiest and solar power wherever it is sunniest. Sounds fine, but such investments do not necessarily produce power where and when consumers want to use it.
As more and more high-quantity renewables are put on the system, prices will fall when the wind or solar resource is strong but shoot up when wind or solar drop off. Prices in California can sink to near nothing midday, but rise sharply in the evening as the sun sets. High winds in West Texas can drive power prices in the region negative.
Shifting to 24/7 REC obligation requires support for clean energy resources capable of delivering power when consumers want to use it. Once REC-prompted demand in the low-cost windy or sunny times and places is satisfied, investment will be induced to tackle the harder problem of filling in the gaps when the sun goes down or wind resources fall below normal for days. There is a little more subtlety in the paper itself, so go download it, read it, share it with your friends, post your complaints below, etc.
For FERC’s rules to be successful, they must overcome utility incentives to overlook cost-saving technologies, prioritize local projects over regional investments, and thwart development of projects that might threaten their generation interests.
Notice that the incentive problem is inherent to the nature of vertically-integrated electric utilities. If a company owns transmission assets and generation assets in the same region, then decisions about transmission assets affect payoffs expected by generation assets. Similarly, decisions about generation assets affect payoffs expected from transmission.
A company board and management cannot be made to be ignorant of the interactions. The board and management of vertically integrated utilities have inherent incentives to invest in transmission assets in ways that do not detract from the value of their generation assets. No code of conduct erases the incentives. Executives may be prohibited from stating the obvious, but they cannot be prohibited from thinking the obvious.
Peskoe said, “Rather than expanding transmission to increase interconnectedness, utilities have recently been mired in small-scale projects that often simply rebuild last century’s grid.”
Not too surprising, right?
The grid built up last century primarily served to connect a monopolist’s generation to the monopolist’s locked-in customer base. That grid and the companies generation fleet were developed together in ways that made sense to utility shareholders last century. That grid enhances the value of old generation assets to utility shareholders even while it may reduce the overall value of the grid to society.
One possible fix is an old idea that was mostly ignored in the US: the transco.
The federal government should prohibit ownership ties between transmission and generation. (Ownership ties between transmission/distribution and retailing are also suspect, but that is less of a federal issue.) Spin off all transmission in an RTO to a single transmission owner with no financial ties to generation or retailing companies. That transco would remain a FERC-regulated public utility. Competition among generation is heightened when the bias created by vertical integration is removed.
So, half seriously, I’m proposing a ban on vertical integration in the electric power industry.
Only half seriously because it would be a fairly heavy handed regulation. Vertical integration often provides economies that dis-integration would eliminate. But here it seems that vertical integration of transmission and generation assets is driving anti-competitive behavior that itself has high costs. Two decades ago FERC and most utilities involved in the formation dismissed the transco idea. Might have been a mistake, as two decades of FERC frustration around transmission investment suggests.
Virtical disintegration. It’s a half serious proposal that requires serious consideration.
How have retail power prices changed due to reforms enabling customer choice of electric power suppliers? Here is a chart summarizing average changes before and after 1997, the year the first state began to reform.
Prior posts have discussed the effects of allowing electric power customers to choose their own electric suppliers (here and here). Many states initiated reforms to allow customer choice explicitly to bring retail power prices down, so many assessments of reform have been concentrated on the price effects.
It seems like an easy task to compare prices before reform and prices after, but easy comparisons can be misleading because they ignore other influences on power prices not directly related to allowing customer choice. For example, natural gas prices have seen dramatic ups and downs over the last 20 years and those fuel price changes will affect retail power prices. We would only want to credit retail price reforms for the benefits of low natural gas prices (or blame them for the burden of high natural gas prices) if the reforms themselves caused those price changes.
Wholesale market reforms may have enabled growth in natural gas generation capacity, but it does not seem that retail customer choice independently has increased demand or otherwise directly affected natural gas markets. Instead, the fracking-driven boom in supply and, more recently, increasing exports of LNG seem to have driven natural gas price trends over the past two decades.
So I’ll repeat the warning from one of the previous blog posts which also applies here: “[T]he chart above isn’t a sophisticated analysis of the causes of electricity rate changes. It would take a lot more advanced analysis to solidly back the claim that competition produced lower rates.”
Some economists and data analysts have sought to produce the necessary analysis. I’ll discuss some of these works in future posts.
“Over the period [2001-2020], Arizona’s electric rates for commercial customers have increased 2.74¢/kWh (a 37% increase over 2001 rates) whereas similar rates in New York, Illinois, and Ohio have increased by only 1 to 1.5¢ and rates in Texas and Pennsylvania have fallen.”
I was listening to the Senate’s Natural Resources, Energy, and Water committee discussion of the bill and was surprised to see the AZ representative of the National Federation of Independent Business stand up in support of this bill, which is to say for monopoly and opposed to competition. (Video of the committee’s discussion is here. The link takes you to the start of the discussion at the 0:49 mark, NFIB’s Chad Heinrich appears just after the 1:19 mark.)
Now Mr. Heinrich reports that the position is the result of a vote by his members, and that is a perfectly respectable way for a group to choose positions. But the organization should also help its members understand the context of the vote. Arizona’s commercial ratepayers may be paying a little extra because consumers are locked into monopoly providers.
The following chart shows the change in average commercial electric rates since 2001 for several states. I’ve shown the U.S. average (blue) and Arizona (light green) along with the five largest states to allow commercial customers to choose electric suppliers: Texas, New York, Pennsylvania, Illinois, and Ohio. (You can look at the data yourself. Click the link to see this data via the EIA’s Electricity Data Browser. Go explore.)
Still, at first glance, over the period available in EIA’s Electricity Data Browser, Arizona’s rates for commercial customers have increased 2.74¢/kWh (a 37% increase over 2001 rates) whereas similar rates in New York, Illinois, and Ohio have increased by only 1 to 1.5¢ and rates in Texas and Pennsylvania have fallen. Again, the chart is not conclusive evidence, but if a monopoly lobbyist wants to reject the suggestive picture above or dispute the data collected by the U.S. Energy Information Administration, ask them to show their work.
NFIB members in Arizona may want to hear from NFIB members in New York, Pennsylvania, Illinois, Ohio and Texas about the advantages and disadvantages of competitive power markets.