S5E1: The EMP epilogue season – Electricity Restructuring 101

Energy Markets Podcast host Bryan Lee explains why he has returned to publishing regular episodes of the podcast after a two-year sabbatical. "I feel compelled to return," Lee says, citing "the looming threat of a retreat from electricity regulatory reforms that have provided billions of dollars in benefits to consumers."

Lee also draws on his long career in energy and environmental policy to provide the history of competitive reforms over the past 30 years intended to replace monopoly regulation of electricity prices with market-based pricing. 

"While the decades-old model for competitive electricity markets needs to be improved, we shouldn't lose sight of the benefits we've derived – billions in consumer savings and a consistently cleaner electric industry," Lee says. "It would be a tragedy if we returned to monopoly regulation rather than take the steps needed to make the markets work better."

Transcript

And we’re back!

It’s been two years since I last published an episode of this podcast. When I recorded the most recent episode of EMP two years ago, I expected the sabbatical to be just a few months. I’d done it before when I needed to concentrate on other things. I had expected to travel overseas for my daughter’s wedding, and then get back to it after I returned.

But for various reasons I wasn’t motivated. I wanted to concentrate on other interests, and then we spiraled into a second trump administration, and it seemed all rather pointless to advocate for market-based reforms to address climate disruption when the president of the united states arbitrarily decides that it’s nothing but a hoax. And while I’m gratified that there were tens of thousands of downloads of this podcast over the years, it was never enough to monetize. I don’t have a financial motivation. And for the most part I’ve been preaching to the choir, not changing hearts and minds. So I focused on other pursuits the past two years.

But now I feel compelled to return. With the president’s little incursion into Iran promising to become a prolonged and disastrous global energy and financial crisis, with the advent of artificial intelligence creating a tsunami of demand from vast energy-gobbling data centers, with communities increasingly rallying against data centers and transmission lines in their back yard, with the price of electricity becoming an election year issue as gasoline prices soar, with the president and others insisting climate disruption isn’t occurring despite the overwhelming onslaught of adverse effects globally, I can no longer sit on the sidelines quietly.

So I return to wrap this podcast up once and for all before I move on to my next project.

This will be the epilogue season of the Energy Markets Podcast, a podcast premised on the fact that catastrophic climate disruption is real, it’s happening now and it’s getting worse every day, so we absolutely must transition to a non-fossil fuel-based energy economy as quickly as possible. So I would ask my guests this question: what should policymakers do to effectuate a transition to clean energy at least cost to consumers?

I received a variety of answers, but I personally believe it’s a very simple question with really only one logical answer. We must complete the transition to market-based competition and fully demonopolize electricity markets, if not the industry as a whole. 

But I think the most compelling reason for me to take this one last at-bat is the looming threat of a retreat from electricity regulatory reforms that have provided billions of dollars in benefits to consumers. I’m seeing terribly negative trends in consumer perception and policy maker decision-making that threatens important pro-consumer market-based reforms in the electric industry, let alone the market-based reforms required to actually improve things. Utilities are increasing their monopoly choke hold on electricity markets and the economy and dominating the public exchange of ideas thanks to their deep pockets and penchant for prevarication.

To explain how I’ve come to understand that continued monopoly regulation of utilities is a substantial barrier to effectuating a clean-energy transition at least cost to consumers requires taking you on a trip through my career. 

For those of you who don’t know me, I have decades of energy and environmental policy experience as a D.C-based journalist covering the electric industry, as the Federal Energy Regulatory Commission’s director of media relations, as a utility executive and as a private consultant. In the parlance of what passes today for public discourse, I was a fake news practitioner who became part of the deep state, and then I went through the revolving door and became part of the swamp.  

I arrived in Washington D.C. in the late 1980s to work as the press secretary for a Republican member of Congress. I was temperamentally and morally unsuited for the role, so I soon segued back into journalism. I found myself working for a trade press publisher specializing in environmental compliance issues. This afforded me the opportunity to cover the congressional debate that resulted in the Clean Air Act amendments of 1990. A chief controversy in that debate was whether to employ a market-based solution to the problem of acid rain. Rather than set strict source emissions limits with technological mandates for how to achieve those limits, Congress instead opted for what is known as a cap-and-trade program, in which industrywide emissions reductions were mandated and the electric industry was given broad flexibility in how to meet those emissions reductions. Emissions reductions in one area could be used to offset continued emissions in another area, but overall sources were required to reduce their emissions. A tradeable market in emissions credits was established, so that sources could “bank” emissions credits and sell them to another source needing them to comply with the law. It was incredibly successful. The Acid Rain program’s emissions goals were reached ahead of schedule and at far less cost than the industry warned would be required to solve the problem.

It was with this experience fresh in mind that I began covering the Federal Energy Regulatory Commission for the first time for a different trade press publisher in 1993, just after Congress had approved the Energy Policy Act of 1992. That comprehensive legislation was the second of two key bipartisan congressional actions establishing competition, not continued monopoly regulation of electricity, as federal policy. The first was the Public Utility Regulatory Policies Act of 1978, known as PURPA. It was a congressional response to the energy shocks of the 1970s – energy shocks not unlike what we see today as a result of the Iran war – and it represented the first chink in the monopoly protection armor of electric utilities. Despite vociferous industry opposition, PURPA required utilities to purchase electricity produced by small, nonutility “qualifying facilities,” or QFs  – typically small renewables facilities such as wind and solar, but also electricity generated as a byproduct of industrial processes. The 1992 EPACT took PURPA’s incremental move towards competition a giant step forward by providing for a whole new class of nonutility electricity producers called exempt wholesale generators, or EWGs. This eventually gave rise to today’s multibillion-dollar merchant power sector, in which generators are not affiliated with a utility or its captive monopoly customers, but rely on the market, and not customers captive to monopolies, to provide the return on their investment in generation facilities.

But this didn’t happen overnight. When I first walked in the doors at 888 First Street NE, the overwhelming majority of electricity was still produced by monopoly utilities, and the vast majority of electricity consumers were captive customers of monopoly utilities. PURPA’s QFs had managed to capture only a very small percentage of the generation market. Less than 2 percent. In fact, some of the more interesting cases on FERC’s very small electricity docket at that time were disputes between QFs and utilities, as the utilities fought to disqualify QFs or limit the prices they must pay for their mandatory purchases from QFs. It was a completely different situation on the natural gas side of FERC’s docket, which was often choked with dozens of proceedings as FERC moved to implement its congressional mandate to deregulate natural gas prices at the wellhead. 

For the first few years, FERC processed EWG applications on a case-by-case basis, but it soon concluded that this approach was inefficient. Borrowing from its experience in natural gas price deregulation, which in and of itself has been a fantastic success for energy consumers, FERC soon adopted its landmark twin rulemakings known as Orders 888 and 889. Order No. 888 required utilities to open up their transmission lines for use by generation competitors in a manner comparable to their own use of the system. Order No. 889 required utilities to provide competitors access to information about available transmission capacity on the same basis as the utility enjoyed. 

At the same time, FERC strongly encouraged the industry to create independent system operators to operate utility-owned transmission systems independently from the utility’s commercial interests. Soon after that, FERC in Order No. 2000 created a new grid-management acronym, RTO, for regional transmission operator. RTOs were larger in geographic scope than ISOs. PJM was one of the first RTOs recognized by FERC. But California’s market, at that time limited to just one state, was deemed not an RTO but an ISO. These large regional markets for wholesale power, overseen by ISOs and RTOs, were among the actions that added rocket fuel to the creation of today’s nonutility merchant power sector.

Competitive reforms in retail electricity have been far less robust than what we’ve seen on the wholesale side of the business. In the late 1990s, as FERC was restructuring wholesale power markets, many states moved to open up their retail markets to competition. It seemed a fait accompli at the time that most if not all states would do the same. But then came California’s first-in-the-nation competitive market which crashed and burned in the great energy and financial crisis of 2000-2001. California retreated from competition and made most consumers captive once again to monopoly utilities, and saddled its consumers with the high cost of their mistakes in setting up a bad market, which they‘ve been paying for decades. As that experience showed, the lesson too many took away from that crisis was that competition in electricity at retail was a bad thing, rather than recognize that California’s market design was fatally flawed. While many states retreated from planned retail market restructuring programs, about a dozen states moved forward, learning from California’s market-design mistakes.

My experience late in my career as a communications consultant for retail providers provided me with insight into why retail competition has been less of a success story than market restructuring at wholesale. Among those dozen of so states that embraced retail power market competition, the Texas experience stands out. Texas was the only state that actually acted on the advice of federal antitrust regulators and quarantined monopoly utilities from the retail market. So without any meaningful regulatory mandates Texas has become a leader in renewable energy generation, particularly wind, but also innovative technologies such as battery storage. The other states all adopted a timid hybrid model that left monopoly utilities as energy providers in the retail market, and their markets have suffered as a result. 

The other advantage Texas enjoys is that the state’s utility regulators have authority over the wholesale market as well as the retail market. I’m sure it was Sam Rayburn who carved out Texas as an exception to the 1935 Federal Power Act’s decision to create a bright line between federal regulation of bulk power markets and state regulation of retail markets within their borders. This nod to parochialism reflected the fact that 90 years ago utilities were far less interconnected than they are today. Today’s highly integrated transmission systems make the Federal Power Act’s artificial demarcation between wholesale and retail markets a barrier to important consumer-friendly reforms. Undoing this arrangement, however, and giving the federal government regulatory authority over integrated wholesale and retail power markets is a political nonstarter. In fact, when FERC was debating the landmark pro-market, pro-consumer reforms of Orders 888 and 889, they considered whether FERC should extend federal authority to retail markets, but dismissed the idea as politically infeasible.

Okay, so I’ve been around the block a time or two here, and I’ve seen a boatload of change. But I have not seen the magnitude of upheaval and foment in the electric industry as we’re experiencing today since the 1990s, when policymakers at both the federal and state levels acted to introduce greater competition in the monopoly-protected electric industry. I see all those gains at risk now.

Let’s tick down those risks, shall we?

-- The disastrous prices in recent PJM capacity auctions is driving state politicians to threaten withdrawal from the regional transmission operator. Rather than let markets work, PJM adopted price caps, requiring capacity markets to provide generators with the “missing money” because scarcity pricing was not allowed to work. Other markets are quite successful without capacity markets.

-- utilities are pushing to cement their monopoly hold on transmission development, looking to block competitive entry just when we need skads of it, not just to accommodate renewables, but to accommodate huge data centers supporting AI that will put everyone out of work. Opposition to siting of new transmission lines and data centers is becoming vociferous.

-- Regulators and lawmakers are reregulating the retail competitive markets in several states, acting to restrict market access instead of making the difficult choice to restructure the market to better serve consumers. As federal antitrust regulators have advocated for decades, this requires the quarantine of monopoly utilities from the market. It is because Texas did quarantine monopoly utilities from its retail market that its competitive market is the stand-out success that it’s become. Policy makers in states outside of Texas should finally follow the advice of FTC and DOJ antitrust oversight officials and quarantine their monopoly utilities from the retail market, not make retail consumers captive yet again to monopoly providers. 

-- the trump administration is heedless of the economics of well-functioning energy markets and is directly interfering in the marketplace by imposing ideologically driven and arbitrary top-down mandates to prop up operations at coal-fired power plants that should have been retired ages ago. There’s little risk to reliability by retiring most of these plants. Ordering out-of-market mandates to keep last century’s technology financially viable makes about as much sense as subsidizing the buggy whip industry. Similarly, the administration has arbitrarily disrupted offshore wind energy development on the Atlantic coast that took more than a decade to come to fruition. Say what you will about the costs of the out-of-market contracts supporting offshore wind energy development, it’s foolish and certainly more costly to arbitrarily disrupt projects well past the planning stages, and then incur billions of dollars in costs on behalf of taxpayers to compensate the canceled projects. 

-- there’s a gold rush to develop many different untested technologies of small modular nuclear reactors. This is happening not as a response to climate disruption, but because energy-hungry AI data centers are looking to island themselves from the integrated marketplace. And conventional nuclear power plants that had been decommissioned, because they were no longer economically viable, are being de-mothballed.

-- the administration is doing everything it can to attack the sound scientific conclusions regarding the role of fossil fuels in driving increasingly extreme climate disruption. Despite rapidly disappearing glacial and polar ice, increasing intensity of precipitation because a warmer atmosphere holds much more water, causing catastrophic floods and storms worldwide, despite other extremes such as drought and resulting wildfires, despite clear scientific consensus, the administration blithely declares anthropogenic climate disruption a hoax and eliminates federal programs addressing climate disruption and whitewashes websites containing decades of data clearly showing the slow-moving catastrophe evolving all around us. This is just one aspect of what is the most anti-science administration in history, appointing podcasters and conspiracy theorists to important positions, attacking vaccine efficacy, allowing deadly diseases like measles to emerge again.

-- as we prepare to celebrate our republic’s semisesquicentennial, we see a complete breakdown in the constitutional checks and balances the founders put in place specifically to preempt the kind of abuses we see today allowing the president to ignore the law and arbitrarily interfere in electricity markets and unilaterally squelch climate science. It’s bad enough there hasn’t been a federal budget passed by regular order in years. Congress, riven by factionalism, lurches from one government shutdown to the next, passing stopgap budget resolutions while they continue to suppress tax revenues and allow federal spending to increase unchecked. Our national debt today equals GDP, something we haven’t seen since the end of World War II. Cowardly lapdog Republicans echo the president’s lies about election integrity, setting the stage for a constitutional crisis in November that will make January 6, 2021, look like a walk in the park. But that’s just Congress. The activist so-called conservative jurists on the Supreme Court are dismantling important precedents. Roe v. Wade is just the most prominent example. In the energy sphere, they fell all over themselves to take up review of the Obama administration’s abandoned climate initiative. Despite the rulemaking being withdrawn and being a moot issue legally, the justices rushed to bring it up so they could dismantle the long-standing Chevron precedent and institute the “major questions doctrine,” a new ideological legal theory without precedent. In such a political climate such as this, I have little expectation that the necessary reforms in the electric industry will happen.

I’m no Malthusian Cassandra. But climate change is real and will have and is having enormous consequences for life on Earth. Markets and fundamental economics are the answer to solving this threat. Climate-altering emissions of greenhouse gases are what economists call an economic externality. In other words, greenhouse gas emissions are causing environmental damage, but the producers of those emissions face no economic consequence for continuing to adversely impact the atmosphere. A cap-and-trade program resolves that inequity.

We should have acted 30 years ago to adopt a market-based approach to stemming greenhouse gas emissions similar to the highly successful acid rain program. But over the years, congressional Republicans, deep in the pockets of fossil fuel interests and monopoly utilities, have consistently thwarted legislative efforts to that effect. At the same time, fossil fuel interests have spent millions on their propaganda campaign to convince the public there’s nothing behind the overwhelming scientific consensus regarding the climate disruption we are experiencing and the role of greenhouse gases in causing it. The result is that over these past 30 years atmospheric CO2 has climbed from about 360 parts per million to 432 ppm, and emissions continue to climb virtually unchecked.

Markets work in the best interests of consumers. If they don’t, it’s because of poor market design or a failure of regulatory oversight. Problems with markets cannot be solved by retreating to monopoly regulation. 

In recent years public sentiment about markets and capitalism has soured. I blame much of it on the continued fallout from the 2007 global financial crisis. Observers are looking at these problems as demonstrating the failure of markets, rather than a failure of regulatory market oversight and poor market design. The Securities and Exchange Commission was asleep at the switch and allowed the mortgage-backed security bubble to burst unchecked in 2007. And the Obama administration failed to hold those responsible for nearly cratering the world’s financial system to account. Many, especially those who increasingly find themselves economically disenfranchised, still resent this.

Another contributor to this poor public sentiment surrounding markets and capitalism is the trend in recent decades to allow remonopolization in various industry sectors. Bigger is not always better for the consumer. We’ve forgotten the lessons learned a century ago in response to monopoly abuses in the gilded age that led to the Sherman Act and meaningful antitrust oversight and restructuring. 

So the failure to fully demonopolize the electric industry is a problem, but so is monopoly power throughout the economy. The huge tech companies now driving the aggressive push to remake the grid to support artificial intelligence have monopoly power and efforts to check that power have gone nowhere so far. On a different scale, federal efforts to check the Live Nation/Ticketmaster monopoly over the live music industry was largely abandoned by the trump administration with a weak, slap-on-the-wrist settlement just the day before an important federal court showdown over the matter. While this administration has abandoned efforts to protect consumers from the Live Nation/Ticketmaster monopoly, many states continued to pursue legal action. So it comes as no surprise that this administration’s Department of Justice has signed off on the massive planned merger of NextEra Energy and Dominion Energy.

Yes, there is just an unbelievable amount of disruption under way right now in the electric industry. Things are changing rapidly. But one thing that doesn’t seem to change is the corruption in the electric industry, both legal and otherwise, that prevents implementation of the reforms needed to benefit consumers and the environment. This will be the subject of a future episode.

And while the decades-old model for competitive electricity markets needs to be improved, we shouldn’t lose sight of the benefits we’ve derived. Billions in consumers savings and a consistently cleaner electric industry. It’s made renewable energy a bigger producer of electricity nationally than coal. Coal has slipped from being about 60 percent of electricity generation before competition in electricity to less than 20 percent today. That is a remarkable story of not regulation, but market forces delivering outcomes to benefit not just consumers but the environment too.

It would be a tragedy if we turned returned to monopoly regulation, rather than take the steps needed to make the markets work better.

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