Emerging Evidence on Electricity Markets: A
Public Power Perspective
By John Kelly
Michigan State University Institute of Public Utilities
38th Annual Regulatory Policy Conference
Richmond, VADecember 4-6, 2006
Oil- and Gas-Fired Generation as a Percentage of Total Generation – Mid-Atlantic and South, 1990-2004
Source: Analysis of the Impact of Coordinated Electricity Markets onConsumer Electricity Charges, LECG Corp., using EIA data
• “Reality trumps economic theory and flawed research methodology. Trying to cast today’s RTOs as money-saving institutions with consumer benefits is like trying to hammer a square peg into a round hole. It just doesn’t fit.”
-Joe Nipper, APPA Senior Vice President
of Government Relations
• Delaware Municipal Electric Corp. President and CEO Patrick McCullar:– “Customers in Delaware are paying
substantially more for electricity” since PJM was formed
– “No significant transmission has been built in the East in 35 years.”
– “Ten percent of the cost [of purchasing power in the bulk electricity market] was congestion charges.”
Blue Ridge Power Agency (VA)
• When Blue Ridge agency signed a new power supply contract after PJM was certified, prices had risen 75%– A year later, the price had risen by
another 25%
Chambersburg, PA
• Allocated just 53% of its requested auction revenue rights
• Threatened with an estimated bill of $5.7 million in unhedged transmission congestion costs
• Has spent nearly $1 million to track and monitor PJM, and is spending hundreds of thousands more to defend its right to historical use of financial transmission rights
Front Royal, VA
• Received only 54% of its requested ARRs
• Exposed to an estimated $3.3 million bill for unhedged transmission congestion costs
• Naperville Postpones Awarding Wholesale Electric Power Contract
Source: Naperville Web site
Media release, 4/25/2006
Warren Buffet on Electric Utilities
• Investing in electric utilities is “not a way to get rich, it’s a way to stay rich.”
• “Most of deregulation was a mistake” because, in a deregulated market, “generators have a clear incentive to reduce power reserves.”
• Owners of generating assets want the market to be tight
• “The last thing in the world an unregulated operator wants is excess capacity.”
Source: Platts Electric Utility Week 20 November 2006
• “The correct test, where markets have been introduced, is not whether prices have fallen but whether electricity prices would have been lower than those today if the old formula of regulated wholesale prices had remained in effect.”
-Branko Terzic,Former FERC commissioner
New York Times letter to the editor11/21/2006
• “Competition has elsewhere encouraged efficiency and innovation better than regulation. That electricity must be consumed when produced is no different from other time-perishable commodities like airline seats, hotel rooms, movie seats and advertising time on television. No barrier there. The solution is to improve market rules and market oversight.”
-Branko Terzic,Former FERC commissioner
New York Times letter to the editor11/21/2006
CT has not created a hot, active market
• “…shopping has been tepid at best during the three years that Connecticut’s transition service offer (TSO) – ending this year – has been in effect.”
• Four marketers were serving competitive customers in September, CL&P (Northeast Utilities) reported.”
• Constellation NewEnergy is the dominant player in the C&I makret with 1,335 of the 1,585 C&Is buying.”
Source: Restructuring Today
Increasing Power Supply Costs
• Kennebunk Light & Power
• Blue Ridge Power Agency
• Braintree Electric Light Department
• Municipal Electric Systems of Oklahoma
• Michigan Public Power Agency
• Lafayette Utilities System
• Iowa Municipal Utilities Association
• AMP-Ohio• St. Charles, Ill.
Not Very Somewhat Very
Capital intensiveness
Financial capital requirements
Scale economies
Lumpiness of investments
Location of facilities
Technology
Product durability
Sunk costs
Substitutes
Seasonality
Product differentiation
Vertical integration
Number of sellers and buyers
Mobility of resources/ Asset specificity
Foreign competition
Network industry
Relevance of industry characteristics to competitiveness
Not Very Somewhat Very
Capital intensiveness
Financial capital requirements
Scale economies
Lumpiness of investments
Location of facilities
Technology
Product durability
Sunk costs
Substitutes
Seasonality
Product differentiation
Vertical integration
Number of sellers and buyers
Mobility of resources/ Asset specificity
Foreign competition
Network industry
Relevance of industry characteristics to competitiveness