U.S. Electric Markets in Transition
The U.S. market for electricity is trifurcated. More than half the country is served by competitive generators bidding against each other in wholesale markets. Almost half is served by conventional state-regulated, vertically integrated utilities controlling generation and transmission. The rest, a much smaller portion, consists of government-owned and customer-owned utilities, some of which are generators and most of which serve retail customers. All categories are in transition.
In October 2016, the Public Utilities Commission of Ohio (PUCO) offered Akron-based FirstEnergy a five-year, $600 million subsidy to be paid by the utility’s customers. The move was designed to compensate for the investor-owned utility’s (IOU’s) large, baseload coal and nuclear plants’ inability to compete in the PJM competitive wholesale market against low-cost natural gas.
Consumer groups slammed the PUCO order as “corporate welfare.” Tony Addison of AARP said the PUCO decision means that “Ohioans should subsidize the failing business model of FirstEnergy.” This, Addison said, “creates a terrible precedent by PUCO and others to bailout companies threatening to leave the state, on the backs of the people that work hard and pay their bills every month.”
FirstEnergy was not satisfied. Within weeks, the company announced it was putting its baseload generating plants, with a combined capacity of over 13 GW, including coal and nuclear units, on the auction block. President and CEO Charles E. Jones said, “We have made our decision that over the next 12 to 18 months we’re going to exit competitive generation and become a fully regulated company.”
A month earlier, responding to the same market forces, Columbus-based American Electric Power (AEP) sold four Midwestern gas- and coal-fired power plants, totaling 5.2 GW of capacity, to an independent power joint venture of Blackstone and ArchLight Capital Partners for over $2 billion. (For more on the flurry of mergers and acquisitions in 2016, see “A 2016 Roundup of Power Sector Wheeling, Dealing, and Repositioning” in this issue.) The company took a $2.3 billion writedown as part of the deal. The sale represents AEP’s move—like FirstEnergy’s—to exit PJM’s competitive wholesale markets, retreating to conventional, cost-of-service regulation that characterized the U.S. electric markets before the restructuring of the 1990s.
AEP was frank about its motives in selling off major generation. President and CEO Nick Akins said, “AEP’s long-term strategy has been to become a fully regulated, premium energy company focused on investment in infrastructure and the energy innovations that our customers want and need. This transaction advances that strategy and reduces some of the business risks associated with operating competitive generating assets.”
A similar dynamic is playing out in Illinois, where the nuclear behemoth Exelon sought, and in early December won, state subsidies to keep several of its nuclear plants generating electricity in the face of their inability to compete in competitive markets. And in New York, Gov. Andrew Cuomo proposed a plan—opposed by consumer and environmental activists and nonutility generators—to subsidize four units at three uneconomic nuclear plants (two currently owned by Exelon) that bid into the New York Independent System Operator’s (NYISO’s) competitive market.
Two years ago, Duke Energy said it would move away from organized competitive markets, with 11 of the company’s 13 generating plants selling power in the PJM market, the largest independent wholesale market.
Do these events represent an existential threat to the structure for market competition in electricity that the Federal Energy Regulatory Commission (FERC) created in the mid-1990s? Former FERC Commissioner Tony Clark (Figure 1), a Republican North Dakota electricity regulator before his FERC appointment, told POWER that the Midwestern retreat from competitive markets is a case of “political buyers’ remorse” among the utilities with expensive power generation. He said, “It’s not clear to me if it is viable to live halfway between” competitive electric markets and regulated markets.
What’s happening in PJM, Clark said, is a case of “the market doing what markets do” by shunning uncompetitive supplies. But the move by some high-cost utilities to escape the market is “creating real tension” among the nation’s electric markets and its regulators, he said.
Getting More Organized
At the other end of the country, the California Independent System Operator (CAISO), the first independent system operator formed after FERC’s 1996 landmark Order 888, presents a contrast to the PJM events. CAISO is thriving and attracting new entrants into the competitive marketplace.
CAISO two years ago developed a sibling energy imbalance market to bring economic dispatch to a wider western U.S. market. The new market could prove to be the first step toward a full-scale independent system operator for the vast region.
As CAISO describes it, the imbalance market “is a real-time, wholesale power market managed by the ISO that enables participating utilities to buy low cost energy available across eight western states, including California, Oregon, Washington, Utah, Idaho, Wyoming, Nevada and Arizona. The efficiencies created by pooling resources across a wide geographic area provide cost savings and environmental benefits.” In a news release in October, CAISO calculated “the total benefits since the western regional market was launched in 2014 to $114.35 million.”
As a result of the success of CAISO’s imbalance market, additional participants are likely to join. Early last October, Arizona Public Service and Puget Sound Energy in Washington state said they will join the new market. Within two weeks, the Balancing Authority of Northern California, a public power transmission operator, and the Sacramento Municipal Utility District, a large public power system, said they also plan to join. At the same time, Mexico grid operator El Centro Nacional do Control de Energia said it is exploring participation with CAISO for the Baja California Norte grid.
In the U.S., electric markets come in three models: wholesale competitive markets such as PJM and CAISO; legacy state-regulated monopoly markets individually governed by regulatory commissions either appointed or elected; and public power systems, such as the Tennessee Valley Authority and Bonneville Power Administration, owned by governments or their consumers.
According to the Energy Information Administration, more than 60% of electricity in the U.S. moves through the competitive wholesale markets such as PJM, the Midcontinent Independent System Operator (MISO), NYISO, the New England Independent System Operator, the Southwest Power Pool, the Electric Reliability Council of Texas, and CAISO. The remainder of the transactions largely occur in state-regulated markets, most in the deep south and parts of the Rocky Mountain West and Pacific Northwest (see the map at the top of this story).
The competitive markets appear to be working well from the standpoint of consumer value. Frederick S. (“Stu”) Bresler, PJM senior vice president (Figure 2), told POWER in a recent interview that PJM’s sometimes controversial capacity markets “have been very successful in attracting investments and efficient retirements.” In the energy markets, he said, “prices have been very low,” thanks to natural gas from shale deposits, and the market is “doing the job markets were intended to do.”