Exelon may like this new pricing scheme, but you won’t RSS Feed

Exelon may like this new pricing scheme, but you won’t

In free markets, the most-efficient supplier usually sets prices. Less-efficient suppliers have three choices: They can lose sales by insisting on higher prices, sacrifice some profit by selling at market prices or get more efficient.

But less-efficient electricity suppliers have a fourth option. They can ask government to override market-based pricing. As my colleague Steve Daniels wrote in this week’s issue of Crain’s, Chicago-based Exelon wants federal energy regulators to do just that.

The operator of the country’s largest fleet of nuclear power plants backs a proposed regulatory change that would reduce the impact of low-cost natural-gas-fired generators on wholesale power prices. For several years now, gas-fired plants have been the most-efficient electricity producers. Low gas prices enable them to generate healthy returns selling power at prices that squeeze the profit margins of nuclear and coal-fired plants.

That’s bad for nuclear and coal companies, but good for customers, who pay less for electricity when gas-fired plants set market prices. It’s also a textbook example of unfettered market forces at work.

Exelon prefers arm-twisting to the invisible hand. Last year, the company cajoled Illinois lawmakers into shoring up money-losing nuclear plants in the state by imposing a surcharge on customers. Now it’s angling for federal intervention that would boost profits across its entire nuclear fleet.

Exelon and other power plant operators back a proposal to change the pricing formula for a regional electricity grid covering all or parts of 13 states stretching from Illinois to the Eastern seaboard. Grid overseer PJM Interconnect plans to seek approval from the Federal Energy Regulatory Commission to scrap a longstanding principle that low-cost producers set prices for customers in the region. Under the proposal, higher-cost generators like Exelon would set prices sometimes.

Guess how the change would affect your electric bill? You guessed right. Customers would pay about $2 to $5 more per megawatt-hour, according to Wall Street estimates. On an earnings call with analysts earlier this month, an Exelon executive vice president said, “That’s the right range to be thinking about and probably the middle part of that range makes a lot of sense to us.” The midpoint of the range would represent a 5 percent hike for customers of Exelon’s Commonwealth Edison subsidiary.

Exelon spokeswoman Robin Levy says the effect on ComEd customers would range from a decrease of 1 percent to an increase of 0.5 percent, after accounting for offsetting reductions in “capacity payments” that are included in customer bills. But PJM Senior Vice President Stu Bresler predicts a net increase of 2 to 5 percent even after reduced capacity payments.

Exelon and its friends justify their proposal in the name of “resilience.” They warn that overreliance on a single fuel source—natural gas in this case—makes electricity supplies vulnerable to disruption. Their argument would be more convincing if natural gas fueled a lopsided share of electricity generation. But figures from the U.S. Department of Energy show a balanced distribution of power-plant fuels, with gas accounting for 33 percent, coal 30 percent, nuclear 20 percent and renewables 15 percent.


Borrowing a page from federal farm policy, PJM proposes to boost electricity prices by paying natural gas generators to produce no power. Guess who pays? Right again.

The proposal is unfair to customers and unnecessary to maintain reliable electricity supplies. New gas-fired plants keep opening even as power prices fall, and nuclear plants aren’t closing en masse. Despite losses at individual plants, Exelon’s nuclear unit still turns a profit.

PJM’s proposal also appears to undermine Exelon’s broader objective of reducing competition from more-efficient natural gas plants. A guaranteed stream of “set-aside” payments likely would encourage construction of more gas-fired plants. Build a plant, turn it off, collect checks—now that’s a compelling investment case.

It’s a head-spinning scenario that might trigger nostalgia for the good old days of regulation, which may be the end game for Exelon. The company pushed Illinois to deregulate electricity back in the 1990s, when nuclear plants enjoyed a cost advantage over gas-fired plants. Company executives figured Exelon would win big in unregulated wholesale electricity generation markets. But Exelon’s nuclear fleet became a competitive albatross when fracking techniques unleashed vast new supplies of natural gas. The unexpected turnabout also rekindled Exelon’s affection for regulated retail utility markets. Last year’s $6.8 billion acquisition of Washington, D.C.-based Pepco Holdings shifted the company’s financial balance back toward regulated businesses, which now account for more than half its profit.


Regulated utilities have one big advantage over competitive power-plant operations: guaranteed profit margins. Regulation might be annoying, but it nullifies merciless market forces like those that have pinched profit margins at Exelon’s nukes. Maybe that’s why a recent Exelon filing with FERC signals a willingness to consider re-regulation of power plants. After expressing a preference for a “market-based solution,” the company said it wouldn’t reject regulation “simply on account of loyalty to a pro-market ideology.”

Read full article at Crain’s Chicago