Exploring a New Paradigm for Electricity in Wyoming Regional Markets and Retail Choice. Thor Nelson May 7, 2018

Transcription

1 Exploring a New Paradigm for Electricity in Wyoming Regional Markets and Retail Choice Thor Nelson May 7, 2018

2 Wyoming Industrial Energy Consumers Who is that? The Wyoming Industrial Energy Consumers ( WIEC ) is a coalition of large electric consumers in Wyoming. WIEC comprises many of the largest oil companies, gas companies, trona mines, chemical plants, cement plants, and other manufacturers in Wyoming

3 Which companies are members of WIEC? Air Products and Chemicals, Inc. Anadarko Petroleum Corporation BreitBurn Energy Partners, L.P. Church & Dwight Co., Inc. Ciner Resources Denbury Resources, Inc. Enbridge Enterprise Products Operating LLC ExxonMobil Corporation FDL Operating, LLC Genesis Energy, LP Merit Energy Company Monsanto Company Mountain Cement Company Peregrine Midstream Partners LLC Phillips 66 Company Simplot Phosphates LLC Sinclair Oil Corporation Solvay Chemicals, Inc. Tata Chemicals

4 Why Does WIEC Care About Electric Rates? Electric costs make up a significant portion of all WIEC members cost of doing business WIEC members, collectively, buy about 55% of the electricity sold by Rocky Mountain Power (RMP) in Wyoming WIEC members purchase, on average, over 250 million kwh per year from RMP. Therefore, a one cent change in the cost of electricity per kwh translates to a $2.5 million/year cost increase for an average WIEC member

5 Why is WIEC Concerned Electric Rate Increases? The traditional narrative in Wyoming is that we enjoy some of the least expensive if not the least expensive electric rates in the nation In 2001 that was true according to data from the Energy Information Administration (EIA) Wyoming Average Residential Rates 10 th lowest Wyoming Average Commercial Rates 4 th lowest Wyoming Average Industrial Rates 2 nd lowest (only Kentucky was less expensive)

6 But by 2017 That Narrative is No Longer Accurate 2017 National Rankings Wyoming Average Residential Rates 17 th lowest (from 10 th in 2001) Wyoming Average Commercial Rates 22 nd lowest (from 4 th in 2001) Wyoming Average Industrial Rates 26 th lowest (from 2 nd in 2001) In 2017, average industrial electric rates in Wyoming were exactly equal to the national average (6.91 cents per kwh) and higher than in New York, Pennsylvania, Illinois, Ohio, Iowa, Georgia, North Carolina, South Carolina, Virginia, West Virginia, Alabama, Kentucky, Mississippi, Tennessee, Arkansas, Louisiana, Oklahoma, Texas, Arizona, Idaho, Montana, Nevada, New Mexico, Utah, and Oregon

7 Not About Blame WIEC believes that the Wyoming Public Service Commission is diligently working to protect the interests of Wyoming customers WIEC and other intervenors in utility rate cases work hard to keep rate increases down Finally, WIEC believes that, in general, utilities in Wyoming are reasonably managed and doing what they can to keep rate increases down

8 So What Can be Done? WIEC recommends that Wyoming re-think the paradigm for how electric utilities in Wyoming are regulated WIEC believes that well-functioning competitive wholesale markets for electric generation and wellfunctioning retail markets can, over time, outperform traditional regulated monopoly models and bring about lower rates for customers and superior quality of service

9 Do you have any evidence of that? Yes, to a degree. Look at rates in states with retail competition starting with residential rates versus Wyoming residential rates Retail Electric Rates Residential (cents per kwh) Residential Rate Rate Change % Change United States % New Jersey % New York % Pennsylvania % Illinois % Michigan % Ohio % Maryland % Texas % Montana % Nevada % Wyoming % California % Oregon % Average (Non Wyoming States) % Wyoming Ranks 2 of 13 4 of 13 9 of of 13

10 What About Commercial Rates? Retail Electric Rates Commercial (cents per kwh) Commercial Rate Rate Change % Change United States % New Jersey % New York % Pennsylvania % Illinois % Michigan % Ohio % Maryland % Texas % Montana % Nevada % Wyoming % California % Oregon % Average (Non Wyoming States) % Wyoming Ranks 1 of 13 6 of of of 13

11 What About Industrial Rates? Retail Electric Rates Industrial (cents per kwh) Industrial Rate Rate Change % Change United States % New Jersey % New York % Pennsylvania % Illinois % Michigan % Ohio % Maryland % Texas % Montana % Nevada % Wyoming % California % Oregon % Average (Non Wyoming States) % Wyoming Ranks 1 of 13 9 of of of 13

12 How is the Meeting Today Intended to Advance That Discussion? WIEC has commissioned two expert consulting firms to provide stakeholders in Wyoming with insights into lessons that can be learned from states that have implemented regional markets and/or retail choice Energy Strategies and Kevin Higgins Brubaker and Associates and Jim Dauphinais These experts have prepared a white paper that discusses Regional Transmission Organizations ( RTOs ) and retail choice and makes recommendations for Wyoming

13 Path Forward The white paper is a first step and provides the Commission, legislature and interested stakeholders with the framework to better understand the benefits and costs of implementing competition in electric markets in Wyoming WIEC asked the experts to include best practices and recommendations to assist in the determination of factors that should be utilized to evaluate how to join an organized wholesale market and implement retail electric customer choice

14 Path Forward, continued What is clear to WIEC is that the status quo may not be the right answer for Wyoming going forward WIEC urges the Commission, legislature and interested stakeholders to begin a serious examination of ways that Wyoming can proactively move to a more robust wholesale competition for electric generation services and retail customer choice

15 What is the End Game? With a well-functioning wholesale generation market and well-designed retail customer choice, consumers in Wyoming will benefit by having increased self-determination over their generation supply and access to market options. Further, those competitive pressures will encourage suppliers to find and expand efficiencies and lead to lower prices and better reliability The path forward will not be easy and will require substantial investments in time and effort by many stakeholders in Wyoming But WIEC believes this time and effort will be well spent as Wyoming and Wyoming s economy needs to find a way to maintain and, if it can, restore its competitive advantage in terms of electric prices

16 Questions?

17 Contact Info For more information please contact: Thor Nelson Phone:

18 REGIONAL TRANSMISSION ORGANIZATIONS Presentation of a white paper prepared on behalf of Wyoming Industrial Energy Consumers to the Wyoming Public Service Commission May 7, 2018

19 RTO Introduction AGENDA Introduction Background Benefits and Costs of RTOs/ISOs Key Features of RTOs/ISOs How RTOs help to enable Direct Access Overview and Benefits of Four RTOs/ISOs CAISO ERCOT SPP/Mountain West Transmission Group (MWTG) PJM Lessons Learned/Best Practices Recommendations for Wyoming ENERGY STRATEGIES 2017 Page 19

20 RTO INTRODUCTION ENERGY STRATEGIES 2017 Page 20

21 RTO INTRODUCTION BACKGROUND ISOs and RTOs are independent, non-profit organizations that ensure reliability and optimize supply and demand bids for wholesale electric power Began in 1990s through various FERC Orders: 888, 889, 2000 An RTO manages transmission and energy flows across its market footprint, performs transmission planning and manages wholesale energy market transactions and cash flows within the market *RTO and ISO used interchangeably in this presentation and refer to organized wholesale market structures ENERGY STRATEGIES 2017 Page 21

22 RTO INTRODUCTION RTO BENEFIT CATEGORIES Description Operational Efficiencies from More Efficient Use of Existing Generation and Transmission More efficient generation unit commitment and dispatch o Unit commitment over a larger footprint can reduce the need to commit reserves (due to load and weather diversity) o Security constrained economic dispatch (SCED) is used to dispatch the most cost-effective units to meet system needs o May be able to lower necessary operational reserves through Balancing Authority consolidation RTOs/ISOs generally permit greater use of existing transmission assets (through monitoring actual flows) than is generally observed under nonorganized markets which use contract path transmission reservation Elimination of multiple transmission rates across the footprint (i.e. pancaking ) helps enable the most efficient units to be used to produce energy Lower Peak Capacity Needs Renewable Integration Transmission Planning Enhanced Reliability Since times of peak load differ across areas, combining the geographic footprints together can result in a lower coincident peak demand which can reduce the amount of capacity required to meet that need Can reduce need to build additional generation capacity Diversity of renewable generation can assist in management of renewable variation Market optimization and more efficient use of transmission can increase the ability to use renewable generation at its full capability (i.e. fewer curtailments) and can increase access to renewables RTOs generally perform transmission expansion planning across the market s footprint RTOs can evaluate the most cost-effective transmission solutions for reliability, economic and public-policy reasons over a larger area Given the broader geography of RTO footprints, transmission planning can also enable utilities to select the most cost effective future generation across the footprint, given resources within the market footprint are not subject to pancaked transmission rates SCED helps better manage energy flows ISOs and RTOs can provide additional situational awareness Organized wholesale energy market can also provide faster identification, dispatch, and delivery of replacement generation ENERGY STRATEGIES 2017 Page 22

23 RTO INTRODUCTION RTO COSTS RTOs offer various benefits but there are costs to establishing and continuing to administer the markets Start up costs can be significant, which is part of why large quantities of load often work together to establish an RTO economies of scale are helpful in spreading out RTO formation costs Ongoing RTO administration costs also benefit from economies of scale Costs associated with transmission cost allocation (both existing and new facilities) should be considered ENERGY STRATEGIES 2017 Page 23

24 RTO INTRODUCTION KEY RTO FEATURES Energy Markets 2 primary markets: real-time and day-ahead Ancillary Service Markets Capacity reserves needed to maintain grid reliability over short time horizons: within a few seconds to ~30 minutes Resource Adequacy Installed resources needed for the system to reliably meet peak load over the long-term Several ways to achieve this, including a capacity market, reserve margin, or an energy-only market that relies on other price signals to incent new generation Locational Marginal Pricing LMPs set the market-clearing price for energy at a given location or node in the system Represents the cost of supplying the next MW of load at a specific node ENERGY STRATEGIES 2017 Page 24

25 RTO INTRODUCTION KEY RTO FEATURES Financial Transmission Rights FTRs allow market participants the opportunity to manage and hedge against congestion costs in the day-ahead market FTRs go by different names in each RTO/ISO Generally used in one of three ways: By generators to offset congestion costs that may be incurred by selling energy into the day-ahead market By financial players seeking to profit from purchasing undervalued FTRs Market Monitoring Oversee the markets, services, and participant behavior in the RTO/ISO to ensure that the market is efficient and fair Transmission Planning and Cost Allocation Long-term transmission planning conducted within the RTO footprint To comply with FERC Order 1000, RTOs evaluate transmission necessary for reliability, economic reasons, or to achieve public policy requirements Cost allocation is slightly different in each RTO and the particular method can impact entities net benefits from RTO participation ENERGY STRATEGIES 2017 Page 25

26 RTO INTRODUCTION RTOs CAN HELP ENABLE DIRECT ACCESS Two key requirements for effective direct access: Liquid electricity markets Non-discriminatory access to the transmission system RTOs provide and enhance both of these components RTOs act as an independent entity to oversee the allocation of scarce transmission resources among competing suppliers RTOs generally increase the liquidity and transparency of electricity markets The formation of ISOs and RTOs, when done correctly, can provide policymakers with the option to provide electricity customers with additional energy supply choices ENERGY STRATEGIES 2017 Page 26

27 OVERVIEW OF SELECT RTOs/ISOs ENERGY STRATEGIES 2017 Page 27

28 RTO/ISO OVERVIEW CALIFORNIA INDEPENDENT SYSTEM OPERATOR CAISO is the only ISO in the US portion of the Western Interconnection Governed by a five member body appointed by the California Governor and confirmed by the California Senate Real-time market, known as the Western Energy Imbalance Market (EIM) is unique in that its footprint stretches across the Western Interconnection EIM gross market benefits estimated around $330M since it was implemented at the end of 2014 Current and future entities make up over two-thirds of load in the Western Interconnection Effort underway to expand the timeframe of the EIM to the day-ahead market Resource Adequacy (RA) in the CAISO is closely aligned with the RA requirements of the CPUC, which requires all load serving entities (LSEs) to procure sufficient resources through three distinct RA requirements: System RA, Local RA, and Flexible RA System RA requirements must meet the LSE s projected need plus a 15% planning reserve margin, while local and flexible RA requirements are determined using other techniques Currently, the CPUC requires RA compliance showings for the coming year and for each upcoming month EIM Footprint ENERGY STRATEGIES 2017 Page 28

29 RTO/ISO OVERVIEW ELECTRIC RELIABILITY COUNCIL OF TEXAS Formed in 1996, ERCOT was the first ISO in the US, and in 2002, it enabled full retail electric choice Since ERCOT s transition to a competitive market, average retail rates in ERCOT have decreased 63% on an inflation adjusted basis Not possible to attribute lower rates entirely to retail electric choice and the ISO construct, but rates are believed to be lower than they otherwise would be absent these two major changes Resource adequacy in ERCOT is unique ERCOT lacks a formal capacity market and is recognized as an energy-only market Energy prices reflect growing scarcity and the risk of higher energy prices is intended to incent new generation development, when necessary ERCOT currently has the highest energy price cap in the country at $9,000/MWh and utilizes the operating reserve demand curve (ORDC), to send scarcity signals in the energy market which will ratchet prices up as demand increases and generation reserves diminish ENERGY STRATEGIES 2017 Page 29

30 RTO/ISO OVERVIEW SOUTHWEST POWER POOL & MOUNTAIN WEST SPP is an RTO serving 14 states SPP s 2016 annual report estimated net benefits in excess of $1.7 billion annually ~$5.71/month for a typical residential customer using 1,000 kwh Resource adequacy requirements determined by SPP s Regional State Committee (RSC) RSC allows one state utility commissioner from each state to provide direct input to the SPP board on adequacy and transmission planning/cost allocation issues Each LSE in SPP is required to ensure a 12% reserve margin SPP reduced the reserve margin in 2016 from 13.6% and believes it was able to do so in part because of the significant transmission buildout that occurred in the region SPP has been actively engaged in negotiations with Mountain West since 2013 MWTG had planned to be fully integrated as members of SPP in early 2020 However, on April 20, 2018, MWTG s largest member, Xcel Energy, announced that it will no longer pursue participation in SPP It is unclear if the rest of the MWTG will be able to continue with plans to integrate as full members of SPP ENERGY STRATEGIES 2017 Page 30

31 RTO/ISO OVERVIEW PJM PJM is an RTO serving the mid-atlantic region PJM reports it offers benefits between $2.8 to $3.1 billion annually Resource adequacy is addressed through a capacity market called the Reliability Pricing Model (RPM) RPM is a forward capacity market that procures capacity three years in the future through a competitive auction Capacity market participants can offer supply from new or existing generators, upgrades to existing generators, and demand response All capacity in PJM must be bought and sold through the RPM, making it a mandatory capacity market Recently, PJM has been working with its stakeholders to evaluate how state policies affect the capacity market and to develop potential solutions and market modifications PJM sent two competing proposals to modify its capacity market to FERC, allowing FERC to pick the winning proposal ENERGY STRATEGIES 2017 Page 31

32 RTO/ISO OVERVIEW CAISO, ERCOT, SPP, PJM COMPARISON Oversight Regulated by FERC CAISO ERCOT SPP PJM Oversight from Public Utility Commission of Texas and the Texas Legislature (not FERCregulated) Regulated by FERC Regulated by FERC Governance Five member Board appointed by the California Governor and confirmed by the California Senate ERCOT Board of independent members, consumers, and representatives from ERCOT's various electric market segments Independent SPP Board elected by members. Board receives advice from the Members Committee (which sits with the Board during deliberations). PJM's independent Board is elected by members. The Members Committee provides advice to the Board. Stakeholder Input Robust stakeholder processes, but no official "voting." Staff collects stakeholder input and presents its recommended approach to the Board. Only Corporate members can vote Only SPP Members can vote on moving items through the SPP stakeholder process Members Committee manages stakeholder process through committees and user groups; non members cannot vote Role of States CPUC is heavily involved in Resource Adequacy construct, and pieces of transmission planning, among other things. Governor and Senate involved in Board selection. Texas Legislature regulates ERCOT Regional State Committee (RSC) allows one state commissioner to provide direct input to the Board; RSC also has primary authority over transmission cost allocation and the methodology for resource adequacy in the region Organization of PJM States, Inc. (OPSI) made up of state regulatory commissions; participate and give input to stakeholder groups but do not vote ENERGY STRATEGIES 2017 Page 32

33 RTO/ISO OVERVIEW CAISO, ERCOT, SPP, PJM COMPARISON CAISO ERCOT SPP PJM Role of Consumer Advocate Consumer advocates participate in the standard stakeholder process, along with all other categories of stakeholders Board includes three consumer representatives which represent: residential and small commercial consumers, industrial consumers; and large commercial consumers. Consumer groups may also become Corporate members (which provides voting rights) SPP does not currently have a defined role for consumer advocates; no consumer advocates have elected to become SPP members and thus do not have voting rights Representatives from office of consumer advocates gets ex officio seat on member standing committees Resource Adequacy (capacity market, etc.) Rules are established both by the CAISO and the CPUC and include requirements for system, local and flexible resource adequacy; with a 15% system planning reserve margin Target reserve margin of 13.75% for LSEs; Energy only market that uses a price adder to its real time energy price to send scarcity signal to market when reserves are low Required reserve margin of 12% for LSEs PJM utilizes a mandatory capacity market (the Reliability Pricing Model) to provide for resource adequacy; the capacity market typically targets reserve margins of about 15 17% Pricing/LMP Nodal market design Nodal market design; LMPs do not include losses Nodal market design Nodal market design Legal Structure Entry / Exit Fee for Members 501(c)(3) nonprofit, public benefit corporation No formal membership (except for Participating Transmission Owners e.g. utilities), therefore no annual or entry/exit fees for members 501(c)(4) social welfare nonprofit Annual fee: $2,000 for corporate membership; $500 for non voting membership 501(c)(6) business league nonprofit Annual fee: $6,000 Exit fees (approximate as of mid 2017): $770,000 for all members; plus $1.46/MWh for LSEs Limited Liability Company Annual fee: $5,000 ENERGY STRATEGIES 2017 Page 33

34 RTO/ISO LESSONS LEARNED & BEST PRACTICES ENERGY STRATEGIES 2017 Page 34

35 LESSONS LEARNED AND BEST PRACTICES RTOs ARE ADAPTABLE TO VARIOUS REGULATION MODELS Each RTO/ISO has found methods for co-existing within the regulatory construct(s) in which it operates Cost of service regulation at the retail level can continue At the same time, an RTO may allow the benefits of a more efficient wholesale electricity market to be passed on to retail ratepayers SPP is a primary example of this For states that allow direct access service for retail customers (i.e., retail competition) ISOs and RTOs serve an important function by providing open access to the transmission system, management of the transmission system, and the liquidity that can facilitate greater customer choice ERCOT is an example of an ISO with a full retail choice model PJM predominantly serves states with electricity choice, but also serves others without retail access CAISO has a limited amount of direct access and recently has seen increased customer choice through the emergence and growing trend of Community Choice Aggregators (CCAs) ENERGY STRATEGIES 2017 Page 35

36 LESSONS LEARNED AND BEST PRACTICES RTOs SHOULD ENSURE SUFFICIENT CAPACITY California s experience with long-term resource sufficiency Looking back to the California energy crisis, one key failure that contributed to the crisis was the lack of a mechanism that ensured sufficient capacity The resulting energy crisis led to extreme prices and sustained rolling blackouts, as well as an eventual restructuring of the California energy market CAISO now requires LSEs to contract for a minimum amount of capacity above projected peak loads System, local, and flexible resource adequacy defined by CPUC; longer-term capacity planning conducted via IRP process Growth of CCAs in traditional IOU territory has created a unique challenge for the state to determine which entity (CCA or IOU) is responsible for long-term resource planning As much as 85% of the state s IOU load departure anticipated by mid-2020s Capacity markets are a continued work in progress PJM has been criticized by some that have concerns about the impact of state subsidies on capacity market prices, asserting that they may suppress capacity market prices Opponents also have concerns that certain rules can increase the cost of electricity without properly incenting the right generation for diverse and reliable power supply Examples: minimum offer price rules and capacity performance incentives ERCOT s energy-only market to date Due to significant thermal retirements, ERCOT s forecasted summer 2018 reserve margin dropped to 9.3% (compared to ~20% in 2017) ERCOT s summer generation capacity has increased recently as several units will return from mothball status and extended outage, helping to increase ERCOT s summer reserve margin by 500 MW Many are observing whether ERCOT s prices will climb higher and incent sufficient generation to move back up towards the target (non-mandatory) reserve margin of 13.75% ENERGY STRATEGIES 2017 Page 36

37 LESSONS LEARNED AND BEST PRACTICES RTOs SHOULD AVOID DISTORTING MARKET SIGNALS In order to operate efficiently, markets need to be allowed to send accurate signals to market participants A number of factors can distort market signals to varying degrees Production tax credits combined with renewable energy credits can create negative wholesale electricity prices Negative prices may distort actual market signals, though they can simultaneously provide an economic indicator for state generation preferences (such as a preference for increased renewable energy production) ERCOT s energy-only market deliberately allows periods of very high energy prices which send signals to developers that new generation may be needed To date, ERCOT s method has provided sufficient generation capacity to meet demands ENERGY STRATEGIES 2017 Page 37

38 LESSONS LEARNED AND BEST PRACTICES GOVERNANCE STRUCTURES ARE CRITICAL Governance structures are the primary ways in which amendments or proposed RTO market rules are made In CAISO, concerns about governance structure and its integration with a single state (California) have limited the expansion opportunities for the ISO However, CAISO has found ways to expand pieces of its ISO offerings through the EIM, which has a distinct governing body from the CAISO Board of Governors Most other ISOs and RTOs have independent boards elected in various ways by their members, however membership requirements can prevent entities from selecting and confirming Board candidates SPP has substantial exit fees which have served as a deterrent for some potential members, thus limiting their ability to vote and participate in selecting Board members Each RTO has different mechanisms for involving state regulators and other key state representatives in the process SPP s RSC provides state regulators with significant authority over certain polices in the RTO including transmission cost allocation and resource adequacy These types of roles and authority may be an important consideration for Wyoming as it explores possible RTO options ENERGY STRATEGIES 2017 Page 38

39 RECOMMENDATIONS FOR WYOMING ENERGY STRATEGIES 2017 Page 39

40 RECOMMENDATIONS FOR WYOMING EXPLORE VARIOUS OPTIONS Each RTO/ISO has substantial differences in its implementation, governance, rules, policies, procedures, and benefits In the West, there are at least 3 entities that may be offering wholesale market services, and policy-makers should explore all options to determine best fit for Wyoming: CAISO via EIM (including potential expansion of the timeframe of that market) SPP Peak-PJM Wyoming should consider the ease of entering and exiting the market structure. EIM provides a unique benefit in that it can be exited relatively easily and with little expense. Conversely, other markets can come with steep exit fees, such as SPP s, and/or with the obligations to pay for a portion of the transmission that is constructed in the market. ENERGY STRATEGIES 2017 Page 40

41 RECOMMENDATIONS FOR WYOMING THOROUGHLY CONSIDER COSTS AND BENEFITS Establishing an RTO can be costly Administrative expenses associated with establishing and operating a market, monitoring the market, and developing policies Ongoing costs of operating the market and increased utility and regulatory staff which may be necessary to participate in the various processes Transmission cost allocation mechanism used in the region and its potential impact on future transmission costs should be considered These potential costs to consumers should be factored into the expected cost of utility RTO participation FERC policies allow for a 50-basis point adder on Return on Equity on FERC-jurisdictional transmission assets for utilities that voluntarily participate in RTOs/ISOs RTOs can more efficiently commit and dispatch generation This type of benefit can generally be quantified through a production cost model simulation and a variety of potential futures can help to bookend the possible benefits Through transmission planning at a broader level, and expanding access to a larger geographic scope of resources, these markets can reduce transmission and generation investment costs These benefits are more difficult to quantify in a benefit cost analysis ENERGY STRATEGIES 2017 Page 41

42 RECOMMENDATIONS FOR WYOMING DEDICATE SUFFICIENT RESOURCES RTOs and ISOs involve significant committee work to develop policies, review market practices, and consider proposals Important for state regulatory representatives to be involved and to have sufficient understanding of the markets in which their utilities are operating RTOs have board meetings, market monitor reports, FERC filings and more, which stakeholders, including state regulators, should participate in and review Lack of understanding or involvement can put state regulators at a disadvantage when wholesale market issues and/or costs arise in some form or fashion through state ratemaking procedures Dedicating sufficient resources and dedicating them early in the process will help position Wyoming to maximize the value of participation in an ISO or RTO, or other wholesale electricity market which may develop in the state ENERGY STRATEGIES 2017 Page 42

43 THANK YOU Energy Strategies 215 South State Street, Suite 200 Salt Lake City, Utah (801) Kevin Higgins, Principal energystrat.com ENERGY STRATEGIES 2017 Page 43

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45 Overview Brief History Sampling of State Implementation Full-Scale Choice Large Customer-Only Choice Recommended Best Practices 45

46 Brief History of Choice 1970s and 80s Rapidly rising fuel costs (Oil and Natural Gas) Large baseload generation cost overruns (Coal and especially Nuclear) Stagnant Load Growth Resulted in high cost regulated electric rates 1990s Regulated electric rates still high due to the foregoing Wholesale natural gas and electric deregulation leads to much lower wholesale prices FERC introduces Open Access Transmission Service 46

47 Brief History of Choice (Cont d) Over 20 states took legislative or regulatory action toward introducing full-scale retail customer choice Concentrated in high retail electric rate states (California, Illinois and Northeast), but also in places like Montana and Texas Generally, phased in starting with larger customers California Energy Crisis Seriously flawed market design along with market power problems Stalled the move of many states to full-scale retail electric customer choice 47

48 Retail Electric Customer Choice Today 48

49 BAI Explored 12 Choice States California Illinois Maryland Michigan Montana Nevada New Jersey New York Ohio Oregon Pennsylvania Texas We will explore these moving from the most successful states to the least successful states 49

50 Texas The Great Success Story Full-scale customer choice successfully implemented in ERCOT portion of Texas with strong participation by both large and small customers Residential electric rates under retail choice have declined by 63% on an inflation-adjusted basis 50

51 Texas -- Contributors to Success Required retail choice by date certain Eliminated standard offer rates by a date certain Imposed operational separation or divestiture of generation assets Imposed limits on market power Established independent operator for transmission system and locational balancing market Accepted market volatility and stayed the course Had the unique benefit of PUC of TX jurisdiction over the wholesale market and transmission service, in addition to retail choice and distribution service 51

52 Illinois, Pennsylvania and Ohio Have also implemented full-scale retail choice with strong participation by both large and small customers Common characteristics Significant generation divestiture Existence of robust day-ahead and real-time hourly energy and operating reserve markets operated by an RTO with day-to-day oversight by market monitor In Illinois and Ohio, municipal aggregation has contributed to the relatively large number of small customers taking service from non-incumbents 52

53 New York, Maryland and New Jersey Have also implemented full-scale retail choice, but with less robust small customer participation While somewhat similar to Illinois, Pennsylvania and Ohio, there are some differences Significant transmission limitations More barriers to generation market entry Municipal aggregation is just beginning to take off or currently not permitted (e.g., Maryland) 53

54 Montana - The Quiet Story Has implemented retail choice just for large customers with very strong participation Originally sought to implement full-scale choice and even had nearly full generation divestiture Reversed course in legislation prohibited 5 MW and larger customers from returning to regulated service unless no harm to other regulated customers was shown Large customers below 5 MW already on choice were allowed to remain on choice Large customer choice thrives in this state without an ISO/RTO or independently operated balancing market 54

55 Michigan The Slow Squeeze Has implemented limited retail choice for only large customers with very strong participation on the two largest utility systems within the constraints of an artificial 10% cap Originally implemented full-scale choice in an atypical manner Transmission system divestiture rather than generation divestiture Import capability increased by 50% High market prices in mid-2000s led to many customers switching back to regulated service 2008 legislation limited choice to large customers and no more than 10% of the total electric sales of each utility Low market prices since 2009 have led to a long customer waiting list for choice on the two largest utility systems Coal-fired generation retirements, transmission constraints and related reliability fears led to 2017 legislation requiring mandatory four-year forward capacity procurement by all electric suppliers 55

56 Nevada The Revolution Has implemented limited retail choice for only large customers and has seen a large amount of recent activity Originally intended to implement full-scale retail choice -- AB 369 and AB 661 reversed the course However, NRS Chapter 704B of AB 661 allowed large customers to go to choice provided: Customer pays exit fees to compensate utility for net cost generated by exit It does not hurt the public interest by raising utility rates Early users were large mining companies in the north who constructed new generation to partly meet their needs Very recently several casinos and data centers primarily in the south have used law or attempted to use it High regulated rates and large exit fees under choice have led to Ballot Question No. 3 regarding full-scale choice Passed in 2016, must be passed again in

57 Nevada Ballot Question No. 3 Approval of this ballot measure would add a new section to the Nevada Constitution establishing that every person, business, association of persons or businesses, state agency, political subdivision of the State of Nevada, or any other entity in Nevada has the right to choose the provider of its electric utility service, including but not limited to, selecting providers from a competitive retail electric market, or by producing electricity for themselves or in association with others, and shall not be forced to purchase energy from one provider. State of Nevada, Statewide Ballot Questions, 2016 at page

58 Oregon Has implemented limited non-residential customer retail choice with very weak customer participation 5-year opt out of regulated service requires payment of 10 years of transition costs Transition costs recovered over 5 years in the case of PacifiCorp Resulting high transition costs have led to very limited customer participation 58

59 California The Horror Story Attempted to implement full-scale retail choice with disastrous results Major utilities sold nearly all of their fossil generation Retail rates frozen and all customers granted choice in 1998 Very high market prices occurred on a sustained basis in due to barriers to entry, a flawed market design, and market power issues Utilities under serious financial pressure due to extreme market prices and returning customers 59

60 California (Cont d) CA Dept of Water Resources was given mandate over utility power purchases in 2001 DWR executed its mandate by immediately entering into long-term high priced purchase power contracts It saddled utilities and their customers with very high costs for an extended period of time CPUC suspended choice as of September 20, 2001 but excepted customers who exited regulated service prior to that date 60

61 California (Cont d) In 2010, California began to open choice to additional customers on a limited basis California continues to face challenges However, 13% of total energy sales remain under choice Furthermore, municipal aggregation is beginning to blossom, though it has led to new stranded cost discussions 61

62 Best Practices for Full Scale Choice We have 11 recommended practices if Wyoming decides to pursue full-scale choice: 1. Eliminate any high market concentration in generation ownership and control that may exist 2. Establish robust, day-ahead and real-time hourly energy and operating reserve markets that are independently operated and under the day-to-day oversight of a market monitor 3. Establish non-discriminatory unbundled rates for distribution service 4. Rules should be established to functionally and operationally separate the provision of generation services from the provision of transmission and distribution services 62

63 Best Practices for FS Choice (Cont d) 5. Reasonable certification rules for retail suppliers should be established and be less onerous for suppliers only serving large customers 6. Allow for municipal aggregation of smaller customers by retail suppliers 7. Careful examination of utility stranded cost claims should be made to ensure the costs were prudently incurred, used and useful and have been mitigated as fully as possible 8. Stranded cost claims that have been shown to be prudently incurred, used and useful and have been mitigated as fully as possible should be recoverable over a term no more than five years; securitization should be allowed when it has been shown it will reduce customer costs 63

64 Best Practices for FS Choice (Cont d) 9. Establish a market-based mechanism for temporary service for customers that are between retail suppliers 10. Establish provisions allowing choice customers to return to regulated service under average cost of service rates when a 5 year notice is provided by the customer 11. Establish provisions allowing choice customers to return to regulated service at incremental cost of service rates to the extent the customer provides less than 5 years notice of its return to regulated service 64

65 Best Practices for Large Customer-Only Choice All 11 recommended practices for full-scale choice are desirable for large customer-only choice, but not all 11 are necessary for large customer-only choice In particular, it may be reasonable to forgo the following for large customer-only choice: #1 regarding the reduction of market concentration in generation #2 regarding independently operated day-ahead and real-time hourly energy and operating reserve markets #6 regarding municipal aggregation In addition, it may be reasonable to modify #7 and #8 such that customer exit fees are determined on a case-by-case basis consistent with the intent of #7 and #8 65

66 Jim Dauphinais Brubaker and Associates, Inc Swingley Ridge Rd., Suite 140 St. Louis, MO