20 Years of Electricity Restructuring in Pennsylvania

breaking up longstanding monopolies that controlled power generation and, at the retail level, giving some customers the opportunity to choose their electricity provider. Twenty years later, competition has provided many benefits but has come with challenges. Today's guests are two experts on Pennsylvania's electricity sector. They recently published a report funded and published by the Climate Center, which looks at the results of electricity industry restructuring in Pennsylvania.

Christina Simeon is Director of Policy and External Affairs at the Climate Center and former director with the Penn Future Energy Center. Co-author John Hanger is the former Pennsylvania Secretary of Policy and Planning and former Secretary of the Pennsylvania Department of Environmental Protection. He's now an energy consultant. Christina and John, welcome to the podcast.

Uh what it did was uh end a state sanctioned monopoly on generation, the building and and operating of power plants, allowed any individual or c uh company uh to build uh power plants and compete for retail business. It maintained the monopoly on the distribution. of power. And that distribution is today still a state sanctioned, fully regulated business.

I i it is also important to understand even within the generation sector where there was a ending of the monopoly and the and the the start of competition, that there remain significant rules. These rules are now Uh uh created and enforced typically by an organization called PJM, uh which is an independent authority that has the responsibility to to make sure the electric grid is r reliably operated and the wholesale market for for power is competitive.

The users of electricity had to pay those rates and didn't have any other options. Wholesale electricity competition forced power plants to now compete against one one another to provide power to the grid, and the rates that they were compensated on was based on market outcomes. rather than regulators. Retail competition gave electricity users the option of choosing a supplier that they wanted to provide them with electricity supply.

Competition did not affect the way that pole and wire companies were compensated. That continues to be regulated by state based regulators like a public utility commission and those rates are based on cost plus plus a profit margin. And this is really because it would be economically inefficient to have multiple companies competing to provide, you know, multiple lines of poles and wires into a a person's home.

So the theory behind wholesale competition was that it would make power plants operate more efficiently and more cost effectively if there was competition that would lower costs for consumers. And then the same thing was really true for retail competition. By giving customers choices about who was their provider, it would promote uh more innovations, it would lower costs. And so that's some of the things that we looked at with the report.

had residential rates that were typically in the top twenty, pr uh sometimes in the top ten uh highest rates uh uh of the country. Uh the Pittsburgh area was serviced by a a u uh utility uh called Duquesne and it too had residential rates that were amongst the very highest in the entire country. Many power plants uh operated by burning coal uh in a very inefficient way. Uh it converted coal to electricity very inefficiently.

It was sort of like a equivalent of a a car that got ten miles to the gallon. Uh and there was no pressure to change that because uh the utilities had a monopoly. They were in business uh with a fixed almost guaranteed return, whether they operated efficiently or not. So

We had a inefficient, uh dirty, uh high rate electric environment in in Pennsylvania twenty years ago. Uh so what the study uh looked at was where are prices today to for consumers? And we looked of course by measuring uh those prices in constant dollars because it's a twenty year time period. And with one or two very small exceptions, prices uh for all customers in all parts of the state.

are down in many cases considerably in constant dollars. We looked at emissions, the pollution coming from the generation of electricity, and that is down also very, very substantially. across the board. And we we also looked at some of the uh product

products that that are being offered. And there you you certainly see many more products than existed twenty years ago. For example, you see long term contracts, uh two, three year contracts where you can lock in your price. That was impossible twenty years ago. You see renewable energy products of different kinds. Uh some are wind made in Pennsylvania, some are n what are called national wind products.

And uh there are certain other innovations that have occurred. I think it's fair to say that the innovation that we've seen so far is really the beginning as opposed to the end of the innovation cycle.

The wholesale markets have been able to successfully attract new investment into newer uh electricity generation resources that tend to be more efficient, for example. And also older, less efficient resources have exited the market. Uh we've seen a significant decrease in coal fire power plant output in the fuel mix and a significant increase in natural gas based power output.

Environmental emissions of carbon dioxide, nitrogen oxides, and sulfur dioxides fell twenty one, thirty one and seventy four percent respectively between two thousand and five and uh twenty fourteen. And we also found that generation resources are generally becoming more reliable. So there's a metric metric called the equivalent forced outage rate. Which is basically a measure of the probability a generation resource is going to go offline or gonna be unable to perform when it's needed.

That uh metric has dropped from eleven percent in nineteen ninety six, the year the law was passed, to six point nine percent in twenty fifteen.

On the retail side, data quality was a little bit of an issue, but overall performance was positive. For the commercial and industrial customers, like commercial businesses or manufacturing plants, industrial manufacturing plants. They tended to save money when they shopped for a competitive supplier and contracted with a competitive supplier.

However, residential customers were more likely to save money by continuing to purchase electricity from the local utility. This local utility service is called default service, and we'll talk about that a little bit later. But it was really for those residential customers who continued to take utility default service instead of the competitive product, it was unclear whether the higher prices from the competitive suppliers were driven by higher costs.

or greater value. For example, that greater value could have been provided by a renewable energy product, or another innovative product that maybe gave them some sort of equipment giveaway or something that made it hard to compare to the standard utility product. Um and that's a that's an area that Certainly needs further research.

When we looked at residential electricity supply prices back from nineteen ninety six, adjusted them for inflation and compared them to today's prices, we found that almost every residential customer in the state would have saved money uh through competition and specifically that utility default service product. We calculated those savings to be in excess of eight hundred million dollars in twenty sixteen.

In addition, the non-monetary benefits to residential customers included these product innovations that John spoke of, such as the ability to maybe choose to lock in your price for multiple years. choose a product that gives you a hundred percent renewable energy that was generated in Pennsylvania or other products. We did observe though that some product offerings that were expected were not available.

Um we also look at at delivery rates, which again are not affected by competition. These are the rates that customers pay to the wires and poles companies to bring electricity into their homes.

In general, commercial and industrial rates fell both on a nominal and inflation adjusted basis, while for uh the residential sector those rates increased above the rate of inflation and are typically over fifty percent of the customers bills, which have some um implications for electricity shopping, for example.

uh right now the local utility. Though under law it could be provided by a different company. In other words, another company could petition the Public Utility Commission to take the place of a utility and provide that competitive option.

But there is no such thing as a non competitive electric product being sold to any customer in Pennsylvania today. They're all competitive products. That's the first Uh the s the second point is that whether it's a default product or a retail product uh provided by a a what's called a a competitive supplier. Uh though but just about for every customer, those products cost less today than the what customers were paying twenty years ago.

once you adjust for the fact that it's twenty years later and there's been inflation over the period. A couple of small exceptions to what I've just said. But basically whether customers buying the competitive uh default pr uh product or like as I am buying a competitive product uh from a retail supplier, the vast majority of customers have saved considerable amount of money. And I think that's

critically important to understand. Uh the next thing to understand is that the power plants that are uh connected to the grid are all on average operating much more efficiently than they were in two ways. One is they break down about half as often as they used to break down. And in the under the old system, when the monopoly was in place.

A owner of the power plant got paid whether the power plant ran or not. It was that investment was in a rate and uh it unless the u utility commission took that investment out of the rate. Customers continue to pay for that investment. The c utility commission basically never did that.

There was one exception. Literally when Metropolitan Edison melted down the three mile island nuclear reactor, that was a little too much for the regulator. And they actually decided, you know what, we better st not have the customer pay for that anymore. Um but with that rather notable exception it just didn't happen. So there was no incentive to run your p your power plants well and and if they broke down so what? Now if they break down you don't get paid.

There's no dollars coming in. So uh not too surprisingly, there's a lot of attention to how well these plants run. The second thing that is very important is that the power plants now care about how much fuel they burn to produce a p a unit of electricity. Under the old monopoly system, the owners of the power plants got paid for every single ton of coal they burnt, regardless of how well or badly they burnt that ton of coal.

It was just recovered in rates. Now, if you are burning m more more coal than necessary to produce a unit of electricity, in other words you're you're using fuel inefficiently, you're the equivalent of a gas guzzler. you are going to have higher costs and even run the risk of being unprofitable because the the price that you're getting paid is a market price and it doesn't necessarily cover your fuel costs. It might or it might not.

So there's huge pressure now to actually build power plants that are the equivalent of a very fuel efficient car. Uh there are more Prius on the road, so to speak, in the power grid today, than Hummers. Uh and and in fact uh the the typical power plant now is converting gas uh at forty, fifty, sixty percent

efficiency rates when in the old days, meaning twenty years ago, the typical power plant converted fuel to util to uh electricity at about a thirty three percent efficiency rate. Those are huge gains. And it's true those wholesale gains flow through to the retail products, whether it's a default product or a so called competitive supply product. Most of the gain is coming from the wholesale sector. That's true.

Uh it's not quite all of it because we've got things like demand response and some other things that are very uh uh fran frankly, c almost delivered completely by competitive suppliers. Not quite, but almost. Um so it's not all of the gains that are coming are coming out of the wholesale sector and being passed through through retail competition, but it's a lot of

The the last thing I would like to to say is for those customers who, like me, uh care about the environment, one of the things that really annoyed me twenty years ago was that my money Oh, it's been taken out of my pocket uh with no choice and given to highly polluting companies. Now I actually am a a customer of a company that is uh providing me electricity uh

generated a hundred percent from wind farms in Pennsylvania. I've actually been able to contract with a company that not only is providing wind power, but wind power generated right here in in Pennsylvania. And for me that's that's a huge value. I I pay more than the lowest cost offers in the marketplace and I personally do it gladly and happily.

So th that's that's part of the the choices that are being being uh offered. Today actually what I'm paying for a hundred percent wind power product in Pennsylvania. would be less than what I was paying for electricity if I were a Pico customer or a Duque customer twenty years.

considerably less. Um I'm actually in the in Hershey area, so I'm not in those service territories. But but were I in those service territories, I would be actually paying less for my wind power than what I was paying twenty years ago for coal and everything else.

However, consumer advocates argue that utility provided default service is an important part of retail choice, is a com an important consumer protection mechanism, insulating customers from market volatility, for example. you know, more is going to more debate is gonna have to inform that discussion, but we believe that's something that lies ahead.

to drive down prices of so called distributed energy resources. These are things like solar panels on a home or maybe a biodigester on a farm. There's a lot of different examples. So that families and businesses might be able to drop off the grid entirely. A combination of generating their own power, perhaps storing it on site when uh where they produce excess power for their needs.

are creating a real policy debate or choice that has to be made about the future of the distribution grid. And to me that's going to be the most important policy choice. One of the things we actually noticed in the in the report is the part of the the electric bill that was continued to be a monopoly has increased in price at rates faster than the rates of inflation.

Uh so we see w the the part of the business which has been subjected to competition. We see prices below the rates of inflation. Some customers have saved fifty percent in real terms. Uh the the some of the savings are very, very large. But across the board, uh, the distribution monopoly has continued and across the board the prices for that distribution service has increased at a at a price or a level faster than the rate of inflation.

And the market players that are left are saying, Well, the r that the pot of money uh is smaller now and we're having a hard time competing and there have been discussions about well is competition working? Maybe it's working for some people and not working for others. And when I mean people, I mean generators. Yeah.

uh they're under real financial pressure. Uh I personally don't have any sympathy for them, uh because they they've run run power plants in a way that are inefficient. Other competitors are eating their lunch. And by the by the fact that other competitors are eating their lunch, consumers are doing well and emissions are going down. So this is in my mind the worst kind of special pleading that we often see. Big

economic interests have a lot of political friends. They give a lot of donations. They they know their governors, they know their president, they know everything about the political system. And when they lose in the marketplace uh they don't take that as the final result. They run right to uh the folks who can uh reach into my pocket, your pocket, and uh take money out of our pockets and put it in their management coffers and their shareholders' coffers.

I guess I don't blame them for trying, but I do blame a political system for giving into this.

I personally believe that competition has driven down emissions and n uh uh and that's actually a fact. It's not a belief. Th the the emissions are falling rapidly. Uh I do take global warming very, very seriously. Uh I do think that uh zero carbon assets should be properly compensated. Personally I mo I believe that ought to be done at either at the federal or regional level, uh through uh the tax system.

as opposed to market distorting uh mechanisms that uh have already been struck down by FERC in the case of uh of Ohio. Uh and we'll see what the federal court does in New York.

In this area, natural gas resources set that marginal price. So as natural gas prices are going down, the the price that everybody gets paid in the market gets lower. That's why I s talk about the bucket of money keeps shrinking. So For some generators, re regulation, a return to rate based regulation

or subsidies look very attractive because they would rather be getting paid their average cost. That would be much better than what they're getting now, which might not you know, they may not be meeting their cost to begin with. But I think it gets into a very tricky situation where As John said, you're making appeals to regulators based on a boom bust cycle that's been seen historically with any kind of commodity based system.

So in boom times companies are gonna want market based systems. In bust times we're gonna wanna re regulate. And do you allow something like that to happen? I mean that's a that's a broader theoretical question, but certainly one that can't be ignored. On the other hand, some people say, hey, well if you continue to allow these dynamics to play out, then our system is gonna be too natural gas dependent and are we

allowing ourselves or leaving ourselves exposed to some theoretical problem in the future. And these are, you know, some of the arguments.

He clearly doesn't understand uh the dynamics between coal and gas. Gas has as well as technology, just uh more efficient mining techniques have caused j uh job losses. The the job losses uh in the mining industry were the steepest during the George W. Bush uh administration. They were steeper than they were in the Obama administration. Nobody accused George Bush of having a war on coal, but

uh long wall mining and and uh other kinds of mining techniques uh were putting a lot of miners out of work uh in that period of time. In in the farm years it's been basically cheap natural gas that's been putting a lot of miners out of work. Plus Renewables. Uh the renewables are are much more competitive today. And that's the second place that he's clearly confused and I'm being trying to be polite.

Um h he he doesn't understand the the cost today of solar and wind are vastly different than they were two years ago, let alone ten years ago. Uh in fact wind in many parts of the United States is the cheapest way of generating electricity. When I say many, though those parts of the state like West Tex those parts of the country like West Texas where the wind resource is is very, very good. Uh solar

Prices have c come crashing down. And certainly in the Nevada and Arizona dev deserts, it's cheaper to make uh power with solar than by burning coal, building a new coal plant and burning it today. So the economic uh have changed radically pretty quickly and certainly President elect Trump is well behind the times on those economics

I I I would agree that a lot of his energy policies seem very inconsistent and I'm really not sure how it plays out. For example, um his kind of desire to increase energy production, coal, oil, natural gas production would really decimate the industries right now, which are already dealing with rock bottom prices and having trouble servicing debt and going through industry consolidation and bankruptcies.

Um he has a trade platform that would make it harder for those commodities to reach international markets, so I'm not sure uh the strategy there. With respect to being kind of pro competition, perhaps Uh he's also pro coal and in the electricity markets it would be very hard for coal to compete given low natural gas prices unless they had some you know out of market support.

Uh so there's a lot of confusion and it doesn't seem to be an integrated strategy at at at this point. So yeah, too early to tell.