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Electricity Markets: Lessons Learned from California.
Subcommittee on Energy and Air Quality
Mr. Alan R. Schriber
The purpose of the testimony is not to reconstruct the economic disaster that befell the State of California, but rather to illustrate that there is something that we all can take with us as we meander down the same electric restructuring trail. Nevertheless, it is difficult to ignore some of the missteps that California took because they are at the very essence of the challenges that all states have - or might - take. In-so-far as the supply of electricity seems to be at the top of the list as an expedited remedy, it helps to have an effective power siting authority. In Ohio, such a board exists to expedite the certification of new power plants and has met with a significant amount of success to date. While having a substantial amount of generation to serve native load is vital, greater comfort - as well as competition - can only come to fruition with a smooth, efficient transmission system that allows power to move across regions. Unfortunately, the very significant economic issues that govern such a process is not yet in place. Even with what we think of as an "optimum" restructuring plan, it is imperative that we remain vigilant to any warning signals of impending problems. This involves the utilization of both manpower and data committed to the market monitoring process. With the support of the legislature in electric restructuring, as well as exiting broad authority, it is imperative that the regulatory body step in decisively and quickly to foreclose any potential harm to both the public and the utilities dedicated to serve it. Introduction Mr. Chairman, Members of the Committee, my name is Dr. Alan R. Schriber. I am the Chairman of the Ohio Public Utilities Commission and the Ohio Power Siting Board and am here today to express our views. I would also respectfully request that my written statement be included in today's hearing record. The Ohio Public Utilities Commission is charged with the duty of regulating the retail rates and services of electric, gas, water and telephone utilities operating within our jurisdiction. We have the obligation under State law to assure the establishment and maintenance of such energy utility services as may be required by the public convenience and necessity, and to ensure that such services are provided at rates and conditions which are just, reasonable and nondiscriminatory for all consumers. I greatly appreciate the opportunity to appear on behalf of the Ohio Public Utilities Commission before the House Energy and Power Subcommittee. I would also like to commend the Chairman for holding this hearing to examine the issues regarding the problems being faced by the State of California and the efforts of the State of Ohio to avoid a similar crisis as it implements competitive retail electric service. Why Ohio is Different than California At the outset it's important to note that my testimony is not intended as a post-mortem on what went wrong in the state of California. I have attended numerous conferences and have read many articles, as you too undoubtedly have, that have told us about the catastrophic events that befell the State of California. Nevertheless it's illustrative to contrast some of the more pertinent components of California's experience to those of our own state in order that we avoid the same outcome. Ohio for example, did not force dissolution of generation by its utilities. This led us to impose retail price caps through a market development period with the knowledge and comfort that wholesale prices are not so critical; Ohio Utilities are capable of fulfilling native load demands with their own generation. There is a down side to this, however, in so far as it represents an opportunity cost to the utility companies who would otherwise be selling off-system into a more lucrative market. Additionally, as wholesale prices rise, competition is thwarted even though the Ohio Commission has the statutory authority to incent "shopping" through the imposition of shopping credits. Finally Ohio has a very aggressive power siting board that I also chair, as well as a transmission system which, while far from perfect, is nevertheless superior to that in the western states. Ohio is in no great hurry; we are willing to learn as we go. This is precisely why we have a true market development period of up to five years in most cases; a period during which we believe the transition to a truly competitive generation market can be achieved. Nevertheless, as discussed further on, we need to be alert to system discrepancies and failures. The Ohio Commission has been endowed with broad authority to impose fixes wherever necessary, actions that we will not hesitate to take if need be. Much of this authority has been conferred upon us by Ohio's state legislature through the passage of electric restructuring legislation (S.B. 3) in 1999. Ohio's Restructuring Legislation Ohio's experience in restructuring our electric utility marketplace has been one in which legislative and regulatory leaders have sought to learn from the experiences of others. Our state analyzed legislation, policies, and practices from a variety of states and watched closely as market began to unfold; first in California, and later in other states like Massachusetts and Pennsylvania. This information was carefully digested and used to craft what we believe to be an effective electric energy policy. Ohio's restructuring legislation, (SB 3) established a policy for the state to begin competitive retail electric service on January 1, 2001. Among other things, it provides for: · The availability of adequate, reliable, safe, efficient, nondiscriminatory and reasonably priced retail electric service, · The availability of comparable price, terms, conditions, and quality options for election by the consumers to meet their needs, · Diversity of supplies and suppliers, including encouraging the development of distributed generation and small generation facilities, · Innovation and market access for cost-effective supply- and demand-side retail electric service, · And finally, ensuring electric retail service consumers protection against unreasonable sales practices, market deficiencies, and market power. These policies serve as the cornerstone for the state's restructured electric marketplace and are important guidelines for the future of our restructured market. Power Siting The Ohio Power Siting Board was originally created in 1972 and consists of the following members: the Chairman of the PUCO, who also serves as Chairman of the Board; the Director of Environmental Protection; the Director of Health; the Director of Development; the Director of Agriculture; the Director of Natural Resources; and an engineer representing the public who is appointed by the Governor from a list of three engineers provided by the Ohio Consumers' Counsel. In addition, the Board includes four legislative members who serve in a non-voting capacity. The Ohio Power Siting Board reviews, evaluates and approves the siting of "major" electric generating plants and major electric or natural gas transmission lines. The definition of a major utility facility is a generating plant of 50 megawatts or more, an electric transmission line of 125 kilovolts or more, and a gas or natural gas transmission line capable of transporting gas at more than 125 pounds per square inch of pressure. In order to receive approval as a major utility, an entity must apply for and obtain a certificate of environmental compatibility and public need. Issuance of the certificate depends on the need for the facility and the minimization of potential environmental harm. An advantage to this process is its jurisdictional trigger. While many states have a siting process their authority applies only if a "public utility" is building a facility. In Ohio, our authority is dictated by the size of the facility, regardless of who is the builder. Therefore, new entrants and independent power producers can take advantage of our streamlined process, just as a traditional utility can. The Board has several statutory criteria that must be met prior to the issuance of a certificate. Those criteria include: the need for the facility; the probable environmental impact of the proposed facility; whether the facility represents the minimum adverse environmental impact considering the technology that is available and the nature and economics of the various alternatives; that the facility is consistent with regional plans for expansion of the electric power grid of the electric systems serving Ohio and interconnected systems, and that the facility will serve the interest of electric system economy and reliability; the facility will comply with all air and water pollution control and solid waste disposal laws and regulation; the facility will serve the public interest, convenience and necessity; the facility's impact on agricultural lands; and, that the facility incorporates maximum feasible water conservation practices. Ohio has a very efficient and effective siting process that has invited new entrants into the market. The process provides for public participation, both formal and informal, affords legal and technical scrutiny and still commands timely decision making. Having a due process that invites public participation has enabled development in our state. Other states do not have processes that are as streamlined as Ohio's. Consequently, delays and slow progress toward siting new facilities has been a problem. Ohio has also encouraged a healthy portfolio mix. Many states are only building gas-fired peaking units. Although a majority of the generation capacity additions in Ohio have been gas fired peakers we also had some gas-fired base load plants, a coal gasification (high sulfur coal and municipal waste) plant under consideration, and a compressed air storage facility. In addition, one of the largest biomass plants in the country utilizing 100% waste wood fuel, and some coal base load units have also been discussed as potential additions. Interstate Transmission: Regional Transmission Organizations (RTOs) While Ohio is comfortable with expected electric generation and transmission additions, it is difficult to know what will happen with the market. A state cannot afford to waste valuable and scarce resources as well as limited sites. Consequently, regional needs must be determined (i.e. transmission vs. generation; base load vs. peaker, coal/nuclear vs. gas-fired, biomass and or distributed generation opportunities) and only an integrated regional strategy will accomplish this. While additional generation capacity will go a long way toward helping to foster a competitive market in the Midwest, we do have our problems. The development of a much-needed regional transmission system has been extremely slow. Thus far, the Federal Energy Regulatory Commission (FERC) has relied totally upon a voluntary approach to the development of a regional transmission entity. Under this approach, utilities would be allowed to turn over control of transmission facilities and functions to a third party. This new entity would then be allowed to run the combined system as one regional transmission unit. Although the FERC has laid out requirements and guidelines for the formation of such an entity, their efforts thus far have been insufficient and have failed to provide the necessary guidance on this matter. States like Ohio continue to look to the FERC for an action agenda that simply has not materialized. We believe that FERC must become more engaged, although we recognize that they are currently operating below their statutory compliment of members. However, more should and could be done. Because this has not been the case, numerous states in the Midwest have banded together to create initiatives that would facilitate the solutions to these problems and begin to move electricity throughout our region. Until such efforts can come into fruition, a number of barriers to transmission remain. For instance within the state of Ohio three separate entities are seeking to develop regional transmission organizations (Midwest Independent System Operator, Alliance Regional Transmission Entity and PJM-West). With three different entities pursuing their own structure and system, "seams" that inhibit the flow of electricity and market choices for Ohioans are likely to develop. We are very concerned about the development of such "seams" both in Ohio and in our region. Our markets for electricity are becoming more regional in their scope and effect with the onset of retail competition. Concurrent with this change has been increasing discussion and contemplation regarding the issue of jurisdiction over transmission facilities and pricing. With the growth of retail competition has come an expectation that states will surrender jurisdiction over retail transmission. This has caused much concern in states where competition has been implemented as well as those that have opted for the status quo. Historically, states have had the authority to site facilities. They possess the unique local knowledge and skills essential to ensure the timely development of new facilities. Furthermore, they are in the best position to work with their regional neighbors to effectively and efficiently implement facilities that will avoid everyday local problems. State and local officials are also the first line of contact when constituents have problems or concerns related to these proposals. Early Warning Signs How does a regulator or a legislator detect problems in the marketplace and what are the early warning signs that indicate a problem exists? This is not an easy question to answer but it is vital to the operation of the industry in a competitive utility marketplace. A wide-variety of market concentration indicators can be employed to measure and calculate what is happening in the market. Every day accountants, economists and other industry experts employ a variety of tools such as indexes and empirical or econometric analyses to extract and calculate the health of emerging electric markets. Comparisons using statistical analysis are conducted to determine what conditions exist and where future problems may arise. Complex models are even being developed to simulate future problems and potential solutions. However, as utility markets become more competitive and these industries move further from the oversight and regulation of utility commissions, the ability to obtain this data becomes increasingly difficult. Regulatory commissions that once depended upon data requests and subpoenas to obtain information are finding that they must utilize market data and various other sources to obtain information. Consequently, it becomes essential that a more diverse stable of market indicators be employed. These include the constant, real-time monitoring of prices and commodity trading taking place in the marketplace as well as a host of other techniques that seek to obtain information in as rapid a manner as possible. Another important function involves the development of comprehensive systems to monitor and track the flow of electricity over regional transmission systems. If early warning programs are implemented to identify and correct constraints and bottlenecks future problems can be averted in advance. Furthermore, states must look closely at both current and future supplies as they relate to current and future demand. More than ever, states must be proactive in the siting of new generation facilities and not simply react when supplies get low. Staying ahead of the curve will be essential to avoiding problems. Other early warning signs will come from consumers themselves. In the past, utilities were regulated on the front end and problems were avoided through burdensome regulatory proceedings. Today, these regulatory proceedings have been replaced by restructured, streamlined systems. Consequently, states are now faced with reacting to problems that arise later in the process and must solve them in an efficient manner. By monitoring the types, number and range of complaints being lodged with public utilities commissions, states can obtain a snapshot of what is happening in the marketplace and utilize this information to determine and correct potential problems. The National Regulatory Research Institute sums the issue of early warning signs up best in their 1999 Market Analyses of Public Utilities paper. They write: "Organizationally, commissions can use the consumer complaint function, not only to resolve individual complaints, but also to detect patterns of internal market failure and market misconduct. At the same time, a market performance division would examine market structure issues. By examining such industry-specific information together, a commission can conduct a more complete and dynamic market analysis that identifies industry-specific problems. Once identified, the commission can address these problems and set policies that promote meaningful customer choice." In the end, states must make every effort possible to proactively address problems in the most effective and efficient manner possible. New skills, technology and techniques will be valuable assets for monitoring the developing market to ensure that competition develops. Powers of the Ohio Commission To "Step In:" To preclude a reoccurrence of what happened in California, states need to have the ability to move as expeditiously as possible to address potential problems. Ohio's electric restructuring legislation (S.B. 3), as well as other statutory requirements recognize this important fact. S.B. 3 provides consumer protection by overseeing electric utility restructuring while at the same time providing shopping opportunities to all customer classes. Among other things, PUCO jurisdiction over electric utility companies and competitive retail electric service providers includes the following: · Commission authority to monitor retail electric competition in the state and, if the Commission determines that there is a decline or loss of effective competition of a declared competitive service, the Commission shall ensure that that service is provided at compensatory, fair, and nondiscriminatory prices and terms and conditions · Further, if the Commission finds that an electric utility has engaged in abuse of market power, the Commission, after an opportunity for hearing, may take such measures within a transmission constrained area in the utility's certified territory as are necessary to ensure that retail electric generation service is provided at reasonable rates within that area. ( · Competitive and noncompetitive retail electric services are subject to State authority regarding energy emergencies. · The Commission has the authority to suspend or rescind certification of competitive retail electric service (CRES) providers for anti-competitive, unfair, or unconscionable practices. · Complaints can be filed, or the Commission can initiate an investigation, concerning the electric utility's or CRES provider's compliance with Commission rules or Ohio laws. · The Commission has the jurisdiction to determine if the electric utility is in compliance with its electric restructuring plan. · An electric utility's Market Development Period (MDP) can not end sooner than 12/31/05 unless the utility files a request for early determination of the MDP upon a showing that effective competition exists or 20% of a customer load class has switched. Requires Commission approval. In addition to the powers granted under Ohio's electric restructuring legislation, the Ohio Commission has a number of other important roles under the laws of the state. For instance, the Commission has general supervision over all public utilities within its jurisdiction. The Commission may examine such public utilities as to their general condition, capitalization, franchises, and as to the manner in which their properties are leased, operated and managed. The Commission has rules that define various foreseen types and levels of energy emergency conditions for critical shortages or interruptions in the supply of certain utility services, including electricity. The Governor also has the power to take various actions to alleviate the shortage or interruption of utility services. Furthermore, when the Commission deems it necessary to prevent injury to the business or interests of the public or to any public utility in case of emergency. The Commission may temporarily alter, amend, or, with the consent of the public utility concerned, suspend any existing rate. Rates set by the Commission apply to one or more public utilities in the state and remain in force for as long as the Commission prescribes. Finally, the Commission has jurisdiction to conduct complaint proceedings against a public utility as to any matter affecting the rates, charges or the service provided by the that utility. Demand-side Management and Energy Efficiency I would be remiss if I did not mention the importance of the 1980's watchword, "demand-side management." In Ohio, the framers of S.B. 3 included a provision for an Energy Efficiency Revolving Loan Fund, to be included in all customer class rates as a temporary non-bypassable wires charge on distribution service. It is administered by the Director of the Ohio Department of Development, after consultation with a newly created Public Benefits Advisory Board. The moneys in the revolving loan fund are to be used for financial assistance for investments in products, technologies or services, including energy efficiency for low-income housing, and for residential, small commercial, small industrial/business, local government, educational institutions or agricultural customers. (Section 4928.61 and 4928.62, Revised Code) In addition, S.B. 3 also continued the work of the Department of Development in its energy efficiency and weatherization programs targeted for the high energy cost, high-volume use structures occupied by low-income customers eligible for participation in Ohio's energy assistance "percentage of income payment plan" program. The goal of this low-income energy efficiency and weatherization program is to reduce the energy bills of the occupants. Participants must meet Federal low-income guidelines and is funded by a State Universal Service Fund rider established as a non-bypassable wires charge on electric distribution service. Conclusion We have come a long way since California took the first bold steps to open their retail market to competition. Many lessons have been learned but much hard work remains. States must be vigilant in monitoring their markets, protecting the interests of their constituents and working cooperatively to ensure that competition is successful. With that in mind, I would again like to thank you for the opportunity to testify before you today and would be happy to answer any questions you might have.
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