Left-Right Coalition Urges Electric Deregulation

In the mid-1980s William W. Berry, president of Dominion Energy predecessor Vepco, championed the cause of deregulating electricity markets. He proposed breaking the electricity industry into separate components: generation, transmission, and retail distribution. Only retail electric lines, he suggested, were a “natural” monopoly. Berry’s vision, which was never fully executed in Virginia, bore strong similarities to the proposals outlined today by the Virginia Energy Reform Coalition (VERC).

VERC, a coalition of free-market, environmental and anti-poverty groups, is calling for a massive restructuring of Virginia’s system of regulated electric utilities. The existing monopoly structure is “broken,” argued a series of speakers at a noon press conference, because politically powerful utilities utilize campaign contributions and their lobbying clout to advance their interests in the General Assembly at the expense of the public.

That argument has been heard frequently from Dominion’s foes on the Left side of the ideological spectrum. And indeed, Clean Virginia, which has promised to contribute to any Virginia legislator who spurns Dominion money, is a member of the group. But Clean Virginia and other long-time Dominion foes were joined by representatives of conservative and libertarian groups such as FreedomWorks, the Reason Foundation, R Street, and the Virginia Institute for Public Policy.

The coalition proposes opening up Virginia to competition in generation and transmission (moving bulk electricity long distances on high-voltage wires) while allowing utilities to continue to owning and maintaining the retail grid (lower-capacity distribution wires that reach individual customers). However, the distribution monopolies would be managed by independent operators, and earnings would be based on performance, not how much capital the utility invested.

“As energy technology rapidly changes we need a modernized electricity market to incorporate those changes to improve reliability, especially for the grid, and provide more options for consumers,” said Adrian Moore, vice president of policy for the Reason Foundation.

Dominion responded that deregulation would be a step backward for Virginia. “Californians left with skyrocketing electric bills and in the dark from rolling blackouts following deregulation proved that all too well,” said Rayhan Daudani, manager-media relations for Dominion Energy.

Customers in deregulated states pay electric rates that are 40% higher on average than in Virginia, Daudani said in an email communication. “Virginia customers get a great value. We keep our costs low, while our reliability remains high. Our residential Virginia customers pay a bill 35% below the average of mid-Atlantic and northeastern states.” 

Meanwhile, Daudani added, “we’re reducing our carbon emission by 80 percent, investing in a massive expansion of renewable energy, transforming the energy grid, launching nearly a dozen energy-efficiency programs and increasing our commitment to our EnergyShare program for our most vulnerable customers. This coalition’s collection of grab bag policies was tried and failed and ultimately led to the bankruptcy of Enron. We know how this story ends, and it is wrong for Virginia.”

However, VERC spokesmen said their deregulatory model bears no resemblance to California’s partial and ineptly managed transition, which they acknowledge was a massive failure. Rather, the proposals are modeled mainly on Texas, with an add-on feature that caps electric rates for lower-income Virginians based on a successful program in Ohio.

Despite Bill Berry’s advocacy of restructuring the electricity industry, full deregulation was never tried in Virginia either, they say. Dominion did divide its Virginia operations into a generating company and a distribution company. But meaningful retail competition never surfaced, and after the collapse of Enron the General Assembly “re-regulated” electricity in Virginia. Since then, the General Assembly has enacted a series of initiatives largely at the behest of Dominion, the result of which, foes say, has been a shift of regulatory control from the independent State Corporation Commission to the easily manipulated legislative branch.

VERC has articulated nine broad policy objectives:

  • Establish a well-designed, competitive retail electricity market;
  • Establish an independent grid operator;
  • Establish streamlined and uniform interconnection standards;
  • Implement performance-based regulation;
  • Establish a low-income bill assistance and weatherization program;
  • Implement an “all-cost-effective” energy efficiency standard;
  • Ensure additional consumer protections and education;
  • Fully integrate grids, markets, and operations;
  • Phase out wholesale capacity markets.

You can find a detailed explanation of these initiatives here.

Free-market advocates say that a deregulated electricity system and a de-bundling of flat and uniform residential rates would encourage innovation. In Texas, 42 retailers provide more than 100 alternatives to customers. Enterprises provide service at different price points with different features and attributes. Some retailers might provide an all-green electricity product based on solar and wind power. Others might vary prices by fluctuations in demand and give consumers the tools to manager their consumption in response. Yet others might offer lower rates if, say, homeowners agree to turn off their air conditioner when demand exceeds supply.

Also, handing over distribution lines to an independent operator, say market advocates, would eliminate the incentive for utilities to increase profits by finding ways to boost capital investment. For example, if population growth and electricity demand were increasing near a particular sub-station, the utility’s incentive under the current regulatory model is to expand the sub-station. But an independent entity might look at less expensive alternatives such as installing a micro-turbine, providing battery-storage backup, or finding ways to conserve energy.

The competitive landscape is very different than it was when Virginia re-regulated the electricity industry more than a decade ago, market advocates say. Virginia now belongs to a deregulated wholesale energy market administered by PJM (an independent operator similar in concept to the distribution-system operators called for). New digital technologies make it possible to create electric grids, manage the flow on distribution systems, and fine-tune electricity consumption at the household level. Dozens of retail providers have emerged from Texas and other states.

The basic regulatory model in Virginia has changed little in a hundred years, said, Ken Cuccinelli, former Virginia Attorney General and regulatory director at the FreedomWorks Foundation. “It’s time to drag Virginia electric regulatory system kicking and screaming into the 21st century.”

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16 responses to “Left-Right Coalition Urges Electric Deregulation

  1. This is not an endorsement, but having cursed the darkness I’m glad somebody is trying to find a way to the light. The utility has brought this on by its own over-reach. It ties in with several themes in the company’s integrated resource plan pending in an SCC hearing tomorrow (which sadly I cannot attend.) I hope this idea doesn’t just go up on a shelf or fill up campaign brochures and then disappear, but forcing Big D to the table on this won’t be easy. It is time to look at this again.

    Much of the benefit could be found with a gradual move away from company-owned generation, as it retires in due course, to merchant generators. Right now, again as I need to illustrate from that case, its very clear the PJM price is often the best one. In the solar realm it is a stark difference.

    • Mr. Daudani speaks speciously. He says, “Customers in deregulated states pay electric rates that are 40% higher on average than in Virginia.” Whoa! remember the context: The states that pushed ahead with deregulation were primarily those in New England and the Midwest and Mid-Atlantic where electricity was already expensive, with older, often oil-fueled generators, inefficiently small utilities, expensive real estate and high labor costs. Regulators hoped that the competition from new independent generators and the grid markets would undercut those prices — and they were right. Virginia was never an easy sell on generation deregulation in part because Dominion historically was a very well run, low cost utility. What Bill Berry saw was the opportunity for Dominion to do very well in the new, bigger regional wholesale markets by undercutting the competition with Dominion’s existing low-cost, competitive generation selling in de-regulated mode and making a lot of cash, investing that in more generation elsewhere. Instead his successors embraced the regulated rate of return of Virginia ratepayer-financed generation and a series of shameless political fixes to manipulate retail ratemaking in Virginia in order to achieve even higher returns for shareholders than Berry might have foreseen in the short run. While Dominion’s historical low cost of operation still has not eroded fully and continues to give it an edge in the region to attract new industrial customers, the present regime doesn’t seem all that interested in keeping retail rates low.

      Jim also quotes Mr. Daudani as saying, “Dominion responded that deregulation would be a step backward for Virginia. ‘Californians left with skyrocketing electric bills and in the dark from rolling blackouts following deregulation proved that all too well.’ ” I’m not going to defend the California experience except to note these things: the wholesale market price did skyrocket due to interference by the California legislature imposing, for example, a mandatory above-market price for solar power and restrictions on fossil and nuclear generation construction in southern California; diminished water power from the NorthWest for a few years due to lack of rain; and extensive manipulation of the original ISO energy market, notably by energy traders at Enron.

      No question, the California gave Virginia regulators reason to pause; but so did the leadership changes within Dominion around that time. The fact remains, you could have left the entire retail access scheme in place after 2007 and we still probably wouldn’t have that much retail competition in Virginia today, because a retail competitor would first have to beat Dominion’s low retail price in order to win over any of Dominion’s customers. Only now, 12 years later, is Dominion beginning to feel real heat from its largest customers — customers who are getting restless about the relentless rate increases resulting from all those RACs and can readily compare Dominion’s retail rates with the (lower) wholesale market rates published in real time by PJM. That is not a failure of deregulation, but a delayed success story from the original deregulation effort.

      As for adopting the Texas rather than the PJM model, there isn’t that much difference between them.

  2. This idea scares the living wits out of me.

    If you turn the electric business over to the real estate development moguls, for example, you will get the wild west, overheating crash and burn market debacles, every ten years or so. In the interim you will get a money chase, dog eat dog mob, that desolates the nation’s country side before the mob goes over suicide cliff to land feet up in the air, dead, until a new generation of young mobsters comes along to pick up the pieces, and do the same wild dance to suicide.

    Meanwhile everyone else in society goes back to living, if they can at all, in a new stone age, struggling and shivering in cold and dark or hot and burn places, awaiting rescue, or sanity from somewhere.

  3. I think an honest question is – is it necessary for one player to be responsible for a reliable grid – and if we go to a system where no one entity is wholly responsible – will we end up with a less reliable, more expensive grid?

    Well, take a look: ” On January 1, 2002, the Texas State Legislature decided to deregulate the electricity industry and open up the supply of electricity to competition. ”

    ” The Electric Reliability Council of Texas (ERCOT) manages the flow of electric power on the Texas Interconnection that supplies power to more than 25 million Texas customers – representing 90 percent of the state’s electric load.[1] ERCOT is the first independent system operator (ISO) in the United States[2] and one of nine ISOs in North America.[3] ERCOT works with the Texas Reliability Entity (TRE),[4] one of eight regional entities within the North American Electric Reliability Corporation (NERC) that coordinate to improve reliability of the bulk power grid.[5]

    As the ISO for the region, ERCOT dispatches power on an electric grid that connects more than 46,500 miles of transmission lines and more than 550 generation units.[6] ERCOT also performs financial settlements for the competitive wholesale bulk-power market and administers retail switching for 7 million premises in competitive choice areas.[6]

    ERCOT is a membership-based 501(c)(4) nonprofit corporation, governed by a board of directors and subject to oversight by the Public Utility Commission of Texas (PUC) and the Texas Legislature.[7][8]”

    ” The Texas Legislature restructured the Texas electric market in 1999 by unbundling the investor-owned utilities and creating retail customer choice in those areas, and assigned ERCOT four primary responsibilities:

    System reliability – planning and operations
    Open access to transmission
    Retail switching process for customer choice
    Wholesale market settlement for electricity production and delivery
    Over the course of many years of meetings and workshops, stakeholders and market participants worked together to develop new ERCOT protocols – the rules and standards for implementing market functions to ensure equitable and reliable scheduling and delivery of electric power throughout the market.

    In 2001, the 10 existing control areas in the ERCOT region were consolidated into a single control area administered by ERCOT. Wholesale power sales between electric utilities began to operate under the new electric industry restructuring guidelines, including centralization of power scheduling and procurement of ancillary services to ensure reliability.”

    Did it work?

    judge for yourself:

    Is Dominion blowing smoke? Do bears crap in the woods?

    Remember – we have a dozen or more electricity providers in Virginia. Why does Dominion define the process?

    • Your ERCOT example is not appropriate. ERCOT (the Electric Reliability Council of Texas) is the sole exception to the Federal Energy Regulatory Commission’s jurisdiction over transmission and wholesale sales; Texas remained exempt from the FERC’s jurisdiction under the 1934 Federal Power Act because it refused for many years to connect with the grids in other states, thus avoiding the “interstate commerce” on which federal jurisdiction depended under that Act. Now ERCOT is interconnected, but weakly, and courts have ruled that it’s entirely under Texas jurisdiction.

      A littl history: For what it’s worth, ERCOT was one of the last ISOs in the United States to be organized, certainly NOT the first. PJM began operations in 1927 and became an ISO in 1997. ISO-NE and NYISO have similar lineages. The Midwest ISO, aka MISO, was formed in the late ’90s on the PJM/New England model; CAISO, in California, started up around the same time, in fact the pioneering work on electricity markets was done for California in the late 80s. Dominion joined PJM in 2001, I believe. Prior to the Texas law your article cites, ERCOT was one of the national reliability councils under NERC; by that law Texas converted it into a dual purpose organization that also ran a market, and frankly copied the market structure worked out years earlier by PJM, overcoming years of resistance by east Texas, fossil fueled utilities to the construction of new transmission lines to import the much cheaper wind power available abundantly in west Texas. By forming its own ISO like the others, Texas also dodged a political bullet, as there was talk in Congress of stripping Texas’ exemption from the Federal Power Act if it didn’t form or join an ISO.

      The main reason retail electricity rates have gone down in Texas is the widespread expanded use of wind and solar power, backed by newer cheap, high efficiency natural gas units, and yes, the wholesale marketplace with regionwide dispatch has helped. But bear in mind, 12+ cents/kWh was a relatively high 2014 rate to start with; I’m surprised it hasn’t come down more than that.

      You ask, “is it necessary for one player to be responsible for a reliable grid – and if we go to a system where no one entity is wholly responsible – will we end up with a less reliable, more expensive grid?” We have never had “one player” entirely responsible for grid reliability. In this country we used to have reliability standards set by the NERC (National Electric Reliability Council) and a series of regional councils; every utility had to agree to observe those reliability rules or get in trouble with its regulator (a State Commission, or USDA, or FERC as the case might be). In 1997 Congress put NERC solely under the FERC’s authority. As for who actually planned, built and maintained the grid, that used to be the various utilities (pursuant to the NERC standards and occasionally State regulatory oversight). Now the planning is still done by the utilities but subject to coordination and a veto power by the ISOs, with appeal to the FERC if necessary. The utilities still own what they build but they must operate their generation and transmission facilities as directed by the ISO for the greater economy and reliability of the grid as a whole. Arguably the ISOs have brought about much greater economy of operations than existed before their regional energy markets and central dispatch. And arguably the ISOs have brought about greater reliability at lower cost through their mandatory capacity markets, planned regional transmission upgrades for reliability, and planned accommodation of independent generators anywhere they want to locate. I say arguably because there are utility execs out there that characterize the ISOs as just another level of bureaucracy getting in their way; but every responsible study I’ve seen says the advent of ISO operators/planners and independent generation and wholesale electricity markets have saved retail electric consumers enormously.

      • My bad. I was under the impression that the Texas grid was operated by ERCOT instead of investor utilities – and that it was a success and that the cost of electricity stayed lo because of competition that included wind/solar.

        Perhaps you should consider writing a post about Texas and how it does “work”? I for one would appreciate it.

  4. The VERC policy objectives may seem bipartisan, but presumably the Left is thinking they will overlay a zero-carbon policy agenda from the new GA over top of this. So you will have freedom to chose from (1) ultra-expensive nuclear or (2) ultra-expensive offshore wind and roof-top solar to meet those VERC objectives. I do not see reaching a low cost, open market energy solution in the cards. With Dominion in charge, those things will be super-ultra-expensive. So if we can set Dominion back a notch, we can get a discount to just ultra-expensive.

  5. Jeezy Peezy – when Reason and the Freedom Works are involved – and we STILL see it as a “left” effort – LORD!

    What WILL it take for some of us to sign on to SOME effort to reduce Dominion’s role and phase in de-regulation?

    Do we want to continue with Dominion effectively telling Virginia how electricity will work which is essentially what is going on right now?

    The impression I get is that if the left supports something – even if the right also support it – that it’s bound to be a “left” idea!! Lordy!

  6. It is fascinating to see some organizations that are concerned with climate change teaming up with Cuccinelli, their bete noire of the past and vice versa. I guess this confirms the old saying, “The enemy of my enemy is my friend.”

  7. Acbar’s excellent comments have already addressed much of what I wanted to say about Dominion’s response to this proposal.

    We must keep in mind why the monopoly power was awarded in the first place. In the first few decades of electricity use, to compete for customers you had to string your own lines. This created a snarl of wires and made electricity more expensive.

    Samuel Insull, Edison’s former secretary, took over an Edison company in Chicago and began competing with over 30 other companies to serve the Chicago area.

    Insull had the insight to realize that once he built a generator, he made more money if it ran more often. He began buying up smaller, marginal companies, mostly to get their customers. Initially, electricity was used primarily for residential lighting and streetlamps at night, displacing gas and kerosene lamps. To get more business during the day, Insull made arrangements with streetcar companies and gave promotional prices to offices and other commercial establishments to use lighting during the daytime. He also convinced industries to replace steam power with electricity, again using promotional pricing. These same customer categories are still with us today and commercial and industrial customers pay less per kWh than residential customers.

    Typically, Insull paid the various private producers of energy to sell their output to him and he would resell that electricity over his wires to a variety of customers. The wires were the natural monopoly. The system worked quite well for decades with a variety of utility and private producers of energy supplying the power. It wasn’t until decades later that generation began to be included in the domain of a monopoly.

    The whole notion of a monopoly was associated with Samuel Insull too. He began buying up utilities in numerous states under the control of one of his many holding companies. Community leaders became concerned about the concentration of power and lack competition. Monopolies were granted in specific service territories in exchange for the oversight of a regulator responsible for establishing fair prices to customers and a fair return to investors. This became known as the utility compact.

    At the height of his empire, Insull controlled utilities in over 5,000 towns in 32 states using his multi-layered holding companies. His business structure was vulnerable and highly leveraged (as is Dominion Energy).

    He was using his many holding companies to hide information from the regulators and overcharge customers. Eventually, Mr. Insull had to flee the country because of criminal charges. But by then, the basic structure of America’s electric utility system was in place.

    Author Gretchen Bakke, wrote of his legacy, “He imagined electric light and power as products for the masses not the few; he made it seem natural that the electricity business could only work as a monopoly, and he ushered in an era in which one of the most powerful things one could do with money, and to make money, was to use information to manipulate public opinion and influence public investment.”

    The oil shocks in the 70s and 80s slowed the growth of electricity use. And for the first time, adding new generating units made electricity more expensive. Neither regulators nor utility executives recognized this as a fundamental shift in the nature of their business.

    Utilities responded to the sluggish growth by creating unregulated holding companies that often owned several utilities or other businesses in order to improve profits. These holding companies were run like other unregulated businesses, to make more profit for the owners.

    This new directive displaced the utility compact and the customers of the utility subsidiaries were treated as a source of profit for the shareholders rather than a group whose interests were to be respected and balanced in order to receive a fair rate of return for investors.

    It is important to understand that utility customers are under no obligation to provide an unfettered stream of profits to owners of the holding company. As members of the public, they have granted monopoly power to a utility in order to receive an essential service at a fair price and are willing to pay a fair return to the utility for its services. If other providers can provide a better or less expensive service than can be provided by the owners of the wires, the public should have that choice and “wires” providers should be paid fairly for their service.

    Investor-owned utilities in Virginia are assuming a level of control over our energy system that was not contemplated in the original enabling legislation for establishing our utilities. It is only through the recent manipulation of the legislative process that the balance has been so greatly tipped in favor of the utilities at the expense and loss of freedom of their customers.

    There are many different schemes that are being evaluated by other states to establish an up-to-date method of regulation. Texas is a unique case, unlike any other state. It has many good lessons to teach us. Austin Energy has made great strides in dealing with many of the issues that would be valuable to Virginians. But Texas is a state that prefers not to cooperate much with its neighbors, and its policies are dominated by what is good for the established energy companies.

    It would be worthwhile to evaluate many of the alternatives, using an objective hand to guide us, and choose the system that best meets the needs of Virginia.

    Eventually our new scheme will need to be enacted through legislation, but the initial exploration of concepts should be broader than just a few weeks of conversation among members of the General Assembly.

    Despite Dominion’s pretense, Virginia’s residential rates are higher than four of the five states that are our neighbors. Only Maryland’s rates are higher but they reduced their rates last year. Our rates are climbing. The new projects authorized by the General Assembly will have little value to Dominion’s customers but will add billions to their energy costs. To be fair, Dominion’s rates are lower than the state average, but that is because they cherry-picked the service territories and selected the most densely populated areas that are cheaper to serve. More expensive-to-serve rural areas were left to the co-ops.

    A survey from about a year ago showed that Virginians have the 10th highest utility bills in the nation. There are reasons for this. Many of us use electric heat pumps for heat that don’t function well in cold climates, where gas or heating oil is used instead. But that doesn’t make a difference to our friends and neighbors who have to pay the bill.

    We can have prosperous utilities that do what we need them to do. If they do a great job of serving us they can make more profit. Our utilities will be better off in the long run with modern rules and so will their customers.

    • Excellent history, Tom. You are particularly on point to mention the reversal of the traditional “customer load growth is good” assumption that dominated the electric utility business model until the ’70s. Starting then, the incremental cost of serving new customers — primarily the cost of financing new generation — began to exceed the embedded (rate based) cost by such a margin that savvy investors became shy of high growth utilities — the value of their existing stock was diluted by all that required additional investment and rates had to increase rapidly . . . particularly if it meant completing all those nuclear units begun in the ’60s with their huge cost overruns in order to avoid even worse stranded-cost consequences if the units were left unfinished. In fact, back in the ’70s, with their high interest rates, my employer sold off some service territory at one point just to postpone financing the completion of a new generating unit.

      How differently Dominion views its investment in new ratebased generation today. New generation is financed with cheap debt and without stock dilution, and allows the retirement of fully-amortized old coal units with their environmental liabilities. New investment in ratebased generation is rewarded in Virginia and yields a better return than building generation to compete in markets elsewhere; buying up independently-built units helps sustain the fiction that the local wholesale markets are not reliable or cost-effective for Virginia ratepayers. Dominion has returned to the Insull model of load growth for success — although its regulatory compact is a political one, with the GA, not the SCC. How then can we trust Dominion to explore energy cost savings with real enthusiasm, without bias against it?

  8. Why not have the state claim that energy is key to the economy and well being for its citizens, declare eminent domain and convert Dominion to a public utility (VA portion), and buy that portion of the utility? The state could issue a bond to pay for the purchase, buying out the shareholders.

    • Not sure where I come out on the merits but back in the 1930s, Nebraska converted all electricity to public power. I lived there in the late 1970s. It seemed to work OK but so did private power in Iowa where I lived through part of the 1990s. Dominion is clearly the worst power company I’ve experienced as an adult. It doesn’t trim trees or otherwise protect distribution plant and it’s regulatory strategies are simply beyond aggressively protecting shareowners and are simply unbridled greed. If we had a chance to force Dominion to lose its Franchise in Fairfax County and go to NOVEC, I’d support that.

  9. Utility franchises have renewal dates. I think it’s about every 30 years in Virginia. An area can choose not to renew it. An incumbent utility is required to remove its facilities within a certain time period or a purchase of the assets can be negotiated.

    Dominion has passed a bill making it unlawful for new municipal utilities to sell electricity at retail. Assets are often greatly overvalued so that it is difficult to negotiate a fair settlement. Court cases then drag out to make such changes impractical.

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