How We Got Here: A Brief History of Utility Competition Jerry Ellig, Research Professor Utility Deregulation Educational Forum 1/16/19

Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 2

Wholesale electric competition Federal power projects focus on generation Many munis and co-ops don’t generate Public Utility Regulatory Policies Act of 1978 Energy Policy Act of 1992 Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu

Retail electric competition Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 4

Texas success ERCOT region 6.2 million residential, 1.1 million commercial, 4336 industrial Senate Bill 7 (1999) starts retail competition in 2002 Generation/marketing separated from wires Utility’s default “price to beat” set 6% below 1999 rate Automatic fuel cost adjustment twice a year Voluntary for co-ops and munis 5,700 MW new plants built 1995-2000 ERCOT customers – 2.6 times the # of SC ratepayers Price to beat offered for 5 years or until utility’s retailer lost 40% of customers Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 5

Texas prices since deregulation Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 6

Texas prices vs. national 6.2 million residential, 1.1 million commercial, 4336 industrial Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 7

Customer switching since 2002 92% of customers have switched Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 8

Residential competition Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 9

Inflation-adjusted electricity prices, 2008-16 Source of chart: Smith & Maloney, “Energizing Enterprise,” Palmetto Promise Institute, Nov. 2018 10

California disaster (2000-2001) Restructuring law passed in 1996 Mandatory retail price reductions as high as 30% 6.4 cent/kwh retail price cap Little or no demand response to price changes Utilities required to buy all power through a state-run spot market Just 672 MW new plants 1995-2000 Hydro imports 48% lower in 2000 than 1999 Hydro accounts for 20-25% of CA electricity Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 11

“We knew that the deregulation of wholesale power markets would bring high volatility in wholesale prices, because of the great variation in the marginal cost of generating energy to satisfy off-peak and on-peak demand levels. To protect against this volatility, the main task of a local utility should be to re-structure their demand schedule to include more interruptible retail contracts that would allow them to reduce consumption in response to high on-peak prices.” --Vernon Smith, A Life of Experimental Economics, Vol II. Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 12

Direct infrastructure competition Walter Primeaux John Kwoka Primeaux: 1960s - 50 duopolies, compet reduces costs by 11% and avg price by 33% Kwoka: 1989 22 cities with some customer switching, costs 16% lower prices 19.4% lower (24% with head-to-head) Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 13

Potential for direct competition? Primeaux: 1960s - 50 duopolies, compet reduces costs by 11% and avg price by 33% Kwoka: 1989 22 cities with some customer switching, costs 16% lower prices 19.4% lower (24% with head-to-head) Source: Smith & Maloney, “Energizing Enterprise,” Palmetto Promise Institute, Nov. 2018 14

Precedents from other network industries -Competition in cable, phone, broadband is accepted and national policy -Service by multiple railroads reduces rates -Most TX gas pipelines operate at decreasing returns to scale, lower costs & revs than FERC-regulated of comparable length (1989-1990) -Competition and dereg in airlines, rail, trucking, gas, and LD telecom generated $50-60 billion annual benefits (price reductions and service improvements) by 1995 Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu

Competition out-performs regulated monopoly Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 16

Conclusions Competition out-performs regulated monopoly, if policymakers get the institutions right Generation and marketing are surely competitive, wires may be Exclusive service territories lead to higher prices Jerry Ellig @RegStudies RegulatoryStudies.gwu.edu 17

For further information: Jerry Ellig jellig@gwu.edu @ElligJerry Regulatorystudies.gwu.edu