ABBACUS report highlights benefits of retail electric markets

On Tuesday the Distributed Energy Financial Group released its 2015 report, Annual Baseline Assessment of Choice in Canada and the United States (ABACCUS). The report provides an excellent overview of the current state of retail electricity markets in the 18 jurisdictions in the U.S. and Canada that permit at least some degree of retail competition. The overall result will not surprise anyone who follows the electricity industry or is a KP reader: for the eighth year in a row, Texas tops the rankings by a wide margin, with Alberta second and Pennsylvania third. And the general trend is promising, both in terms of market experimentation and regulatory institutional change to reduce barriers:

In nearly every jurisdiction in North America, REPs continue to expand their presence, increase the number of offerings, and increase the variety of offerings in the residential marketplace. These positive developments are primarily in response to market opportunities, but the activities of regulators to facilitate retail choices should not be glossed over. Regulators have reduced barriers to entry, facilitated the speed and ease of market transactions, and raised public awareness about the opportunities for retail choice. Numerous states have invested in advanced metering infrastructure, providing lower-cost access to detailed consumption data. These data are essential to offer time-differentiated prices, to track the costs to serve an individual consumer (rather than relying on an estimated load profile) and to offer new products and services, including prepaid service, high-usage alerts, or targeted price-risk management offers. Combining advanced mobile communications with advanced metering data has also facilitated new products and services.

The report is also extremely clear and well-written, so if you are interested in learning more about retail electricity markets and regulatory policy, and what the current trends are in the distribution and retail segments of the industry, read this report. Its appendices also provide state-by-state (province-by-province) summaries with extensive detail.

The report’s policy recommendations are in keeping with the idea that market processes provide opportunities for producers and consumers to benefit through experimentation and trial-and-error learning, and that product differentiation through innovation is the most potent form of dynamic competition for creating meaningful consumer benefits. Note in particular that their recommendations focus on default service, suggesting to

Reform default service in the near term … Allow competitive suppliers to provide default service instead of the incumbent utilities … Limit residential default service pricing to basic (“plain vanilla”) service and let the market offer other choices … Adopt a plan to phase out default service. The plan must reflect the realities of each jurisdiction. No two plans would be the same as each jurisdiction must be mindful of past decisions.

I am thrilled to see these recommendations, because incumbent default service can be a costly obstacle and entry barrier for small, new potential entrants. In fact, my Independent Review article from last fall lays out the precise economic argument for how incumbent default service can be an entry barrier and why regulatory policy should “quarantine the monopoly”:

Incumbent vertical market power in deregulating markets can be anticompetitive, as seen in the current process of retail electricity restructuring. This paper uses the AT&T antitrust case’s Bell Doctrine precedent of “quarantine the monopoly” as a case study in incumbent vertical market power in a regulated industry. It then extends the Bell Doctrine by presenting an experimentation-based theory of competition, and applies this extended framework to analyzing the changing retail electricity industry. The general failure to quarantine the monopoly wires segment and its regulated monopolist from the potentially competitive downstream retail market contributes to the slow pace and lackluster performance of retail electricity markets for residential customers.

In the case of Texas, default service was indeed transitional, as intended, and was not provided by the incumbent.

The issue of incumbent default service as an entry barrier may be part of the upcoming “utility of the future” discussion that will take place in Illinois, according to this Retail Energy X story:

If the Illinois Commerce Commission opens a “utility of the future” proceeding, the structure of default service, including its potential elimination, would likely be discussed in such proceeding, ICC Commissioner Ann McCabe said during a media call discussing the Annual Baseline Assessment of Choice in Canada and the United States.

Asked about the ABACCUS recommendation to end default service, McCabe said, “That’s subject to discussion. If we pursue some kind of ‘utility of the future’ initiative, that will be one of the questions likely to be addressed.”

Dallas Morning News on competitive retail power market fees and rate designs in Texas

At the Dallas Morning News James Osborne reports on the controversy over minimum use fees in the competitive retail power market that includes most Texas households. As discussed here at Knowledge Problem last week, retail suppliers sometimes design contract offers to be especially cheap for consumers using 1000 kWh per month. The state’s powertochoose.org website defaults to presenting offers from low to high by the average cost of power at exactly 1000 kWh per month. Minimum use fees can be used to help boost an offer to the top of the ranking.

Minimum use fees are sometimes controversial — consumers feel penalized for conserving resources — and the Texas state legislature looked into the issue earlier this year. Osborne wrote:

During this year’s legislative session, Rep. Sylvester Turner, D, Houston, introduced a bill banning retailers from charging customers for using too little power. Power companies quickly lined up against the bill, arguing the fees were essential to the financial health of the retail industry, which must navigate wide swings in wholesale power prices. The legislation never made it onto the House floor.

But Osborne noticed, “For some companies, the controversy presents an opportunity.” He explains retailers offer an increasing variety of plans – some with free nights and weekends for example, others designed to accommodate solar panels, and still others that reward conservation over consumption.

A Houston Chronicle analysis in January 2015, link below, concluded over 70 percent of the contract offers for the Houston area included minimum use fees, but then nearly 30 percent of the offers did not. Consumers simply need to understand a bit about their own power consumption and shop accordingly.

Related:

Gaming the rankings on the Texas Power to Choose website

To help provide consumer information on competitive retail offers in the Texas electric power market, the Public Utility Commission of Texas maintains a website at www.powertochoose.org. Enter your zip code, click a button, and it will display the top ten (out of nearly 300) offers.

Because the table shows the lowest priced offers first, with the average calculated assuming 1000 kWh of energy consumption, companies can compete for the front page by minimizing their average price at exactly 1000 kWh. But as it turns out, the low cost offer at exactly 1000 kWh of consumption may not be the low cost offer for consumers using a little bit less or a bit more than 1000 kWh.

For example, when I search for downtown Houston (zip code of 77002) the website tells me there are 290 plans available. Click “View Results” and at the top of the table is Texans Energy’s “12 Month Texans Choice” plan at an amazing 4.3¢ per kWh (for comparison, the U.S. average residential power price is around 11¢ or 12¢ per kWh).

But check the offer’s “Electricity Facts Label”: Texans Energy obtains the top spot via a rate design of 10.8¢ per kWh but tossing in a $65 credit if usage falls between 999 kWh and 1200 kWh during the billing cycle. The usage credit creates a low-price sweet spot at 1000 kWh. (The second result is Texans Energy’s similarly designed “6 Month Texans Choice” plan.)

The rest of the first 10 results work similarly to blend in a bill credit kicking in around 1000 kWh to create a low-price sweet spot at that consumption level:

  • Power Express’s “#Super6” rate at an amazing 4.4¢ per kWh, which they produce via 12.4¢ per kWh rate with an $80 bill credit for consumers using more than 999 kWh.
  • Pennywise Power’s “Wise Buy Conserve 6 Plus” also showing 4.4¢ per kWh. Their rate includes a usage credit of $25.00 per cycle for consumption between 999 and 2001 kWh.
  • Discount Power “Prime 24” showing at 4.5¢ per kWh, obtained with an 11.04¢ per kWh and a bill credit of $65 for consumers using more than 999 kWh in a billing cycle.
  • Gexa Energy’s “Gexa Choice 6” showing at 4.5¢ per kWh. The rate includes a “monthly service fee” of $14.95 for consumption of less than 1000 kWh and a “residential usage credit” of $25 for consumption of more than 999 kWh.

Also showing on the first page of the Power To Choose results: The Frontier Utilities “Frontier Credit Back 3” plan similarly offers a $60 credit for usage of more than 999 kWh per month. Our Energy “Our Optimal Residential Plan” also offers an $80 credit for usage greater than 999 kWh per month.

Clearly rates are being designed for prominent position on the Power To Choose website. No doubt these offers are good deals for consumers who regularly consume at or a little above the 1000 kWh level and watch their usage. But because the consumer bill will jump significantly at consumption levels just below 1000 (and in some cases above either 1200 or 2000 kWh), they could be surprisingly expensive contracts for consumers who are not so careful.

The power to choose

But the consumer has the “power to choose.” On the results page the viewer can select estimated use levels of “500 – 1,000 kWh,” “1,000 – 2,000 kWh,” and “more than 1,000 kWh.” The selection re-sorts the results based on average price estimates at the 500, 1,000, and 2,000 kWh usage levels. (The middle is the default.) Consumers who use less than 1000 kWh monthly can easily find a contract good for them, perhaps the Infinite Energy “Conserve and Save 3-month” offer that includes a $9.95 credit for consuming less than 1,000 kWh and averages just 4.2¢ per kWh at 500 kWh!

A little different deisgn is 4CHANGE ENERGY’s “Value Saver 6,” which has a per kWh rate that drops between 500 and 1000 kWh usage, but jumps by nearly 5¢ per kWh at 1001 kWh. The effect is that of a rolled-in billing credit that grows in size with usage from 500 to 1000 kWh. The average rate is 8.6¢ per kWh at 500 kWh, drops to 4.9¢ per kWh at 1000 kWh, but rises to 7.6¢ per kWh at 2000 kWh. Unlike many of the above rate designs, however, the “Value Saver 6” does not have sharp jumps up or down.

Don’t like complications? Maybe Discount Power’s “Saver – No Gimmicks No Minimum Usage Fee – 24” plan is for you. Just as described: no minimum usage fee, just a fixed flat rate that averages about 8¢ per kWh.

Gaming is good

Overall, the competition is good for consumers. These supplier games may create traps for unwary customers, but consumers in Downtown Houston currently have 290 contract offers from over 50 different suppliers to choose among. Most residential consumers in the competitive retail part of Texas have a similar number of opportunities. It is easy to avoid the traps!

These suppliers offer contracts that differ across many margins: fixed price vs. variable, flat price vs. time-of-use, different levels of renewable content, pre-paid or not, terms ranging from 1 month to several years. On the other hand, Texas residential consumers outside of the competitive region (either because outside of ERCOT or because served by a municipal or coop utility in ERCOT that opted to stay out) are lucky to see more than two or three different options from their local monopoly utility. These offers might include a fuel cost adjustment tracking wholesale costs to a degree, and might get adjusted annually. But dynamic? No. Competitive? No.

The competitive retail electric power market for residential consumers in Texas is probably the most dynamic one around. With a little care consumers can avoid the gimmicks and find a pretty good deal.

HT: Big thanks to the economically-savvy anonymous tipster who brought the gamesmanship to my attention.

Elementary error misleads APPA on electricity pricing in states with retail electric choice

The American Public Power Association (APPA) recently published an analysis of retail power prices, but it makes an elementary mistake and gets the conclusion wrong.

The APPA analysis, “2014 Retail Electric Rates in Deregulated and Regulated States,” uses U.S. Energy Information Administration data to compare retail electric prices in “deregulated” and “regulated” states. The report itself presents its analysis without much in the way of evaluation, but the APPA blog post accompanying its release was clear on the message:

after nearly two decades of retail and wholesale electric market restructuring, the promise of reduced rates has failed to materialize. In fact, customers in states with retail choice programs located within RTO-operated markets are now paying more for their electricity.

In 1997, the retail electric rate in deregulated states — the ones offering retail choice and located within an RTO — was 2.8 cents per kilowatt-hour (kWh) higher than rates in the regulated states with no retail choice. The gap has increased over the last two decades. In 2014, customers in deregulated states paid, on average, 3.3 cents per kWh more than customers in regulated states.

But the APPA neglects the effects of inflation over the 17 year period of analysis. It is an elementary mistake. Merely adjusting for inflation from 1997 to 2014 reverses the conclusion.

The elementary mistake is easily corrected: Inflation data can be found at the St. Louis Fed site. Using the 2014 value of the dollar, average prices per kwh in the APPA-regulated states were 8.4 cents in 1997 and 9.4 cents in 2014. In the APPA-deregulated states the average prices per kwh were 12.5 cents in 1997 and 12.7 cents in 2014.

Prices were up for both groups after adjusting for inflation, but prices increased more in their regulated states (1 cent per kwh, so up about 11.3 percent) than in their deregulated states (0.2 cents; up about 1.4 percent). The inflation-adjusted “gap” fell from nearly 4.1 cents in 1997 to 3.3 cents in 2014.

ADDENDUM

Surprisingly, the APPA knows that an inflation adjustment would change their answer. The report ignores the issue completely; the APPA blog said:

For example, a recent analysis by the Compete Coalition finds that, after accounting for inflation, rates in restructured states decreased by 1.3 percent and increased by 9.8 percent in regulated states since 1997. The data in the APPA study, which does not account for inflation, show that rates in the deregulated states grew by 48 percent compared to a 62 percent increase for the regulated states.

However, a percentage-based comparison obscures the important fact that the 1997 rates in deregulated states were much greater than those in regulated states.

The Compete Coalition report is not linked in the APPA post, but the data points mentioned are here: “Consumers Continue To Fare Better With Competitive Markets, Both at Retail and Wholesale.”

The remaining differences between my inflation-adjusted APPA values and those of the Compete Coalition likely arise because Texas is in the Compete Coalition’s restructured states category, but not in the APPA’s deregulated states category. Seems an odd omission given that most power in Texas is sold in a quite competitive retail power market. APPA does not say why Texas is excluded from their deregulated category.

According to EIA data [XLS], average power prices in Texas were 9 cents per kwh in 1997, but in 2013 had fallen to 8.7 cents. Both numbers have been adjusted for inflation using CPI-U values from the St. Louis Fed website and reported using the 2014 value of a dollar. The 2013 numbers were the latest shown in the EIA dataset.

How cool is this? A transparent solar cell

I’ve not been sharing enough of my “how cool is this?” moments, and believe me, I’ve had plenty of them in the digital and clean tech areas lately. I find this one very exciting: Michigan State researchers have developed a fully transparent solar cell that could be used for windows or device screens:

Instead of trying to create a transparent photovoltaic cell (which is nigh impossible), they use a transparent luminescent solar concentrator (TLSC). The TLSC consists of organic salts that absorb specific non-visible wavelengths of ultraviolet and infrared light, which they then luminesce (glow) as another wavelength of infrared light (also non-visible). This emitted infrared light is guided to the edge of plastic, where thin strips of conventional photovoltaic solar cell convert it into electricity. [Research paper: DOI: 10.1002/adom.201400103– “Near-Infrared Harvesting Transparent Luminescent Solar Concentrators”] …

So far, one of the larger barriers to large-scale adoption of solar power is the intrusive and ugly nature of solar panels — obviously, if we can produce large amounts of solar power from sheets of glass and plastic that look like normal sheets of glass and plastic, then that would be big.

The energy efficiency numbers are low, 1%, but they estimate they could go up to 5%. Figuring out how much cost this TLSC technology adds to large panes of glass and comparing that to alternative electricity prices is the next step in assessing its commercial viability. But the technology is seriously cool.

 

Forthcoming paper: Implications of Smart Grid Innovation for Organizational Models in Electricity Distribution

Back in 2001 I participated in a year-long forum on the future of the electricity distribution model. Convened by the Center for the Advancement of Energy Markets, the DISCO of the Future Forum brought together many stakeholders to develop several scenarios and analyze their implications (and several of those folks remain friends, playmates in the intellectual sandbox, and commenters here at KP [waves at Ed]!). As noted in this 2002 Electric Light and Power article,

Among the 100 recommendations that CAEM discusses in the report, the forum gave suggestions ranging from small issues-that regulators should consider requiring a standard form (or a “consumer label”) on pricing and terms and conditions of service for small customers to be provided to customers at the tie of the initial offer (as well as upon request)-to larger ones, including the suggestions that regulators should establish a standard distribution utility reporting format for all significant distribution upgrades and extensions, and that regulated DISCOs should be permitted to recover their reasonable costs for development of grid interface designs and grid interconnect application review.

“The technology exists to support a competitive retail market responsive to price signals and demand constraints,” the report concludes. “The extent to which the market is opened to competition and the extent to which these technologies are applied by suppliers, DISCOS and customers will, in large part, be determined by state legislatures and regulators.”

Now in 2015, technological dynamism has brought to a head many of the same questions, regulatory models, and business models that we “penciled out” 14 years ago.

In a new paper, forthcoming in the Wiley Handbook of Smart Grid Development, I grapple with that question: what are the implications of this technological dynamism for the organizational form of the distribution company? What transactions in the vertically-integrated supply chain should be unbundled, what assets should it own, and what are the practical policy issues being tackled in various places around the world as they deal with these questions? I analyze these questions using a theoretical framework from the economics of organization and new institutional economics. And I start off with a historical overview of the industry’s technology, regulation, and organizational model.

Implications of Smart Grid Innovation for Organizational Models in Electricity Distribution

Abstract: Digital technologies from outside the electricity industry are prompting changes in both regulatory institutions and electric utility business models, leading to the disaggregation or unbundling of historically vertically integrated electricity firms in some jurisdictions and not others, and simultaneously opening the door for competition with the traditional electric utility business. This chapter uses the technological and organizational history of the industry, combined with the transactions cost theory of the firm and of vertical integration, to explore the implications of smart grid technologies for future distribution company business models. Smart grid technologies reduce transactions costs, changing economical firm boundaries and reducing the traditional drivers of vertical integration. Possible business models for the distribution company include an integrated utility, a network manager, or a coordinating platform provider.

The New York REV and the distribution company of the future

We live in interesting times in the electricity industry. Vibrant technological dynamism, the very dynamism that has transformed how we work, play, and live, puts increasing pressure on the early-20th-century physical network, regulatory model, and resulting business model of the vertically-integrated distribution utility.

While the utility “death spiral” rhetoric is overblown, these pressures are real. They reflect the extent to which regulatory and organizational institutions, as well as the architecture of the network, are incompatible with a general social objective of not obstructing such innovation. Boosting my innovation-focused claim is the synthesis of relatively new environmental objectives into the policy mix. Innovation, particularly innovation at the distribution edge, is an expression of human creativity that fosters both older economic policy objectives of consumer protection from concentrations of market power and newer environmental policy objectives of a cleaner and prosperous energy future.

But institutions change slowly, especially bureaucratic institutions where decision-makers have a stake in the direction and magnitude of institutional change. Institutional change requires imagination to see a different world as possible, practical vision to see how to get from today’s reality toward that different world, and courage to exercise the leadership and navigate the tough tradeoffs that inevitably arise.

That’s the sense in which the New York Reforming the Energy Vision (REV) proceeding of the New York State Public Service Commission (Greentech) is compelling and encouraging. Launched in spring 2014 with a staff paper, REV is looking squarely at institutional change to align the regulatory framework and the business model of the distribution utility more with these policy objectives and with fostering innovation. As Katherine Tweed summarized the goals in the Greentech Media article linked above,

The report calls for an overhaul of the regulation of the state’s distribution utilities to achieve five policy objectives:

  • Increasing customer knowledge and providing tools that support effective management of their total energy bill
  • Market animation and leverage of ratepayer contributions
  • System-wide efficiency
  • Fuel and resource diversity
  • System reliability and resiliency

The PSC acknowledges that the current ratemaking procedure simply doesn’t work and that the distribution system is not equipped for the changes coming to the energy market. New York is already a deregulated market in which distribution is separated from generation and there is retail choice for electricity. Although that’s a step beyond many states, it is hardly enough for what’s coming in the market.

Last week the NY PSC issued its first order in the REV proceeding, that the incumbent distribution utilities will serve as distributed system platform providers (DSPPs) and should start planning accordingly. As noted by RTO Insider,

The framework envisions utilities serving a central role in the transition as distributed system platform (DSP) providers, responsible for integrated system planning and grid and market operations.

In most cases, however, utilities will be barred from owning distributed energy resources (DER): demand response, distributed generation, distributed storage and end-use energy efficiency.

The planning function will be reflected in the utilities’ distributed system implementation plan (DSIP), a multi-year forecast proposing capital and operating expenditures to serve the DSP functions and provide third parties the system information they need to plan for market participation.

A platform business model is not a cut and dry thing, though, especially in a regulated industry where the regulatory institutions reinforced and perpetuated a vertically integrated model for over a century (with that model only really modified due to generator technological change in the 1980s leading to generation unbundling). Institutional design and market design, the symbiosis of technology and institutions, will have to be front and center, if the vertically-integrated uni-directional delivery model of the 20th century is to evolve into a distribution facilitator of the 21st century.

In fact, the institutional design issues at stake here have been the focus of my research during my sabbatical, so I hope to have more to add to the discussion based on some of my forthcoming work on the subject.