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.”

More on dynamic electric power prices for residential customers in Illinois

Michael Giberson

In the comments on yesterday’s post, “Dynamic electric power prices for residential customers in Illinois,” Matthew Scallet, a Power Smart Pricing program administrator, offers a few more details on the savings by customers:

As far as savings are concerned, the average savings for our entire customer base is 13% since the beginning of the program in Jan 2007. Over time the savings levels has fluctuated as power prices change, but we’ve had a very good run lately. In 2009 with the wholesale market price for electricity being so low, the average savings for customers has jumped to 27%. Ameren’s flat rates went down a bit in June which has cut into those savings a bit during the summer but since summer power prices haven’t increased as much as in past summers, the numbers continue to look really good. Not paying a risk premium for a flat rate is what’s making the program attractive to customers.

The comment also addresses concerns about the participation fee and other issues raised in earlier comments.

The 2008 program analysis report provides more details for that year.  Supporting statistical results and older reports are available from this page.

Dynamic electric power prices for residential customers in Illinois

Michael Giberson

From the Danville, Illinois Commercial-News, a report of a two-year old dynamic power price program for residential customers of Ameren in Illinois:

The program offers customers the ability to track in real time, via the Web, the day-ending regional commodity price of electricity. And as the rate fluctuates, participants can adjust their usage to avoid peak rates the following day.

“You don’t have to turn everything off and you don’t have to sit around in the dark,” said Stephanie Folk, a spokeswoman for CNT Energy….

She said it’s more a matter of knowing when the prices are high or are going to go higher, and then saving major chores such as laundry for a less-expensive part of the day.

“Maybe you just turn up the air conditioner a couple of degrees at certain times,” she said.

The reporter suggests that customers “can save nearly 15 percent”, but doesn’t indicate if that is a maximum or mean value.

Probably nothing new in the article for regular KP readers, but in a world in which people think such pricing programs are impossible — politically or practically — the mere existence of a two year old program offers a proof.

The next step is to automate the adjustment processes.  For example, if the air conditioner’s thermostat setting was a function of price rather than a fixed number, the power customer could capture savings without needing to check prices nightly.  This kind of thing is already possible, but hampered by the current lack of energy data communication standards to allow thermostats to communicate to other household systems, the power meter, and the consumer’s energy retailer.

Lynne could probably name devices that can already do this kind of thing, and describe the current state of progress on data standards, too.

Chicago Tribune: Enable Free Markets in Electricity in Illinois

Lynne Kiesling

On Monday the Chicago Tribune published an editorial about electricity policy in Illinois (registration required). We’ve got a lot of electricity policy issues on the table right now. Nine years ago, the political bargain struck to allow wholesale market competition in electric power was a ten-year retail rate freeze, at a discounted rate relative to 1996 rates. At the time this was seen as compensation for inefficiency and cost overruns associated with nuclear plant construction, which meant Illinois retail rates were some of the highest in the country (and thus the impetus for introducing competition).

Nine years ago Illinois lawmakers voted to slash and freeze Commonwealth Edison’s electricity rates while the state prepared to move to a competitive market for power. Residential rates were cut by 20 percent, bringing ComEd customers closer in line to what neighboring states were paying.

In the ensuing decade, fuel prices have risen due to increased domestic demand, increased foreign demand, and environmental regulations that have constrained supply and have shifted out the demand for fuels like natural gas.

At the end of 2006, these heavily-discounted retail rate caps in Illinois expire. We have had much administrative procedure over the past two years trying to figure out “what to do” once the retail rate caps expire. One thing that is moving forward is a long-term wholesale procurement auction. I have reservations about the wholesale auction that I won’t elaborate on here (yes, auctions introduce market processes and price signals, but the structure of the wholesale auctions and having the incumbent as the purchaser may simultaneously lock customers into long-term prices/contracts that they might not otherwise have chosen, and it may also provide a substantial entry barrier to competing retailers who have to compete against this incumbent product offering). But the auction is coming, and it will reflect market values for electricity and expectations of those values for the next 1-3 years, so it will mean price increases.

One thing you can’t do is avoid the inevitable. Illinois and other states are going to move away from the old system of government-regulated electricity rates and into a competitive market. And they should. Over the long run, that’s going to be the best way to govern supply and demand–and encourage conservation–of power. …

The cost of electricity in Illinois does seem destined to rise sharply, at least in the short term. The wholesale price of electric power in much of the nation has increased in the last two years, driven by soaring prices for natural gas, which fuels nearly all the new electric generating capacity built here in the last decade. That marginal capacity largely governs the price in the wholesale markets. ComEd’s auction will reflect that rise in price.

The editorial correctly points out that supply is part of the story, but so is demand:

The price of electricity for ComEd customers right now is 8.67 cents per kilowatt hour–every hour of every day. But the market price fluctuates depending on how much power is needed at what time. Most of the time though, the market price for electricity is somewhere around 6 cents. In the middle of the night, it’s just a penny or two. On a steamy July afternoon the price can spike well above 10 cents. The need to have enough power available, whatever it costs, for the hottest minute of the hottest day is what drives up the overall price.

Consumers haven’t had price information to respond to a spike in electricity like they can respond to a spike in gasoline. (That is, use less of it.) But that might be coming.

Under a pilot program set up as part of the 1997 deregulation law, ComEd installed meters that gave real-time price signals in some homes. The result: On last summer’s hottest day, July 25, participants cut their peak-hour electricity consumption by an average of 15 percent.

You KP readers are already familiar with this program, the much (and justifiably) touted Energy Smart Pricing Plan from the Center for Neighborhood Technology.

The editorial closes by essentially saying we can’t go backward, nor should we, because the regulated past wasn’t that great a place to begin with!

Those who want to delay the move to an electricity market seem to have a mistaken nostalgia for the old days. ComEd consumers were paying the highest prices in the Midwest in the mid-1990s, in large part because of the government-protected monopoly’s notoriously poor management of its nuclear fleet. Exelon, the successor to ComEd, has been a much more nimble and efficient firm as it moves toward a market-driven power system.

As you would expect from someone who knows way too many of the details of topics such as this, I have quibbles with some of the editorial’s claims, but in general I think this is a useful commentary, and valuable for Illinois customers and politicians to consider.