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The Role of Regulators in Energy Restructuring

The United States Experience:A view from the State of New Jersey

A Paper Presented to Round Table 10-BThe 18th World Energy Congress

By Commissioner Frederick ButlerBuenos Aires, ArgentinaApril 20, 2023

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United States

The Early Regulators

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Beginnings of Regulation in the United States

First appeared in the states of the Great Plains (Midwest), where railroads dominated economic life

Continued to spread to East and South

Eventually concentrated on electric, gas, and telecommunication sectors by early 1900’s

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RegulatoryOrganizational Models

Theory of Command and Control prevailed during most of 20th

Century

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Theory of Command & Control

All decisions both financial and operational needed to be approved by the regulator

Return on investment accomplished by rate-base rate of return methodology

Planning for redundancy was the accepted norm

Rate payers paid higher than efficient prices, but were assured reliability

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The New Jersey Board of Public Utilities Consists of five members, appointed by the Governor

and confirmed by the Senate to six year terms One Commissioner is designated as President by the

Governor Regulates investor-owned utilities in the electricity,

natural gas, telecommunications, water, and cable television sectors

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Background and History

Established in 1911 by Governor Woodrow Wilson Oldest consumer protection agency in New Jersey Empowered to set rates, approve financing and set

standards for the utilities Originally had jurisdiction over railroads, buses,

canals, subways, pipelines, gas, electric, light, oil, sewer, waste disposal, telephone & telegraph

Board today has jurisdiction over electric, natural gas,telecommunications, cable television, water and waste water companies

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Theory and Process of Deregulation/Restructuring from the Regulator’s Point of View Growing movement in

1990’s to allow competition among suppliers of electricity, natural gas, and telecommunications

Local distribution systems to end-users would remain a monopoly and fully regulated

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Inefficiencies in Supply Market Would Be Eliminated

Prices would fall as a result of new efficiencies and competition

Almost half the 50 states in the United States have adopted some level of deregulation/restructuring of the energy sectors

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 Status of State Electric Industry Restructuring ActivityAs of August 2001

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Restructuring Legislation EnactedArizona, Arkansas, California, Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, and West Virginia

Comprehensive Regulatory Order IssuedNew York

Legislation/Orders PendingNone

Commission or Legislative Investigation OngoingAlaska, Colorado, Florida, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, North Carolina, North Dakota, South Carolina, Utah, Vermont, Washington, Wisconsin, and Wyoming.

No ActivityAlabama, Georgia, Hawaii, Idaho, Kansas, Nebraska, South Dakota, and Tennessee

Source: Energy Information Administration.

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The Current Model

Regulators as Generation Market Facilitators and Distribution

System Overseers

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In Restructured Markets, Regulators Have Abandoned Their Role As Command and Control Agents With Regard to Suppliers of Energy Their new role is more of a market referee Rules of market are established Separation (unbundling) of supply, transmission, and

distribution portions of the former vertically integrated monopoly

In supply sector, the regulator oversees the market and the adherence to market rules in much the same way as a referee in a sports contest

Penalties can be assessed (in states like New Jersey) both financial and punitive (license revocation)

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Legislative Framework

Enabling Legislation

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New Jersey Board of Public UtilitiesEnabling Legislation

New Jersey Permanent Statutes Title 48:2-13 Powers of the Board

The board shall have general supervision and regulation of and jurisdiction and control over all public utilities

Title 48:2-16 Supervisory and regulatory powers in general

The Board may require from any utility:– Compliance with laws and ordinances– System of accounts– Periodic reports– Notice of accidents

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In Contrast, Regulators Still Act As Command and Control Overseers With Regard to the Local Distribution System to End-users.

Rate-base rate of return policies still in place for the distribution system

Unbundled services of incumbent utilities are viewed differently by the regulators

Need arises for new bifurcated thinking and staff resources, while we act as both market managers and delivery system controllers

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BPU Organizational Chart

W a te r/W aste W a te r

C ustom er Re la tions

L ega l S ervices (7 )

A u dits (28 )

C om m u n ications

(7 )

B u dget/F iscal

(6 )

In ter-G overnm en tR elations

(3 )

C able Televis ion

(20 )(2 2 )

(1 5 )

Com m issioner (4) Com m issioner (4)

Managem entInform ation

System s(9)

Energy (47)

Telecom m unications(22)

Service Evaluation(31)

Hum an ResourcesAdim inistartion (20)

Secretary of the Board(3)

Chief O f S taff (3) Executive D irector Econom ist (10)

President (6) Com m issioner (4) Com m issioner (4)

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Problems Encountered in Problems Encountered in Obtaining the Desired Obtaining the Desired

ResultsResults

Some Potential SolutionsSome Potential Solutions

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Difficult to chart a course toward deregulated energy supply markets while avoiding twin obstacles of too heavy-handed market management and overly lenient deregulation

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Balancing Act

Too heavy-handed: Requiring full divestiture of generation; overly

onerous environmental restrictions; or setting comparison supply kwh price too low

Too lenient: Assuming a market will develop spontaneously

and overnight; not having in place controls against gaming the system by suppliers or customers

California guilty of both excesses “The Perfect Storm”

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California Restructuring Law (AB1890)

• Utilities directed to sell off thermal capacity – market dominance concerns.

• The state backs refinancing of utility debt.• Power exchange (PX) created for wholesale power

transactions, which utilities are required to buy through. (Spot market).

• ISO created to manage grid operations and reliability.• Direct access for customers.• Electricity rates were frozen at a discount.

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Market Flaws

Deregulation design has been largely criticized for the perceived market flaws it created:

• No time-of-day rates, therefore few, if any, price signals to users.

• The utilities could only buy power on spot market. • Marketers did not enter the market due to public

utility commission’s establishment of low capped rate for the three electric utilities.

• Setting the comparison supply Kwh price too low

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The Perfect Storm• Many commentators on the California situation have

likened the confluence of events that caused this crisis to the “perfect storm”.

• Lack of new generation – no new power plants built in the state in the past ten years.

Reason include: 1) uncertainty over effect of restructuring on

cost recovery.2) environmental gridlock – NIMBY.

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The Perfect Storm (Cont’d)• California is a net importer of its energy needs (in-state

generating capacity is 75% of total demand). Much of that energy is supplied by the northwest.

• The northwest region, which relies heavily on hydropower is experiencing the driest year in 75 years.

• In 2000/2001 hydroelectric generation levels fell 23% below previous levels. A decrease of almost 9 million MWh.

• Throughout the summer of 2000, imports into the California ISO significantly decreased by 40% due to growth in surrounding states and low hydro levels.

• Additionally, California generator owners exported power from California to regions that were willing to pay much higher prices for their energy, contributing to the shortage of power in California.

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Underlying FactorsDemand has increased:

Peak demand has increased by 12% from 1996-1999. Peak demand increased by 5,522 MW from 1996-1999.

Only 672 MW of net capacity was added. Demand increased linked to California’s booming economy.

An unusually hot summer in 2000 and a colder than normal winter in 2000/2001, the coldest since 1911.

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Underlying Factors (Cont’d)

The drop in hydroelectric power availability increases reliance on natural gas supply, prices and emissions costs.

In June 2001, natural gas prices increased from $2.30/Mcf to $9.00-10.00/Mcf.

45% of California generation is fueled with natural gas.

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Underlying Factors (Cont’d)

Outages:

Year 2000 planned and unplanned outages increased by 53% in June, 57% in July and 23.5% in august compared to 1999. Average megawatts out of service increased by 77% in June, 121% in July and 461% in august above the same period in 1999.

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Solution1) Strive to maintain a balance and a

preference for slow, steady change2) Evolution not revolution3) Key points to remember

1) Markets develop slowly2) Rapid, diametric shifts destabilize confidence

levels of market participants (including end users) and can be profoundly counterproductive

3) Many laws can be repealed, but not the laws of supply & demand

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The Problem of Assuring Reliability in the Distribution System While a balance between

too heavy and too lenient direction must be achieved on the supply side, vigorous regulation of the distribution system must be in place to assure reliability

Although price is a very key component, reliability is the most important value for customers

Unless firm and vigilant regulation is being practiced by the regulatory body, the tendency will be to rest on the planned redundancies of the old era and not make the necessary investments to upgrade the distribution system

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Solution: Reliability Assurance Techniques of New Jersey, PJM, New England States, Etc.

Oversight and monitoring of investment levels

Setting of performance goals Consideration of incentive regulation

and penalties

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The Problem of Open Market Creation – Difficult to Assure and Disruption to Consumers May Threaten Achievement of the Goal

The competitive market can theoretically produce lower prices and greater choice of products for consumers

Volatility is a threat to consumers’ confidence, yet it is a reality in most competitive regulation-free markets

Consumers must be educated as to the benefits and new realities of the open market, and safeguards must be put into place to avoid wide market fluctuations

Solution: A system of cross border trading and a market monitor such as the

PJM Independent System Operator in the Mid Atlantic United States

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PJM Independent System Operator (ISO)

Membership:200+ Members100+ Transmission Service Customers

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Independent System Operator Roles Operates largest electric power system in North

America Administers the regional wholesale electric

market Controls a reliable transmission system Provides market monitoring coordinated with

states Provides for comprehensive regional

transmission expansion planning Provides an information resource for regulators

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PJM Statistics

Complexity 540 Generation Resources with Diverse Fuel Types 8,000 Miles of Transmission $5.5 Billion of Transmission Assets Over 22 Million People Served

Uniqueness Single Control Area in NERC Region Six jurisdictions ( PA, NJ, MD, VA, DE, DC)

Energy Market Volumes: 2000 Number of Energy Transactions: ~ 197,369 Average Daily Transactions: ~ 539 Annual Spot Market Purchases: ~ $1.3 Billion

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ISOs in North AmericaPJM is the largest centrally dispatched Control Area in

North America

California45,000

New York30,311 New England

22,523PJM

51,600

ISO Peak MW % Generation MW % Generation

PJM 51,700 8.4% 56,774 7.8%

California 45,000 7.3% 45,000 6.2%

New York 30,311 4.9% 36,358 5.0%

New England 22,523 3.7% 27,170 3.8%

Total ISO 149,434 24.3% 165,302 22.8%

Non ISO 465,500 75.7% 558,698 77.2%

Total USA 614,934 724,000

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PJM/PJM West59,491 MW

WORLDWIDE ISO COMPARISONS

EDF (France)70,000+ MW

Italy41,300 MW

Tokyo Electric64,300 MW

National Grid(England)

49,700 MW

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Two Tier Governance

INDEPENDENT BOARD

Members Committee

GenerationOwners

TransmissionOwners

Other Suppliers

ElectricDistributors

End-UseCustomers

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Independent System Operator (ISO)Energy Market

PJM operates the most liquid and active energy market in the United States, commonly called the PJM Spot Market.

The PJM Spot Market Consists of:o Real-time, bid-based energy market;o Power can be bought and sold on an hourly basis by PJM’s

members;o Bids and offers for energy are accepted on a daily basis; and o Bid offers are capped at $1,000/Kwh

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New Jersey Board of Public Utilities

www.bpu.state.nj.us

Commissioner Frederick Butler

Two Gateway Center

Newark, New Jersey 07102

Newark

(973) 648-2027

Trenton

(609) 777-3333

Fred.Butler@bpu.state.nj.us