Energy Restructuring in a Time of Financial Crisis

Presentation by John Kelly

Director of Economics & Research American Public Power Association

Washington, DC

Center for Research in Regulated IndustriesRutgers University

28st Annual Eastern ConferenceSkytop Lodge

Skytop, Pennsylvania May 15, 2009

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Exelon Announces 1st Quarter ResultsApril 23, 2009

First Quarter

2008 2009 % Change

Earnings (millions) $581 $712 23

Earning/Share $0.88 $1.08 23

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Exelon Announces 1st Quarter ResultsApril 23, 2009

“Our strong first quarter results are keeping 2009 earnings on track to meet our estimates in spite of the difficult economic environment.” (emphasis added)

John Rowe, Exelon Chairman & CEO

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Broader Question

“With continuing analysis of competitive performance of alternative institutional arrangements we will be able to determine more definitely what is the best that we can expect in an imperfect world.” (Emphasis added)

Paul Joskow, The Energy Journal, January 2006

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Dimensions of Performance?

Demand Response/Price Structures

Capital Attraction

Customer Switching

Efficient Investments

Environmental Benefits

Alleged Shifting of Risk

*Consumer Benefits -- Reduced Prices*

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FERC “… Under wholesale competition, the efficiency of

existing nuclear, coal, and other types of generation has improved significantly, lowering costs to consumers and reducing environmental effects, and the increased capacity factors and availability of these units has further lowered electric generating costs. -- ANOPR, Wholesale Competition in Regions with Organized Wholesale Competition in Regions with Organized Electric Markets, , June 2007

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PJM Market Monitor Unit on Competitiveness of Energy Markets

Recent annual reports stated:

“Strong Evidence” that PJM Energy Markets are Competitive

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Prominent Economists …“There is growing evidence and convincing

studies that show that consumers have saved billions of dollars in energy costs as a result of competitive markets.” (Emphasis added)

Vernon Smith, Alfred Kahn, Paul Joskow, William Hogan, et al. in “Open Letter to Policymakers," Compete Coalition, Washington, D.C., June 26, 2006

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Paul Joskow (Energy Journal, January 2006)

“Empirical evidence suggests that well-designed competitive market reforms have led to performance improvements in a number of dimensions and benefited consumers through lower retail prices." (emphasis added.)

“It is evident that real residential prices fell more in states that implemented retail competition programs than in those that did not.”

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Price Comparisons of States in Joskow Analysis (Residential Customers; Prices in cents/kWh)

% Change% Change 1996 2004 1996-20041996-2004

ME 12.6 12.2 -3.2% -3.2%MA 11.3 11.8 4.4%4.4%RI 11.8 12.2 3.4%3.4%CT 12.1 11.6 -4.1%-4.1%PA 9.7 9.6 -1.0%-1.0%NJ 12.0 11.2 -6.7%-6.7%IL 10.3 8.4 -18.4%-18.4% OH 8.6 8.5 -1.2%-1.2%CA 11.3 12.2 8.0%8.0%NY 14.0 14.5 3.6%3.6%

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Selected Factors Affecting Residential Price Changes in Retail Choice States (used in Joskow Analysis)

(% Change State 1996-2004) Selected Factors

ME (- 3.2%) Standard Offer Service (SOS) Staggered AuctionsMA ( 4.4%) Rate Reduction, Rate FreezeRI ( 3.4%) SOS, Rate Cap FormulaCT (- 4.1%) Rate Cap, Rate ReductionPA (- 1.0%) Rate Cap (generation service)NJ (- 6.7%) Rate CapIL ( -18.4%) Rate Reduction, Rate FreezeOH ( -1.2%) Rate Reduction, Rate FreezeCA (8.0%) Masks 2000-2001 increases; mitigating effects of large

proportion of public power in stateNY (3.6%) Rate Reduction, Rate Freeze

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Price Comparisons of Selected States in Joskow Analysis (Residential Customers; Prices in cents/kWh)

% Change% Change % Change1996 2004 2007 1996-20041996-2004 1996-2007

ME 12.6 12.2 15.2 -3.2% -3.2% 20.6%MA 11.3 11.8 16.3 4.4%4.4% 44.2%RI 11.8 12.2 14.0 3.4%3.4% 18.6%CT 12.1 11.6 18.7 -4.1%-4.1% 54.5%PA 9.7 9.6 11.0 -1.0%-1.0% 13.4%NJ 12.0 11.2 14.4 -6.7%-6.7% 20.0%IL 10.3 8.4 10.4 -18.4%-18.4% 1.0%OH 8.6 8.5 9.5 -1.2%-1.2% 10.5%CA 11.3 12.2 14.4 8.0%8.0% 27.4%NY 14.0 14.5 17.1 3.6%3.6% 22.1%

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If PJM “Energy Markets are Competitive, Explain …

(All Sectors, Prices in cents/kWh)

1996 2009* Cents Chg % ChgDeregulated

DE 6.9 12.1 5.2 75.4 DC 7.4 13.8 6.4 86.5

MD 7.0 13.2 6.2 86.3 NJ 10.5 14.7 4.2 40.0

Regulated GA 6.4 8.6 2.2 34.4 NC 6.5 8.4 1.9 29.2

SC 5.7 8.3 2.6 45.6

*Twelve month average, Jan. 08-Jan. 09

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68

10

12

14

Ce

nts

1990 1995 2000 2005 2010

Year

MD DC

NJ DE

Selected Mid-Atlantic States

68

10

12

14

Ce

nts

1990 1995 2000 2005 2010

Year

NC SC

GA

Selected South-Atlantic States

1990 - 2007Average Revenue per KWH (All Sectors)

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Generation Mix of Selected Deregulated and Regulated States, 2006

88 89

020

4060

8010

0P

erce

nt o

f Gen

erat

ion Coal and Nuclear

Deregulated Regulated

02

46

8P

erce

nt o

f Gen

erat

ion Natural Gas

Selected PJM Regulated

01

23

4P

erce

nt o

f Gen

erat

ion Other Sources

Selected PJM Regulated

Year: 2006

(MD, DC, DE, NJ, VA, WV, PA) (NC, SC, GA)Selected PJM States vs. Selected Regulated States

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Coal, Nuclear, and Natural Gas Capacity as Percent of Total Capacity: Selected Regulated and Deregulated (PJM) States, 2006

State Coal Nuclear Natural Gas

GA 44 12 44 NC 51 20 29SC 33 34 33PJM* 48 19 34

* Delaware, District of Columbia, Maryland and contiguous states

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Benefits: Selected Company Profits

Summary of Stock Holding Period Returns (%)(1995-2005) 10 yrs. 5 yrs. 3 yrs. 1yr.

Regulated 10 9 9 12S&P 500 7 5 10 15

Exelon 22 27 30 26Constellation 13 22 19 11PSGE 19 13 20 4PPL 17 18 23 15Allegheny 7 3 60 49

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Selected Company Profits (ROE) 2007-2008

2007 2008

Exelon 29.4 29.3

PSGE 18.3 13.1

PPL 24.1 17.5

Allegheny 19.9 14.7

Constellation 16.5 -30.9

Regulated Utilities 8.1 8.8

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Concluding Observations --

“Empirical evidence [[DOES NOT SUGGESTDOES NOT SUGGEST]] that well-designed competitive market reforms have led to performance improvements in a number of dimensions and benefited consumers through lower retail prices”

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Coal Capacity as Percent of Total Capacity: Selected Regulated and Deregulated (PJM) States, 1996 and 2006

State 1996 2006 GA 73 44

NC 50 51SC 83 33PJM* 57 48

* Delaware, District of Columbia, Maryland and surrounding continuous states

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Nuclear Capacity as Percent of Total Capacity: Selected Regulated and Deregulated (PJM) States, 1996 and 2006

State 1996 2006 GA 20 12

NC 42 20SC 15 34PJM* 30 19

* Delaware, District of Columbia, Maryland and surrounding continuous states

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Natural Gas Capacity as Percent of Total Capacity: Selected Regulated and Deregulated (PJM) States, 1996 and 2006

State 1996 2006 GA 7 44

NC 8 29SC 2 33PJM* 13 34

* Delaware, District of Columbia, Maryland and surrounding continuous states

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Puzzling Questions Why FERC and Prominent Economists Make Broad,

Categorical Statements about Consumer Benefits/Price Reductions without Providing Evidence;

Why PJM Market Monitor Ignores Relevant Price Comparisons/Company Profits;

Why a Peer-Reviewed Economic Journal Article Makes Egregious Analytical Error of Ignoring Price Reductions, Freezes, and Caps;

Why are Obvious, Readily Available Facts Ignored?

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Positive or Normative Analysis? “… Policy prescriptions in the areas of monopoly,

competition, the role of government, and similar areas are more qualitative and valued-based than analytical and fact-based … [consequently] economists do not have to deal with the difficulties of statistical models and “checkable, quantitative forecasts.”

Odd result of “vigorous and confident policy prescriptions” although there is usually a paucity of empirical analysis to support them (Emphasis added).

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Positive or Normative Analysis? “…The confidence of economists’ policy

recommendations [in areas of government regulatory intervention] is essentially ideological: it rests on their commitment to the competitive market as an ideal, and the consequent belief that any step in the direction of the ideal is desirable.”

Carl Kaysen

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“Waiting for Schumpeter” in Maryland