The debate over the benefits of competition for energy consumers has persisted since the advent of retail competition for electricity and natural gas more than two decades ago. Consumers are stuck in a limbo between traditional monopoly regulation and competitive choice because the movement to deregulate energy pricing (much as most other formerly price-regulated industries were deregulated decades ago) has stalled in the wake of the catastrophic collapse of California's disastrously ill-designed market at the turn of the century.
Ever since, competition advocates have sought to expand the dozen or more states where competitive energy supply is available to consumers, but mostly have been thwarted in the face of monopoly utilities' deep-pocketed opposition. Today, emboldened monopoly utility interests, along with well-meaning but misguided consumer advocates, are supporting legislation in at least two states – Maryland and Massachusetts – that would effectively end competitive retail energy supply choices for residential customers.
Travis Kavulla, vice president of regulatory affairs at NRG Energy, is on the front lines of the battle by competitive energy suppliers to preserve customer choice for residential consumers. The former Montana utility regulator discusses the headwinds in states like Maryland and Massachusetts, but also the opportunities to expand retail energy choice in other states – such as South Carolina and Louisiana – where elected officials seek to reign in the increasingly higher costs their constituents pay to monopoly utility suppliers for electricity and natural gas.
The debate over the benefits of competition for energy consumers has persisted since the advent of retail competition for electricity and natural gas more than two decades ago. Consumers are stuck in a limbo between traditional monopoly regulation and competitive choice because the movement to deregulate energy pricing (much as most other formerly price-regulated industries were deregulated decades ago) has stalled in the wake of the catastrophic collapse of California's disastrously ill-designed market at the turn of the century.
Ever since, competition advocates have sought to expand the dozen or more states where competitive energy supply is available to consumers, but mostly have been thwarted in the face of monopoly utilities' deep-pocketed opposition. Today, emboldened monopoly utility interests, along with well-meaning but misguided consumer advocates, are supporting legislation in at least two states – Maryland and Massachusetts – that would effectively end competitive retail energy supply choices for residential customers.
Travis Kavulla, vice president of regulatory affairs at NRG Energy, is on the front lines of the battle by competitive energy suppliers to preserve customer choice for residential consumers. The former Montana utility regulator discusses the headwinds in states like Maryland and Massachusetts, but also the opportunities to expand retail energy choice in other states – such as South Carolina and Louisiana – where elected officials seek to reign in the increasingly higher costs their constituents pay to monopoly utility suppliers for electricity and natural gas.
S4E4: Travis Kavulla, Vice President of Regulatory Affairs, NRG
(transcript edited for clarity)
EMP: Welcome to the Energy Markets Podcast. I’m Bryan Lee. Our guest today is Travis Kavulla, former Montana utility regulator and currently vice president of regulatory affairs at NRG Energy, one of the leading competitive retail suppliers. We’re going to talk about the state of retail competition today for residential customers. No one questions industrial customers bypassing their traditional utility provider and having a choice of suppliers for electricity and natural gas. The benefits are very clear there. But there is growing momentum to ban residential customer choice for natural gas and electricity, with at least two states – Massachusetts and Maryland – actively considering legislation to end residential customer choice. Travis, thanks for coming on the podcast.
TK: Great to be with you, Bryan.
EMP: I think we're long overdue for this. But first – as a former Montana official – your opinion on the TV series “Yellowstone”? Thumbs up? Thumbs down?
TK: (laughter) I have only watched a few episodes primarily because it makes me homesick. But from what I see of it, it perhaps renders the state in a more exciting manner in terms of explosions and political tumult than actually exists. I wish it were really that thrilling. And I hope my comments can dissuade people from going and living in Montana (laughter) to help out the people who would like to return there someday.
EMP: You're the second Montana regulator I've come to know. The first was Bob Anderson. Did you know him?
TK: I did know Bob Anderson. A great man. He gave me a lot of advice when I first came onto the Montana Public Service Commission and I think about Bob a lot. I knew both him and his wife, Grace Anderson. And when he passed away that really moved me. He was just an excellent individual – really a kind soul and a rare public servant in terms of not really having a strong ideology, but just wanting to do what's right for the public at large. So thank you for bringing him up.
EMP: I was quite fond of him, not the least of which because we would play frisbee together at NARUC meetings.
TK: (laughter) I don't think I've ever played frisbee at a NARUC meeting. If there was a NARUC frisbee club I think it's been disbanded.
EMP: Well, I'm sure it has. Yeah, it was in the parking lot, not in a meeting room, although that would have improved the atmosphere I think.
TK: Seriously. Okay. I'm making a note to try to bring that back some day.
EMP: So NRG stock is trading today around $52, which is an all-time high level for the company. You now have an interim CEO replacing Mauricio Gutierrez after pressure from the activist hedge fund Elliott Investment Management. Flesh this out for us.
TK: Definitely all of the stuff about Elliott is a matter of public record. And I won’t comment on that other than to say we reached an amicable standstill agreement and added new members to our corporate board. I think the stock is trading at a high candidly because people do believe in a future for value-added consumer-facing energy services. We've managed to get our operational targets to really run a pretty tight ship in delivering value to consumers and shareholders. And despite the headwinds that I know we're going to talk about in this podcast, I think in many ways, the future of the electric power sector is going to be more demand-driven than we've seen it. I mean, we see across the United States investments being made in advanced metering infrastructure and that provides a platform – untapped oftentimes as of yet – to have a more dynamic and nimble electricity economy. That's certainly the case as we continue to add new electric loads, both through electrification and the advent of entirely new technologies and industries to the power grid. So I think the future is actually pretty optimistic for the electric power sector. And then the other side of our business, natural gas, again, despite headwinds, seems to have a relatively robust near- and medium-term future. Natural gas usage is actually growing in the United States. The pipeline capacity that is available is becoming more valuable as capacity-expansion prospects diminish in certain parts of the country that are still significantly dependent upon natural gas. So all of that puts a company we bought a number of years ago from Centrica, Direct Energy, in a really good position to optimize its gas assets in a phase of transition. So, you know, they don't, you know, they don't, Bryan, let me near investors that often, but just from the regulatory perspective I actually think that a combo electric and energy services and gas company has the right DNA, and that's what NRG is.
EMP: Well, you mentioned headwinds. So I guess in anticipation of this, NRG I see, as being instrumental in establishing REAL, the Retail Energy Advancement League, to help counter the adverse sentiment that we're going to talk about. How is that group going for you?
TK: REAL is doing a great job and I want to give a shout out to the other companies who came together with NRG to form it. They include Vistra, Calpine, Constellation, IGS, Clean Choice. You know, they run the gamut of both large-cap diversified companies – Shell as well – and, you know, small-cap players that are more pure-play retail competition sector.
EMP: Genie
TK: Genie as well. Thank you. And they're really united around really two things, raising the bar on retail competition as it exists today, making sure that the markets for it improve and that the actors that are in that hold themselves to account. So we have a Customer Bill of Rights that you can access on the REAL website, and then also making it more easy, more transparent, pure transaction costs for customers to shop in states where that's allowed. It still is kind of a mystery to people in certain places, although not all places, that shopping is a possibility for energy products, even though people have had a choice for a couple decades in certain jurisdictions. And then there's other places where you know, we actually see prospects for retail market expansion, both for commercial and industrial customers, as well as residential, at least on a limited basis. And so REAL is being selective and identifying a few of those jurisdictions as well. So it's sort of, you know, defend, improve and expand the prospects of retail competition. They've done a great job in just a couple of years getting that organization off the ground and establishing a presence in state capitals and regulatory commissions.
EMP: Let's start with Massachusetts. Denying customer choice to residential energy customers has been a pet project of Governor Maura Healy since she was attorney general. Tell us what's going on there and what NRG and/or REAL are doing in that regard.
TK: Yeah, so there's a couple of rival pieces of legislation, I guess I would say, in the Massachusetts Legislature under consideration right now. One is a bill that would forbid residential customers from exercising the right they currently enjoy to shop for an energy supplier of their choice. And another piece of legislation that would reform the market, establish a new office within the regulator for enforcement and do a number of other changes, including licensing and bonding improvements, that would discipline the market. It won't come as a surprise to you that we favor the latter rather than the former. And this debate, candidly, is happening at a really odd time. There are people out there talking about shutting down the market right after we had the past winter, 2022 to 2023, that saw the utility basic-service price really blow through the roof. I mean, there was a time when Massachusetts all of a sudden became if not the most expensive jurisdiction for electricity, then the second or third right behind California and Hawaii, depending on how you measure it. And at that same time, every single competitive electric supplier in the state had offers available that were below the utility basic-service rate. So a lot of our customers signed up for our plans. You know, our average customer, we calculate, saved a little north of $400 over that winter, and a lot of other customers experienced savings. Now, I think that the opponents of retail competition and customer choices say, well, that's just a single year and what happened in that winter won't happen again. And if we go back and look at the amount of savings historically in the market, you’ll find that losses have accrued to retail customers. And I guess I have really two comments about that. First, nothing about the fundamentals of the New England wholesale market have changed. It's a very risk-prone, volatile market in terms of fuel supply, and that has ramifications on the pricing that you see in the market. People deserve the ability to protect themselves through a fixed-term, fixed-rate contract in a market like Massachusetts. Second, and this really annoys the heck out of me, Bryan, these reports that get produced that tally up the costs of competitive electricity supply offers, and then compare it basic service, are missing one big thing. And that's any attribution of value whatsoever to the other bundled benefits that are sold as part of competitive electricity suppliers’ products. So we offer to a lot of our customers 100% matched clean energy to people's electricity consumption. We offer airline miles and other kinds of award points. There are plans you can sign up for that include remittances on behalf of the customer to Boston Children's Hospital that we administer. There are all sorts of recently-coming-into-the-market products where you can sign up and add gadgets and hardware that help you manage energy supply at your home – and by the nature of the reports the attorney general's commissioned, all of those things are assigned a value of zero. (laughter) And then the “orange” that is competitive electricity suppliers’ products is compared to the “apple” for the purposes of their analysis of utility basic service. That's not how competition works in this industry or in any other industry. It would be like comparing the Verizon cellular service that I have to Mint Mobile or copper landline service, a comparison that most people would reject right off the bat. But of course, you know, in some ways I understand electricity is a lower-salience product – even (less) than telephony. People don't get the differences of the products necessarily intuitively that are there in the market. But they are real. And candidly, this is another reason why the debate is kind of coming at a weird time. Candidly, those differences are going to be more profound. As state like Massachusetts begins its rollout of smart meter technology. This is a state that for the longest time did not have smart metering, unlike a lot of its neighbors and a lot of states to the south in PJM. But finally, the utilities are installing smart meter technology. That will mean that a supplier like us will finally become capable of knowing when our customers are using energy and to offer them financial incentives to help avoid use during certain critical hours in exchange for additional benefits or rebates or technologies that they can put in their homes to help them manage that use. You're in a situation where even while consumers – ratepayers – in Massachusetts are funding the expansion of pretty spendy metering technology that's intended to transform the retail landscape that they're talking about abolishing competition in the retail landscape. It really does not make any sense and I’m relatively confident that in the fullness of time legislators will not adopt a full market closure bill in that state.
EMP: Where do things stand now? When does the legislative session end in Massachusetts?
TK: We would expect them to deliberate on these pieces of legislation into the second quarter, and then I believe they have to adjourn roughly by mid-year, so I would say roughly speaking, stay tuned for the kind of April/May timeframe to understand whether this legislation is moving and how.
EMP: You talked about the fraught supply situation for New England. That was an issue all the way back when I was still at FERC. New England is at the end of the pipeline system. And they almost left this winter without their LNG terminal. I guess a deal was cut in recent days to keep that open.
TK: The two big utilities up there National Grid and Eversource, acting in their capacity as gas local distribution companies, have filed contracts for approval before the Department of Public Utilities that would make them offtakers of the Everett Marine Terminal – the large LNG import facility up there. Right now that facility is supported by the electric side of the industry and specifically a reliability-must-run agreement with Everett’s sort-of affiliate, I suppose, the Mystic generating station. It's a bit of a hot potato. I mean, everyone seems to concede that Everett provides reliability benefits to New England’s energy system – both gas and power – no one quite knows how to deal with it, however, and so now it's transformed from being an ISO-New England power matter under FERC regulation to becoming once more a state-jurisdictional matter for gas LDCs. That's just sort of the – I don't want to call it the canary in the coal mine because that would be very old canary at this point – but to your statement, it's a longstanding problem about New England that they are fuel constrained, in effect, by their own choice in terms of citing infrastructure, But that signals that the scarcity in effect that they have caused to be present on the wholesale market for power at certain critical times – sort of indicates the necessity on the other side of the market, the retail side of the market, to have plans where customers can shift that innate risk associated with the New England market back onto their supplier. Because consumers should not have to bear the risk of price blowouts in New England. They may occur. They may well occur on the wholesale market. But they should be able to contract away that risk for a flat rate. And they can do that by retail competition. That's really their only tool to manage that unless we get a much more active demand side, which again, the competitive retail can help out on as well.
EMP: Let's move on to Maryland. The bill that’s at play here is SB 1.
TK: That's right.
EMP: I understand you testified yesterday about this bill?
TK: Yeah, that's right. It was a late Valentine's on February 15. I gave testimony before the House Economic Matters Committee on the House version of this bill. And this bill purports to be something less than market closure. But taken all together – its constituent parts – I think it really would drive out a lot of the market participants who currently have retail plans available in the state of Maryland and it would do so by a variety of means. First, it would impose a price cap that is based on the 12-month historical average of utility standard-offer service pricing to all forward retail offers. That's problematic because in the situation where energy prices are rising – have risen – like we see at the current moment a price cap like that makes no sense. When I do the math on calculating the price cap that would be in effect right now, if this bill became law, for Pepco which is your and my utility, I get a value of about 9.9 cents per Kilowatt-hour based on a historic 12-month rolling average. Ironically, the standard-offer service right now, though, is priced at about 12 cents. So what that means is the thing that I'm defaulted to under my utility costs 12 cents to me, but the price cap for retail suppliers would be a little less than 10 cents. So even in the name of protecting customers from overpricing, they're banning lower-priced products. That price cap would also then extend and apply to all products in the market, including 100% clean-energy products or other value-added products. The bill at the same time would also require all clean-energy products that are offered in the state to have their renewable energy certificate sourced from the PJM market or have associated energy that's bundled for delivery together into PJM. The bill sponsor at yesterday's hearing talked about how admittedly this would increase prices and increase value for RECs and renewable energy projects in PJM. That's the point I agree with him on. But that necessarily means that the retail offers associated with that kind of product would be more costly, which is to say almost certainly above the price cap the bill imposes. So the bill which is 28 pages long, which we received, like, five days before it was introduced, is just a sprawling heap of regulations, some of which are in direct conflict with one another, and which in any case are not going to support a healthy retail market going forward. But the one thing I'm reasonably confident that the bill would not do is actually discipline the worst of the bad actors that are out there. And I'm really sympathetic to those because I sat through testimony from people – not like me – but just average consumers yesterday, who had had people come to their door and slam them and do unauthorized enrollments in retail products. There's no reason those people, those suppliers, should still be in this business at all. And yet that, ironically, isn't really the focus of the bill. The focus of the bill seems to be price regulation and effectively banning value-added products. So I'm again, if not optimistic then hopeful, at least hopeful that this bill kind of takes a redirection to target the things that are actually the problem. I heard some encouraging commentary from Chairman Fred Hoover, the new chairman of the Maryland Public Service Commission, who I think struck a really good sort of balanced tone in the hearing about the need for better regulation and enforcement for the industry. And that's something that NRG and the REAL companies support because there's nothing that annoys me more than having scofflaw suppliers who never show up to participate in the regulatory process or in legislative hearings like this, causing so many problems that they end up taking up all the time of ethical suppliers like NRG. So it is frustrating that the industry is in a place where a handful of bad actors have caused such problems, but the solution cannot be to deprive all customers, all residential customers, of their right to select a supplier and a plan of their choice. That's a huge step backwards that would effectively remonopolize the state of Maryland. A big mistake.
EMP: Isn't it the state's duty to enforce and oversee these sellers? I mean, we've had rip-and-skip roofing contractors for time immemorial. But we don't outlaw certain roofing companies. Who's behind this? There's always somebody who's got a financial interest in the industry that stands to benefit from this. So who are the supporters of this?
TK: Well, one notable provision of the law, I thought, was a provision that allows utilities in the state to market the standard-offer service product, which they're currently restrained from doing since it’s the default product of last resort, and allows a particular utility, SMECO, to offer alternative products and market them as well, such as their own green product. Which, you know, to the Public Service Commission’s credit they've restrained that utility from doing. So, you know, the bill certainly bears some hallmarks of having been written by the monopoly utility industry. And frankly, you know, ever since the dawn of the demonopolization and retail competition of this industry it's been a strategic ambition of at least some utilities to remonopolize it. And so I think there's things in the short term and the long term that the regulated utility community would gain from the closure of the market. You know, they certainly don't want retail suppliers ultimately owning the part of the market that they would like to serve with, you know, electric vehicle offerings and that type of thing. And then, you know, another data point, candidly, is just the longtime former governor of Maryland, who is now a paid spokesperson for a utility-backed sort of dark money group, Power for Tomorrow, has kind of cropped up on the Maryland scene stumping for this piece of legislation. So I don't know that the utilities themselves wrote the bill, but they're certainly behind the scenes throwing their support behind it. And in the case of SMECO, which is an electric cooperative in southern Maryland, overtly supporting it in the realm of the legislature. I think that's unfortunate. And to your prior point, yeah, it is government's job to regulate this industry. The response of government to any other industry that has problems is not to institute a state-regulated monopoly but to instead try to improve the quality and transparency and customer protections of products in the market. And that's true of roofing or auto body repairs or low-salience industries like insurance products. So this industry has no reason to really be any different from that but for the fact that there is sort of a monopoly-in-waiting. And that is sort of the original sin, as you know, of the way a lot of these markets demonopolized, which is that, unlike Texas, which did a better job, usually, of enforcing the barriers between people who would be regulated monopolies and people who would be in the competitive part of the industry, in the Eastern states you’ve always had the regulated utilities with one foot still in the supply sector. And we heard, you know, yesterday at the hearing a very intelligent legislator, I have a lot of respect for her, Delegate Lorig Charcoudian of Takoma Park, asking me a question about, well, you know, shouldn't we just be satisfied that since standard-offer service unfolds according to a competitive auction that there’ll still be competition even if we outlaw you guys and there's just one buyer. And that's just not the way in my view it works. Competition requires many buyers and many sellers to work well, and we've really seen the hazard, I think, of having a single sort of administrative buyer of these products because the procurements can be designed in a certain way to make them frankly not reflect the outcomes that would derive from the natural give-and-take of many buyers and many sellers trying to vie for end-use customers’ market share. Inevitably your customer in that single-buyer situation becomes the regulator and the government. And so that's what we're facing down in the state of Maryland if legislators have ears to hear.
EMP: Power for Tomorrow is writing the checks for former governor Glendening. They’re Southern utilities behind that, aren’t they?
TK: Yeah, primarily, we know – and a great outfit who would probably incidentally have, you know, choice things to say at times about NRG as well – but the Energy and Policy Institute tracks a lot of this utility spending. They did great report on who’s behind Power for Tomorrow. So this isn't my research, but it's the Dominions and the Dukes and the Southerns of the world not merely content to spend money in their own jurisdictions to defend their turf. They seem to have taken the show on the road in this case.
EMP: Well, I think they always have. The best defense is a good offense.
TK: It's true.
EMP: Well, let's talk a little bit more about Governor Glendening. I noticed a piece in Maryland Matters that he wrote – or somebody wrote for him – that talked about his buyer's remorse for signing electricity competition into law in Maryland back in 1999. He said, quote, “Alternative energy suppliers ensured everyone that by creating competition for Maryland's regulated electric utilities, (customers) would save on their power bills. After 25 years, vast amounts of evidence show this was not true.” Was the promise of competition that it would lower electricity costs?
TK: Well, there were a couple of promises. First, that it would discipline costs, for sure, for people who wanted – if you are a customer whose only concern is the lowest cost of electricity, you know, it's obvious that there are plans, you know, almost every day of every month of every year since the dawn of competition that are available for you that are below the cost of utility-backed standard-offer service. But, of course, that that wasn't the only prospect of competition. It was necessary to adopt to retail competition in order to demonopolize the supply of generation which is legendarily chock full of overbuilds and cost efficiencies in regions like this one.
EMP: Gold plating.
TK: Gold plating. Yeah, because for me, and I'm sure nearly all of your listeners know this, but the traditional cost-of-service regulatory model, one that persists to this day, is one that where you spend more you make more as a regulated utility. Every dollar that you invest that’s permitted by the regulator has a return on equity that is awarded to the regulated utilities. So the more you can convince your regulator to let you spend, the more profit you make. It's the old joke that the utility is the only business in the country that earns return on the CEO’s desk chair. A true fact. So there was that. There was also the promise of innovation. And candidly, innovation has been slower in the electricity sector than in the telecom sector, I think primarily because we have not had the right kind of technological groundwork in the form of metering and other things to really allow that to happen in the retail energy space. You know, until advanced meters were installed and then software to allow billings to happen on a granular basis actually took place, a retail supplier like ours, weren't even able to tell you how much energy their consumers were using until a month after they had used it. Which is not a recipe for innovation and demand flexibility and the whole nine yards in the consumer’s home or business. I will grant that has, so far, been a bit of an unrealized promise of retail competition, but I think there's great strides being made in that as well. And then finally, I guess I would just say there was sort of the ineffable difficult-to-describe element of competition, which is if you're able through regulation and technology to demonopolize an industry in the United States, we've tended to take that bargain. We took that bargain in airlines, in telecommunication, in all sorts of other industries. And there is nothing particularly so special about the supply of natural gas and electricity that it's not possible to do here. In fact it’s clearly possible. So we've done it. So I don't think those arguments hold a lot of water. You know, Governor Glendenning doesn't identify the counterfactual that he’s really measuring against. The states that opened to retail competition have had prices that have fallen consistently since the dawn of that competition, whereas the retail monopoly states have rates that have risen. People like the former governor will try to compare, you know, somewhere like Massachusetts, to a place like Washington state, which have radically different cost structures for their . . .
EMP: We’re back to apples and oranges.
TK: We’re back to apples and oranges. The relevant example is if you adopted competition, what happened to prices afterwards? And if you didn’t, if you remained a monopoly, what happened to prices afterwards? And I think that tells a very good story, actually, for the presence of customer choice merely on a cost basis.
EMP: Somewhere someone suggested that since the dawn of alleged retail choice here in Maryland, that consumers have, quote, overpaid, unquote, by a billion dollars.
TK: I just don't accept the characterization to begin with, because we're right back to the thing we talked about earlier, which is a comparison of value-added products that do cost more but have additional benefits versus a benchmark that is not comparable to that value-added product.
EMP: It's a benchmark that's really a de facto wholesale price.
TK: It is with just a small administrative fee, which constitutes the utility’s margin added on top of it, but yeah, I mean, I'm a Maryland ratepayer myself. I obviously a customer who shops around. I pay more than the utility standard-offer service price for a 100% clean-energy product. And I'm not being overcharged. No one is fleecing me. I fully understand the agreement that I entered into, and I resent the idea that the Legislature would forbid me from entering into that contractual relationship when I do so, with eyes wide open, and when my action actually has a tangible causative effect to result in lower carbon emissions, which is a policy of the state of Maryland that I'm voluntarily paying more to do. So it again, doesn't make a lot of sense. And there are a lot of remedies for the problems that do exist in the market that are well short of imposing a kind of price cap that would remove my ability to shop around for products like that.
EMP: Let me tick through the rest of Glendening’s article that I saw in Maryland Matters. I guess we already addressed the idea of the problem with door-to-door marketing and bait-and-switch offers and teaser rates, etc. You believe that better enforcement, better standards, would help address that.
TK: Yes, I do. For sure.
EMP: When I was affiliated with RESA (the Retail Energy Supply Association) for many years, I would often get phone calls: I want to get into the retail electricity business. How do I do that? (laughter) I'd say call a lawyer and they'd say what?
TK: Yeah.
EMP: Alright, so we'll skip over that. But he goes on to kind of take issue with your whole value-added argument. You know, he talks about offering people gift cards to sign up for retail electricity supply. Why is that a problem?
TK: I don't know why that's a problem. Promotions are a common feature of marketing in a lot of industries. Again, I mean, this is a product that you can't touch. And so oftentimes, it shouldn't surprise anyone, the sale of it you know, sometimes benefits from having something you can touch. And that can take the form of, you know, miles and points or gift cards, or any number of other amenities and you know, if he doesn't like that, he doesn't have to buy a product like that.
EMP: I guess finally he attacks the whole idea of quote, green, close quote, green clean power. So he is questioning the legitimacy of renewable energy certificates, saying that, you know, they're not really buying green energy. They're buying the same variety of production sources, including coal and natural gas. “The initial goal was that competitive retailers would build more clean-energy generation. They instead buy renewable energy credits, which few can explain let alone understand.”
TK: This is a very weird argument to me. I mean, renewable energy certificates exist primarily because of state laws, renewable portfolio standards, that people in Governor Glendening’s party have been champions of, have caused the state of Maryland to adopt. And those laws use compliance instruments called renewable energy certificates in order to match consumers’ megawatt-hours of consumption, with megawatt hours of production from renewable energy, because it is inherently impossible for any given consumer to tell you exactly what their source of electricity is. So this is an auditable and verified accounting standard, where renewable energy producers register their production, are awarded certificates for every megawatt-hour that they produce, and then they sell those certificates for value – for money – to among other people, retail suppliers, who then retire them for the benefit of their customers in order to make this claim of clean energy. In the process of renewable suppliers paying clean-energy developers for RECs, that money goes to help fund those renewable developments. And there is a direct translation between the production of a megawatt-hour of renewable energy and pushing something else that's on the margin off the grid – usually a gas plant, usually a coal plant. So for people whose primary concern – and this is mine – is the reduction of carbon dioxide emissions in order to mitigate the effects of global warming, then a REC is perfectly legitimate. And again, if state governments don't like that approach, then why did they adopt renewable portfolio standards that are built on a foundation of RECs to begin with? If they want to do something else, then change those laws, and the industry will change along with it. But it's unfair to attack the competitive supply community for using the very same type of environmental attribute commodity that is used to demonstrate compliance with that same state's law. That makes no sense whatsoever.
EMP: I think it stems from a basic misunderstanding or lack of understanding of what is basically an invisible commodity. And a lack of recognition of the laws of physics behind electricity flow. You and I live near Takoma Park, Maryland, which is famous as a nuclear-free zone. But I would imagine that at least 40% of the electricity that's consumed there is from a nearby nuclear plant.
TK: I understand these are difficult-to-grasp concepts, but that one in particular rubs me the wrong way. Because again, what my company and our whole industry do is really just to follow the lead of this environmental attribute commodity that, again, was, if not created, then a market exists for it, and depth and liquidity exists in that market largely because of state government standards that require the purchase of these RECs. And that has caused an industry to develop that also facilitates the sale of additional voluntary RECs beyond the compliance threshold. So if we want to change that, it's a much bigger conversation than retail competition for energy.
EMP: A couple of years ago, NRG helped promote a bill in Maryland would have adopted what I like to call the Texas model for its retail energy industry. That didn't get very far. But I bring that up solely as entryway to talk about the difference between the Texas market, which is unique in this country, and the other dozen or more states that ostensibly have retail competition. And I think that the main difference is that they have properly quarantined the monopoly to the wires business. The utility companies are not in the business of necessarily supplying to the retail customer, whether it's commercial or residential. And I think we've seen in Texas an incredible amount of the innovation that you said is missing in Maryland and Massachusetts and the other states. The amount of storage that’s being built there is incredible. Do you want to elaborate on that?
TK: Sure. I first agree with you that I think the decision to make the dividing lines clear – to quarantine the monopoly – was an important decision and the right one to make. And that has all sorts of effects that find their way down ultimately to the consumer. I mean, one of the big differences in the consumer experience between Texas and the Eastern markets that allow retail competition is who bills the customer – who's responsible essentially, for maintaining the relationship that the customer that is most visible to the customer, which is when they pay their bill, who are they paying the money to. And in Texas, consumers in the competitive retail market pay the supplier and the supplier inherits the poles-and-wires charges and bills them in a consolidated fashion with their own energy charges. In a place like Maryland and other Eastern states, the utility is the one who does something called utility-consolidated billing. They purchase the receivables of the energy supplier and then they pass that on to the end-use consumer. And that frankly results in some of the harms that we're hearing about today in Maryland. It is easier for bad actors to get away with unauthorized enrollments if their charges ultimately are hiding out on page three of someone else's bill. That customer would know right off the bat if someone had enrolled them in an unauthorized way if they suddenly got a bill from some outfit they had never heard of before. An outfit which incidentally probably would not even have the technological capability to bill a customer in the first place. That's an example of a policy where even in the kind of half-baked Maryland market where you still have the utility involved in this stuff, where we've taken a swing at reforming it, NRG and other companies filed the petition back in 2017 with the Maryland Public Service Commission, to have them permit supplier-consolidated billing to be sort of a disinfectant of some of the troubles of the industry. And it took years and years and years but finally that policy is on track for adoption. The Maryland Commission has adopted it, and now it's being implemented. So if the retail competition industry survives this legislative session in Maryland, supplier-consolidated billing is due to be instituted by the end of this year – albeit on a voluntary basis in the state of Maryland. I think we would prefer candidly that it be mandatory and that suppliers have to do it as part of table stakes of offering retail supply. But that is kind of an example. And I think it's sort of understandable how a market would work very differently depending on who’s doing the billing. Texas is also a good example because I mean, there was just the strong tradition of customer awareness and shopping in that market. We actually had the city of Lubbock, which had been closed to retail competition, recently became part of the ERCOT grid. And in tandem with doing that decided to demonopolize its municipal utility and open it to retail competition. And this is kind of breaking news, but the initial shopping window for the city of Lubbock just closed and 67% of customers in Lubbock made an affirmative choice of an electricity supplier. They went out and they shopped. Only a third of those customers will be served by the default providers of service, which include NRG’s companies. But that's a remarkable testament that in a two-month window, a greater percentage of people in Lubbock managed to actively shop than the same percentage in a lot of states that have had retail competition for two decades. I think it shows you the role of regulation and government in terms of trying to educate and push people to shop because the health of the market depends on shopping being made easy, and for transaction costs for shopping to be reduced. And that's something that Texas and the city of Lubbock dedicated themselves to, whereas it remains very difficult to shop for these commodities in a lot of states that notionally allow retail competition on the Eastern seaboard.
EMP: Well, it's not all bad news. We've got some important developments happening in the Southeast, which is probably why Power for Tomorrow finds itself getting involved in Maryland. In Virginia former hedge fund billionaire Michael Bills is underwriting something called Clean Virginia, a PAC that is offering Virginia politicians an alternative to utility money for financing their campaigns. And it seems to be moving the steamship by degrees. We now have a State Corporation Commission that has regained its authority to oversee rates, which should not be a novel concept.
TK: Virginia is an interesting place because it's an example of something we talked about at the very beginning, a jurisdiction that has huge growth on the electric side. And it is not at all clear whether the incumbent utilities are really up to serving and meeting that load. I mean, what utilities are going to do, if you listen to them there, is they want to build a bunch of shiny new power plants in rate base and charge it to all their customers regardless of whether that commercial and industrial growth materializes. And so our advocacy there is then, you know, don't hook up a new growth to the same old engine, allow competitive suppliers to supply that growing piece of the pie, which also properly allocates the sort of the risk of that growth – of the risk that it doesn't actually materialize in the quantity or duration that it's projected to – to allocate that risk to the competitive market for us suppliers. So that's been part and parcel. Right now, Virginia does have some limited shopping. It is a jurisdiction whose utility regulatory statutes look completely different than any other state’s. And the rules for shopping are, candidly, an absolute morass of red tape. And in spite of that, they have something like 10% of their commercial customer class shopping. But a lot of barriers. A lot of transaction costs. A lot of hurdles to jump through. And the utility that, of course, doesn't want to give an inch already resents even that small part of the pie is being taken away from. So, but it is a state where the governor's administration, Glenn Youngkin, has shown admirable leadership on these issues, and where Democrats as well see a role for third-party suppliers, as opposed to just having a singular monopoly in control of the state's energy future.
EMP: Is there legislation pending there that would aim to open up choice a little bit more in Virginia?
TK: There is. REAL is advocating for a piece of legislation, Senate Bill 591. It will be held over and studied by the Commission on Electric Utility Regulation during the interim between the current legislative session and the next one. But stay tuned. I think that's a ripe topic for debate going into the remainder of this year, into 2025.
EMP: Continuing south, we've got a lot of interesting things happening in the Carolinas – particularly South Carolina. We had Tom Davis on the podcast last year. Tell us about what's going on there.
EMP: Count me as a huge fan of Tom Davis, a really great legislator. South Carolina had simply a massive blowup of their sort of oldest regulated utility in the state, SCANA, which went bankrupt after being in business for a century due to gold plating and the failure of a massive nuclear ratebase project. And I think that opened the eyes of many in South Carolina to ask whether there was a better way. The conversation to date has focused primarily around whether to institute a competitive wholesale market. And you know, I would, I would sort of go back to what we were talking about before that that's really important. But, you know, to have a competitive wholesale market is not the end of the game. If you just do that, if you have competitive supply, but a retail monopoly buying out of that market, you've not achieved anything like your full purpose in restructuring this industry. So it remains to be seen what the scale and scope of those ambitions are. But I know they've done a lot of work on it, and they're asking the right questions.
EMP: Now you mentioned in an email that there are interesting things happening in Louisiana?
TK: Yeah, Louisiana, after my own heart, is an elected utility commission. And that commission itself has the authority and responsibility for the structuring of their state’s electricity sector. So the Commission on its own prerogative opened a docket – they call it the customer-centered options docket – to consider a variety of topics including retail competition in the state. They recently sort of on wholesale side of things, allowed a group of electric cooperatives to get out from a – I’ll call it a monopoly relationship – with incumbent investor-owned utilities and instead put your power from a wholesale suppliers on the open market. And I think the question is whether that change will ramify down to true retail competition for commercial and industrial customers individually. So stay tuned. Just to flag, I think it's a really interesting story. A couple of lthe eaders on commission there, Commissioner Craig Green, who's a medical doctor, practicing medical doctor, in addition to being a utility regulator, I don’t know where the man finds the time, is really one of the leading Republican voices in state public utility regulation for the liberalization of the industry and for the adoption of sensible reforms to the way utilities are regulated, which is certainly overdue in the state of Louisiana. And then on the other side of the political aisle, a really interesting guy, Commissioner Davante Lewis, a Democrat and a young guy, frankly, much younger than what you typically see on the part of state utility commissioners, and again, a very reform-minded individual kind of singing out of the same hymnal on some of these reform approaches. So it remains to be seen what they'll do, how far they'll go in Louisiana, but they've certainly been exploring issues comprehensively. And that's a huge credit to them. I think people who are unfamiliar with benchmarking and handicapping the states would hear Louisiana and they might not think it's up to much, but they would be wrong, because they have some really reform-minded individuals on the Public Service Commission there.
EMP: When I saw Davante Lewis get elected I couldn’t get him on the podcast soon enough. We had a very interesting discussion and he said that he is very much looking into competition as something that will help consumers. How do we get every state in the country have a market design like Texas? I mean we have to do it before Texas secedes, obviously.
TK: Well, you may be more optimistic than me on that front. But what I will say is, I don't understand how this industry is going to be more customer-centered if we don't have retail competition, because fundamentally what retail competition means is a variety of businesses vying for the attention and the business of the customer. Whereas the status quo ante and the regulatory model that persists in, sadly, a majority of states for electricity, is one where the utility’s customer is fundamentally a government regulatory commission or some other politician. And that and that's just not going to work for an industry that needs to be more dynamic to untap all the possibilities of the demand side. And so I think ultimately, some of those fundamentals, I have hope, will have ramifications into the policy calls that need to happen to get this done. But it remains to be seen. You know, I will say short of sort of the classic form of retail competition that exists in Texas, which I think is pretty well-designed, you have seen other kind of quasi-competition attempts take hold. I mean municipal aggregation and community choice is not the best thing in the world but at least instituting it means that the customer has a choice of two, you know, between their government-run municipal aggregation and their incumbent investor-owned utility. Again, I think ultimately, you need more choices to really gain the innovations of a marketplace, but in places that have not adopted full retail competition, you know, that's a possibility. And then you also finally have, you see things like demand response aggregations, where the customer remains supplied by the incumbent utility, but the attributes of demand flexibility are gathered together by a third party and offered into the wholesale markets or offered into a utility program. And the customer's main sort of point of interface for a lot of the energy stuff that's happening at their home is then not the utility but instead the sort of demand-services provider. Again, you know, that has all sorts of thorniness. In my book, it's sort of important to have the person who ultimately bears the responsibility as load serving entity to be the same person that provides demand services to the customer. So this is kind of a kludgy workaround, but you know, kludgy workarounds sometimes work.
EMP: Kludgy workaround – that'd be a great name for a band.
TK: (laughter) I wish I could play an instrument very well.
EMP: Travis Kavulla with NRG Energy. Thank you very much for your time today.
TK: Thank you so much, Bryan.
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