Since the dawn of retail energy competition a quarter century ago, various factions pro and con have engaged in a "battle of the statistics" (as former FERC Commissioner Bill Massey termed it in Episode 1 of this season) regarding the benefits that consumers – particularly residential customers – obtain from competition in retail electricity service. Mostly, these statistical arguments have centered around price savings that residential consumers may or may not have obtained from having a competitive choice in energy suppliers.
In this episode, we hear from Constellation Energy's Rich Spilky, who on behalf of the Retail Energy Supply Association breaks down for us the body of RESA-sponsored work by the late former Illinois utility regulator Phil O'Connor that objectively sought to identify the consumer benefits of customer choice over time, with the price data adjusted for inflation. Spilky assisted O'Connor in these data analyses, which sought to objectively identify which states had effective retail energy competition, and to use federal government statistics to compare the performance of those retail choice states against that of states that retained traditional monopoly price regulation.
The results have been compelling. For both studies that Spilky assisted O'Connor in preparing – Restructuring Recharged and The Great Divergence – as well as in the analyses that Spilky has conducted independently since, this objective methodology has shown that electricity consumers in the 14 jurisdictions with effective customer choice have generally experienced downward price trends while their counterparts without choice in monopoly states have generally experienced upward price trends.
The analyses clearly show "there's something good going on in the competitive states, pricewise and cost-containmentwise, that's not happening in the monopoly states," Spilky says. "I think it's remarkable."
Since the dawn of retail energy competition a quarter century ago, various factions pro and con have engaged in a "battle of the statistics" (as former FERC Commissioner Bill Massey termed it in Episode 1 of this season) regarding the benefits that consumers – particularly residential customers – obtain from competition in retail electricity service. Mostly, these statistical arguments have centered around price savings that residential consumers may or may not have obtained from having a competitive choice in energy suppliers.
In this episode, we hear from Constellation Energy's Rich Spilky, who on behalf of the Retail Energy Supply Association breaks down for us the body of RESA-sponsored work by the late former Illinois utility regulator Phil O'Connor that objectively sought to identify the consumer benefits of customer choice over time, with the price data adjusted for inflation. Spilky assisted O'Connor in these data analyses, which sought to objectively identify which states had effective retail energy competition, and to use federal government statistics to compare the performance of those retail choice states against that of states that retained traditional monopoly price regulation.
The results have been compelling. For both studies that Spilky assisted O'Connor in preparing – Restructuring Recharged and The Great Divergence – as well as in the analyses that Spilky has conducted independently since, this objective methodology has shown that electricity consumers in the 14 jurisdictions with effective customer choice have generally experienced downward price trends while their counterparts without choice in monopoly states have generally experienced upward price trends.
The analyses clearly show "there's something good going on in the competitive states, pricewise and cost-containmentwise, that's not happening in the monopoly states," Spilky says. "I think it's remarkable."
S4E6: Rich Spilky, Principal, Retail Market Development, Constellation Energy, representing the Retail Energy Supply Association
(transcript edited for clarity)
EMP: Welcome to the Energy Markets Podcast. I'm Bryan Lee, and today we're going to discuss what former FERC Commissioner Bill Massey, in our first episode of this season, termed the battle of the statistics. Since the inception of competition in electricity at retail, monopoly advocates have pointed to power prices in the dozen or more states with retail choice to argue against competition in this last-monopoly-standing industry. And as long as you didn't dig too deep into their methodology, it was an effective PR campaign. But they were comparing apples and oranges. Joining us to expand on this is Rich Spilky, principal, retail market development, with Constellation Energy, who is joining us today representing the Retail Energy Supply Association. Rich, Exelon and Constellation merged after I had left the company so I didn't get to work with you there. But I did get to know you from my time as a media relations consultant at RESA. Thanks for talking with us today.
RS: Yeah, thanks for inviting me, Bryan. I'm very eager to share the information we have. I’m thrilled to have the chance to try to add some clarity.
EMP: So I like to think of you as the Steve Kornacki of retail energy. Kornacki is the khaki-pants-wearing, sleeves-rolled-up journalist with NBC who breaks down the polling and voting statistics for viewers on election night. He does a great job of taking nerdy numbers and graphically presenting them in an accessible way. Now we're an audio-only podcast so we can't have you at the “big board,” as they call it. But let's do our best to paint the pictures and graphs with words. You're carrying on the legacy of Phil O'Connor for RESA. Phil was a former Illinois utility regulator and consultant and an important advocate for retail competition in energy. Tell us about Phil's work that you're carrying on for RESA.
RS: Yeah, that’s a great starting point, Bryan. I met Phil in 1999. I started to read his testimony, particularly in Illinois rate cases, even prior to that in the mid ‘90s. But I had not met him yet. I just knew him as a, you know, an advocate for competitive markets and an advocate for competitive choice. I was already admiring his work from a written point of view and then I admired him even more, you know, once I got to meet him, and then I actually got to work with him for quite a number of years after that. So he was the one who definitely brought me forward. I knew how to crunch numbers, but he tried to illuminate me and educate me on the importance of, you know, bringing the numbers in a vivid way. Before there was restructuring, you know, like, say the ’90s it was, you know, we'll have to call it a theory. It was a theory that a competitive market would work better than a monopoly structure. And that theory was predicated on other examples. You know, the trucking industry, the airline industry, the telecommunications industry and several others where that had worked out for the good of the economy and for the good of the country. And so that's what Phil and others were kind of basing the premise on. But as the years went by, and as I continued to work with Phil into the into the teens – the 2010s and teens – Phil passed away in late 2018. You know, Phil would encourage me, you know, to look at, hey, you know, we now have almost 20 years of data where the competitive states have done certain things, or the monopolies states have done certain things. And let's add it together. Let's add it together in a big giant weighted-average form, like all the monopoly states added together into a big pile, and all the competitive states added together in a big pile and let’s just measure everything, generation build, generation performance, price, performance, renewable performance, emissions reductions, reliability, everything. So that's what Phil encouraged me to do and which we've done and continue to do even since his passing away, and expanded upon that kind of idea, and the results are remarkable. We'll get into it here in a minute. But, you know, it's also interesting, because what's happened in the last, you know, 20 years has affected our entire country, not just the competitive states, the monopoly states. And when you think about the shale gas revolution, and how that completely turned the generation market upside down with the abundance of inexpensive natural gas that our country experienced, when you think about what Phil called the flat-load era, from around 2008 even up until the present really, how the load has been flat, relatively speaking, compared to the decades before that when load was just going up by incremental percentages year after year after year. And the impact that's had on the monopoly markets compared to the competitive markets, the interest in renewables, clearly the interest in renewables and also the technology of the renewables themselves. Both of those things have been going on. And what's interesting is, and again, I'm not an economist, but if I were an economist, it would be fascinating because everything I just talked about has been going on in monopoly states and in the competitive states at the same time in the same country with the same currency with the same economic environment, yet the competitive states in almost all cases are handling these things in a superior way compared to the monopoly structures, and all the evidence we have and gathered, you know, kind of proves that. And so it's fascinating to me that, you know, for whatever reason, the arguments that you even pointed out yourself in your introductory remarks: well, you know, the prices in the competitive states are higher than in the monopoly states, you know, therefore, we should not embrace competitive markets. I mean, yes, people still cling to that anecdote, and it's just it's fascinating to me, because that's not what we should be measuring. We should be measuring the changes that occurred when you change the form of regulation from a vertically integrated traditional rate-based approach to a competitive one. That's what we should be measuring. And if you measure that, holy cow, what a difference it makes.
EMP: Let’s talk about the methodology. I think the methodology was first applied only in terms of price by the Compete Coalition. And that was when I was there, Bill Massey was counsel to Compete. We were running into this price argument. We were 10 years into competition at retail. And the price caps had only just come off in the last few years at that point. We didn't know how this experiment would work. Because what we were faced with was primarily the American Public Power Association, APPA, would – and still does – point to prices for municipally owned monopoly utilities being cheaper than prices in the competitive regions. And of course, that ignores the fact that prices were already cheaper there to begin with, even before competition had been put in place, largely because the cost of financing for a municipal utility is much lower given their tax-free status. But their reports that were prepared for them to make these arguments on price were a case of garbage in, garbage out. They would include in their list of competitive states those that had moved to competition but had reversed course – states like California, Michigan, and Virginia were included in their methodologies. And they would compare prices between these two buckets of states, or two buckets of regions, or two models, statically as a snapshot in time, rather than over time. It’s the price trend over time. If you're going to examine the change in prices over time, you need to adjust for inflation, so you're not perpetuating the apples-to-oranges problem. And so, at Compete, we decided that we would take a look at this. We would take a look at what are truly competitive states versus states that still had monopoly structure. And that we would adjust it over time. And I give credit to Scott Brown, who was my report to at that time, for agreeing to this, and for making the money available to do this first-time look at this. And we were 10 years into competition. And I was amazed the results came back from the consultant. We saw a clear trend where prices in the competitive states were coming down, whereas prices in the monopoly states were going up. We're now more than 10 years past that point. We're about a quarter of a century now into competition. Phil took that methodology and expanded it to not just look at price, but to look at real important factors, such as innovation, and that sort of thing. Tell us about Phil's reports.
RS: Your audience can't see this, but if they go to the RESA website and they look at the Phil O'Connor thought leadership page, they will see what I'm about to show you here. So there was the first paper that he wrote, called Restructuring Recharged . . .
EMP: So the first one was called Restructuring Recharged. The second one was called the Great Divergence.
RS: That’s correct.
EMP: So let's go ahead and flesh this out.
RS: Right. So let's start with Restructuring Recharged. They're both similar, but Restructuring Recharged was first. The first paper written for RESA was Restructuring recharged. But basically, let's just start with the states because you said it yourself. And it's so important to define what constitutes a competitive state versus a monopoly state. So this little chart that I'm showing now this little map that I'm showing now on the screen basically shows what we define as the 14 competitive jurisdictions.
EMP: So what we're looking at is most of the Northeast, except for Vermont, and Illinois with a little gap in between Illinois and Ohio because Indiana is still a monopoly state.
RS: That's correct. And so the definition I’m showing you, I got the two bullet points, you know, showing here on the screen adjacent to this chart, in order to be considered a competitive state on this on this map, to be green colored, I guess, amongst the 14, two conditions need to be met. One is that all customer classes are able to choose a retail supplier without hiring a lawyer or reading complex tariffs or you know, negotiating some special arrangement with the utility. It's just a matter of business practice, you can just choose your retail supplier. And again, even there I’ve got to be even more technical – not that I want to be but, you know, but we have to be. In the states that we've colored green, it's the IOUs – the investor-owned utilities – that have to allow their customers to choose. The co-ops and the munis in the states sometimes allow choice, but usually not. They're usually exempt. They usually don't permit choice. So even in a state that we call green, competitive, they're still you know, segments that cannot choose their retail supplier because they're in a co-op or a muni. So just to clarify that. And then the second and, probably, maybe even more important point to become a green-colored state is that the utilities in these jurisdictions in these states have divested all or almost all their generation and no longer own the generation. It's no longer in the rate base. They are a delivery-service-only utility. So if those two conditions are met, we call them a competitive state. So when you talk about Virginia and California and Michigan, those are those are dark gray on this map. We call those hybrid states where there are still vertically integrated monopolies, the utilities still own the generation, they're still getting a guaranteed rate of return, customers for the most part cannot choose a retail supplier. But like in the case of Virginia, for example, there are certain loopholes that allow certain large customers to choose a retail supplier if they meet certain criteria. But generally speaking, the vast majority of customers cannot choose and the vast majority of generation in those hybrid states is still vertically integrated with a guaranteed rate of return. So they're still monopoly states, basically, you know.
EMP: So to describe this map that folks can see on the RESA website if they want to pull it up while we talk. These are shaded dark gray, so you've got states like Virginia, Montana, and much of the West Coast, including California, where there's extremely limited choice and effectively no choice for the average customer.
RS: Exactly. And California is a great example. Yes, there is what they have they have, what they call a lottery process in California and certain C&I customers can choose their supplier. But even then those customers that are able to choose have to pay large stranded-cost charges. They call them PCIAs (Power Charge Indifference Adjustment) in California just to be fancy, but you know, they're paying stranded costs on the utility-owned generation assets that they're no longer using.
EMP: Wait, wait a second, Rich, twenty-five years ago when, when California allegedly opened its market to competition, the utilities were allowed to recover their stranded costs, and most of them had effectively recovered their stranded costs by the time the market collapsed because it was so badly designed. So now they have to pay stranded costs again in order to access the competitive market?
RS: Absolutely, yeah, we have a number of customers that we do serve in California, and they have to pay what's called – they don't call them stranded-cost charges. Like I said, they call them PCIAs. They are effectively stranded-cost charges and they have a very complex mechanism for determining the, you know, based on the year that you entered into the market and the year you started shopping. But yeah, but they do have stranded-cost charges. They call them PCIAs. They have different years that change the number the change in the calculation called vintages, that yes, you're paying straight across charges. They're continuing on with that trend. So the point is, though, that when someone says a California is a competitive state, and should be included in the competitive, you know, group, I strongly oppose that assertion or that idea, because again, they don't meet either of the criteria that we just outlined about having the ability to choose freely and about not having the generation owned by the utilities. So clearly, California is a vertically integrated monopoly state, for the most part, not just for the most part, you know, they don't meet either of the criteria, so they should not be in the competitive pile. And in fact, the prices in California, you know, are sky high, I think, largely not because they have a little bit of choice, but largely because they don't.
EMP: What happened was they screwed up the market, and they entered into very, very high-priced contracts to get out of the situation and saddled their customers with those costs for a couple of decades. This gets to what I was saying in describing the APPA methodology and critiquing that, they were including states like California in their comparison papers. So go on.
RS: At the end of the day, that's why we define the way we define the competitive states. I think it makes perfect sense. I think it's a fair way to group things and a fair way to compare things. So our definition is clearly defined here. We make it clear. We don't make it a mystery. We show what the criteria is to be considered a competitive state. It has to do with who owns the generation, and which customers can choose and which ones can't.
EMP: So to try and short circuit the description of the methodology though. So this is important: Get the right states, so you're not comparing apples and oranges. And then the price data comes from the Energy Information Administration?
RS: Yes, we take the EIA Data. Now, the EIA Data is, you know, independently gathered by the federal government and they've been doing it for perhaps 30 years or more. And it's as good as we got, but the problem with it, I mean, it's not ideal. I mean, I admit it's not ideal. It's as good as we got and trends are definitely captured. But the EIA data does not separate – I mean, I wish it did – but it does not separate the delivery services which are still a monopoly function – the wires charges – from the competitively procured energy and capacity and ancillary markets. It does not separate those components. So that's unfortunate. So all we can do is combine the bundled costs, you might say, you know, where it adds everything together, it still shows that the competitive states are doing a much better job managing the costs, but it doesn't separate the wires charges.
EMP: Well, let's explain why that's important. Because when you're a utility and you're no longer making money from generation, you're making money through the wires charges, so you've got an incentive to load your costs into the wires charges, so that you get a rate of return on that. And we've seen a real spike in wires charges in recent years.
RS: Yeah, there's no doubt about it. I wish we could separate them because I think it would show the competitive states doing even better than they already are compared to the monopoly states if we could filter out the wires charges that have gone pretty high in most of the, you know, in all states but in the competitive states in particular because of the reasons you've stated, Bryan, you know, because now the utilities there, that's all they got. They just the wires there. They don't have a generation anymore, you know, by definition. So, but if you look at this next chart, and again, I know people can't see it, but if you look at this next chart that I'm showing you again, this is again zeroing in on price. This is the inflation-adjusted weighted average price performance by customer class.
EMP: Rich, let me interrupt you before we get to this graph. The third piece of the methodology is not comparing this EIA price data between these two buckets of states statically, in a snapshot in time, but looking at it over time, and adjusting for inflation so that we have an apples-to-apples comparison. Right?
RS: That’s right. We do it both ways, actually. We do it with it and without inflation adjusted too. The chart up showing now is inflation-adjusted, but we have the data without the inflation adjustment as well.
EMP: And so on this chart, we've got competitive states on the left. This is titled inflation-adjusted weighted average percentage price change by customer class, choice versus monopoly states. And this is 2008 through 2022, which is, I guess, 2008 is chosen because that's when price caps came off and you've got a real – you're actually looking at the effect of competition at that point.
RS: Well, that's another really great observation, Bryan. Why did we pick 2008? There's many reasons why Phil picked 2008 and I'll explain most of them. We can pick any number you want. You know, Phil predicted that people would nitpick that and he was right. People do nitpick the starting point. But let's talk about why it was chosen. But I'm happy to pick other years. And I have data for every start year and every end year if you really want your mind to be baffled by a thousand different data points. But anyway, why would you take 2008? There's like four reasons – maybe five. Reason one is that's when stranded-cost charges stopped being collected. That's the reason one. Reason two is that that's when the flat-load era that I described briefly earlier began, you know, about then is when it began, give or take a year. That's also when the shale gas technology started to assert itself – or started to have an impact. That's also when the renewable technologies and renewable interests started. And it's also I guess, here's the fifth reason. The fifth reason is that that's when residential customers first began to shop in a manner that was approaching, you know, it was probably 1%, 2%, 3%, 4% or 5%. It was less than that prior to 2008. So it started to show up on the screen as a percentage, you know, in the 5% range in the competitive states. So all five of those reasons are reasons why Phil picked 2008 as a good starting point, because it captured all those contributors or those metrics. So that's why we picked it. You know, I have data – as Phil predicted that people will say, well, you picked 2008 because it makes you look good. No, we didn't pick 2008 because it makes us look good. We picked it because it made sense to pick it for the reasons I said, but I have the data if someone really wants to study it. With every start year and every end year you can imagine. And yes, there's a few little exceptions where the monopoly states might have done better if you pick a certain start year and pick a certain end year. But the vast, vast, vast majority of the start years and the end years show that the competitive states are doing a better job.
EMP: When we first did this at Compete, it was 2010. And so we looked back over a decade. And the price trend showing increasing costs in monopoly states, decreasing costs in competitive states, was apparent even then. So in continuing the description of this graph, so we've got the two states competitive states, monopoly states, and we've got multicolors showing costs going down for the competitive states and costs going up for the monopoly states.
RS: Absolutely, yep, that's true across the board and for the different rate classes that you're, you're seeing the different colors here that may not be discernible on this small screen I’m sharing here.
EMP: And you've got it broken down into all customer segments, residential segment, commercial segment and industrial. I mean, this is, I think, really demonstrable.
RS: I think it's remarkable. I like to talk about this chart a lot because a picture says a thousand words. So, yes, clearly, just glancing at this chart, there's something good going on in the competitive states, pricewise and cost-containmentwise that's not happening in the monopoly states. And again, remember, shale gas is happening across the country, the renewable technology is happening across the country, the flat load is happening across the country. All those things we talked about all those trends are happening in the monopoly states and in the competitive states at the same time over this time period. Yet, look how the competitive states are dealing with it costwise and cost-containmentwise compared to the monopoly states, I mean, clearly, the there's something good going on in the competitive states that kind of leaps off the page when you look at this chart. And I want to also talk about residential because residential – Phil used to say that the residential competitive market is maybe only 10% of the business, but it's 90% of the politics. If you look at the red-colored chart here on the chart, which is the residential grouping or the residential class, yes, it's clear that the residential customers are not benefiting as much as the business community is, as the nonresidential customers are, but they're still benefiting compared to the monopoly states. What I think the data shows us here is that, you know, in a lot of monopoly states, the residential customers have been subsidized. So you can do that in a political environment in a monopoly structure where we are allocating costs in a political fashion. But when the subsidies come off in a competitive market, which is what's happening here, you know, naturally the business customers are benefiting disproportionately because they're no longer subsidizing the residential customers the way they used to. So I think what we're seeing here is that subsidies have been removed. The residential customers are still winning, they're still winning quite a bit. But the business customers, the nonresidentials, are winning proportionately more because they're no longer subsidizing the residential folks. I think the data is showing us that.
EMP: So we've got a real strong trendline here on price. But I guess what Phil did with this was to expand it beyond price to look at the things that are really more important than just price, which is the access to clean energy and innovation, et cetera. Do you want to expand on that for us?
RS: Yeah, absolutely. So we've zeroed in on price. And that is, you know, we can't get away from it. People do want to talk about that. So, that is captured here. And we got a lot of charts that, you know, measure that in depth. So, so the second paper he wrote, we got away from our little guidance here, was called the Great Divergence. But you know, just as the name implies, the Great Divergence is talking about, you know, the price trend between the monopoly states and the competitive states. We've already covered that but I just want to point out that he wrote his second white paper prior to his death that was published right before he passed away, actually, and that just zeroed in on this great divergence, this price disparity that we're talking about. And it shows you know, the millions and billions of dollars that the competitive states have benefited that the monopoly states have not benefited from.
EMP: Stop scrolling for a second, Rich. So we've got a couple of graphs here. One is a line graph, one is a bar graph. The first one shows unrealized savings for 35 monopoly states equals $630 billion dollars. And the avoided loss by 14 competitive jurisdictions equals $430 billion. Do you want to explain that?
RS: Yeah. So what we're doing here is, we're saying, hey, if the monopoly states as shown by the black-colored line and data, if they would have behaved pricewise, and performed pricewise the way the competitive states did over this timeline, in other words, if they would have also restructured and followed the same trend, they would have saved $630 billion. So that's what we call that unrealized saving. They didn't save $630 billion, because they didn't restructure and they didn't behave that way. So they, you know, they might have saved $630 billion had they restructured and acted like the average competitive jurisdiction did. And then on the flip side of that coin, the competitive states did perform the way the competitive states performed. And so if they would have acted like monopoly states, they, you know, they would have paid $430 billion more. So they saved $430 billion because they didn't act like monopoly states and they acted like competitive states. You know, as they were. So that's what we're trying to say.
EMP: So the bar graph shows all sector price percentage change, by state from ‘08 to ‘22. And it shows the majority of monopoly states cluster in the upper part there. In other words, they had the greatest percentage price increase, and the competitive jurisdictions tend to cluster in lower range. In other words, that they had the best price percentage change. Do you want to expand on that?
RS: Yeah, absolutely. That's what we're trying to show. So you know, if you look at it state by state by state, you clearly see as you described verbally that on the right hand side of the chart, which is the lower price changes, and in fact, sometimes they're negative, their prices have been going down some of the competitive states. It's clearly showing that the competitive states are clearly on the righthand side of the chart. And there's like one exception, I can't see what state exactly that is. There is one competitive state it might be New Hampshire, the one we were talking about a minute ago. I think I think it might be New Hampshire, that's an exception where they haven't done quite as well. As their brethren in the competitive grouping. But you know, all the generally speaking, you know, all the competitive states, with the exception of New Hampshire are on the righthand side of the chart. And all the monopoly states. You know, there's a few on the righthand side of the chart, but most of the monopoly states are on the lefthand side of the chart. So it's not a perfect it's not like the competitive states always beat the monopoly states, but generally they do and, and this chart kind of captures that idea.
EMP: It does show the clear trend line, which is that prices have been increasing for states that maintain monopoly regulation. And we've got better price regulation – better control of costs going up – in the states that moved to open up their markets to retail competition. Let's talk about how Phil took this methodology and expanded it beyond price.
RS: So, yeah, price, price, price. We’ve beaten that to death. This is a figure I'm showing now about what we call capacity factor that, you know, this is more of a wholesale measure. But when you have competitive markets, and you have the generation owned by nonutilities, and they are not getting the guaranteed rate of return, the cost of that facility is not in the rate base of a utility and those generators have to compete, you find that they end up operating them more efficiently and they're utilizing them in a more cost-effective way, which is a lot of where the price savings is coming from which we have already covered. A lot of it's coming from the competitive wholesale market where the generators are being operated in a different way because they're owned, and their performance is measured, in a different manner because they're not in a rate base and there's no guaranteed rate of return. So we measured the capacity factor, we measured, you know, if the generators are even, you know, getting built at all without a guaranteed rate of return. So we have charts that demonstrate – because I remember one time I was in a monopoly state, it was actually Indiana, you mentioned Indiana a minute ago, but it doesn't matter where the idea came from. But I remember the person challenged me and they said, hey, prove to me that in a competitive state without a guaranteed rate of return, that generation gets built based on market signals alone. And that person challenged me and at that time I didn't have this data. And it really made me think and I brought it back to Phil. I brought that question back to Phil. And anyway, we have the data now.
EMP: So change in capacity factor that is probably one of the most important elements of how competition has improved things for electricity consumers. Just look at what happened with nuclear power capacity factors. Before competition, the average nuclear power plant had a 60% range therein of capacity factor. Today, given that the vast bulk of nuclear power plants operate in competitive markets, there's a strong incentive for them to operate as much as possible and to minimize downtime. And you've got phenomenal capacity factors well above 90%. It's an astounding change. But we don't see that just for nuclear. We see that all across fuel types. We see it for coal, we see it for natural gas, etc. Correct?
RS: Yeah, absolutely. The data shows that – and I use the phrase, singing for their supper, because the phrase I use, Bryan – not just nuclear but like you say all fuel types and all power plants in a competitive market, you have to sing for your supper is the phrase that I use, you know, if you're not running and you're not operating, if you're not winning bids, if you're not winning contracts, if you're not winning bilateral contracts with counterparties, you're not making the profit or the margin that you want to make as an investor. So you have to sing for your supper. You have to win those contracts and those bids, be they ISO day-ahead bids, or be they counterparty bids for a fixed price, whatever it is, we're trying to win. You have to win, you know, profitable business, for your, for your company, for your investor or you’ll soon be out of business. Whereas in a monopoly state, I'm not saying that they're not trying I'm not saying that they're not working hard. But you know, at the end of the day, they get a guaranteed rate of return if the commission deems that the investment was prudent, and that the asset is used and useful, they get a guaranteed rate of return.
EMP: So have we talked about all of the other factors besides price that Phil looked at?
RS: No, we haven't. So let me share my screen one more time. Just for a minute. And again, I know your audience can't see it. But you know, for you to see it will help me describe it. Let me share one more time. All right. So we've expanded to a few other areas. So first of all, in the area of reliability, so this is a really important one. Again, the same grouping. You know, you recognize the grouping methodology, the competitive states versus the monopoly states. And utilities have six major reliability metrics that they report to EIA every year. And they started this in around 2015. So this doesn't go all the way back to 2008. They didn't start gathering these data points until 2015. So to make a long story short, if you're just glancing at this particular chart, this chart is measuring one of the outage metrics called SAIDI – I forget what SAIDI stands for but it's on the chart and defines it. But it's you know, basically you want to have a low number here. You want to have a low outage, average duration in minutes or frequency of outages, you know, you want to minimize both the frequency of the outages, you want to you want to minimize the length of the outages, you know, common sense.
EMP: So what we have here is a bar graph that's just stunning in terms of measuring reliability between monopoly states and competitive states. The black bars representing the monopoly states are towering over the green bars representing the competitive states.
RS: Yeah, in this particular metric, that's true. If you look at the other metrics that may not be quite as pronounced, but the point we're trying to refute here is, the point you hear all the time thrown out by the opponents of competitive markets or by the pro-monopoly group, the pro-monopoly crowd, as I call them, you know, they're like, oh, you know, if you allow competitive markets you're, you know, introducing a lot of bad, you know, reliability will suffer reliability will go down. Well, you know, again, if you look at the chart, this chart and the other ones, I'm not saying the reliability will improve, that would be too strong of a statement. I don't want, I'm not saying that. Certainly the reliability is not worse. And in many cases, it is better as this chart indicates. So clearly, they're just saying that the reliability goes down because it's not happening in real life.
EMP: Let's move down now. There's more to look at here?
RS: Yeah, there's more. There's the utility financial performance. And so again, this is for the people who are concerned that the utility is going to go out of business, because sometimes the utility will say, well, we're going to go out of business and we're going to not be around, you know, donate to your favorite charity or to your favorite organization because our financial performance will go south if you force us to restructure.
EMP: The bottom line here is it's clear that from both a credit rating perspective and a return on equity perspective, they're nearly identical across both categories.
RS: Yeah, absolutely. It's a very boring set of charts.
EMP: The next one, I think is really, really important. And that's reductions in emissions attributable to electric generation.
RS: Yep, absolutely. I'm very pleased with this one. This is a relatively new one, just a couple of years we've been measuring this one, again, expanding on Phil’s work. But yes, bottom line is the green bar, again, is the emissions reductions in the competitive state as a group, and the black bar is monopoly. And the green bar is not a lot larger than the black bar. It's just a little. So it's not like blowing the monopoly states out of the water. But what I do want to say is, first of all, it is reducing emissions more. So that's a fact. But more importantly, or equally importantly on that statistic is how are the competitive states doing it compared to – the monopoly states are doing it with securitization payments, which you could also classify as stranded-cost payments, in many cases, to the vertically integrated utilities to close down prematurely before their life, you know, their total life cycle was expected to last on the coal plants. So they're doing it through securitization payments to utilities, the monopolies states are, and they're doing it by guaranteeing a guaranteed rate of return to the utility to build the solar and the wind facilities, you know, that are contributing to the emissions reductions. The competitive states don't have either one of those vehicles available to them because the utilities again don't own the generation facilities in the competitive states. So how are the competitive states doing it? They're doing it through, you know, private investment. I often talk to my friends and colleagues that live in different states. You know, I live in Illinois, like I mentioned, if you drive by the windmills and the solar farms in my state, and you were to pull over and look at the fence and look at the nameplate of who owns the facility in Illinois, it's not the utility. It's, you know, private investors, private developers. If you drive by in a monopoly state, the solar farms and the wind sites, you know, they're generally owned, not always, but they're often owned by the utility getting a guaranteed rate of return. So we're doing it, we're achieving these same objectives, and even slightly more, without resorting to those two types of financial incentives that the monopoly states have to resort to.
EMP: Let's talk about the price issue that we're dealing with right now in at least Massachusetts and Maryland, where I live. This whole idea that residential customers opting for a competitive supplier are paying more than if they stay with their default supplier. Do you want to elaborate on that issue?
RS: Yeah, this is a terrible, terrible misunderstanding that's going on across the board. I guess it's happening in Maryland and Massachusetts, you know, currently, but it's happened in other competitive states as well at different points in time. It's a very big misunderstanding that's just driving me crazy. So I appreciate the chance to comment on it, Bryan. So there's been all these studies that have been done by different professors and different analysts that show during points in time and over periods of time, let's just say Maryland, for example, in this example where retail suppliers have been charging more than the default service at certain points in time. And I will say, hey, that's true. That has happened. There are times when the retail suppliers can beat the default service, which is also true based on the way markets move and the market changes and the timing of the default service purchases compared to the timing of when the retail supplier makes their offer available. That's also true. But generally speaking, the retail suppliers have had difficulty competing with the default service not just in Maryland, but in you know, the other states where that exists. And I want to say is what is default service anyway? You know, what is this thing called default service that we're comparing the retail suppliers against? You know, default service is the utility going out, generally, well, they have tariffs that describe this, this function, but it's basically them going out and buying the power, buying the default service power in the competitive wholesale market that now exists in these restructured competitive states that we just got done talking about, by definition. They're basically buying the power from the same competitive wholesale market that the retail suppliers are buying their power from. We're all buying power in the competitive wholesale market to serve our customers. So why is it that the default service, oftentimes, more than, you know, more than half the time ends up being less expensive than what the retail suppliers are able to give? I mean, does that mean we're bad or we're bad business people or bad at forecasting our load, or we're bad at procuring the power, you know, whatever? What's the problem? Well, the problem is pretty simple. The problem is that a retail supplier has all these costs of employees, like me, for example, I'm an employee of a retail supplier. I am paid, I get paid a salary, you know, to work on the projects that I work on, and we have folks that interact with the ISOs. And we have folks that interact in the legal sphere and in the regulatory sphere and the sales and the marketing sphere. And all these costs that we have as employees and the retail supplier, we need to capture on top of the cost of that commodity of the wholesale power itself. And we call that margin. You know, that's a pretty common term, we have to add a cost on top of it. The utilities also have employees performing very similar functions. They're interacting with ISOs. They have state government affairs employees. They have lobbyists and rate analysts and lawyers and you know, they also have very similar functions. They have, you know, rent on their offices, they have IT support, whatever. They have the same kind of overhead costs on top of the commodity costs that we have as retail suppliers. And those employees of course are also paid – they’re not working for free – but they're paid for and those costs for those employee expenses are paid for primarily in the wires charge, the delivery service rates of those utilities. So that's where this cost disparity comes from, primarily, is that the utilities are only including in their default service prices, or rates, the cost of the commodity itself and they're not including all this additional cost of the overhead. And it's substantial. It's a big number. And a colleague of mine, Frank Lacey, has documented this and has done the rate analysis and it's a significant number. And really, if you take that into account, it pretty much erases the cost disparity that's being disputed and debated. The problem comes in with the misunderstanding, because the utility is procuring this power and making it available in the form of the default service tariffs, people assume that it's equivalent to the same type of rate base when they did own the generation 20 years ago. They assume that that's equivalent, and it's coming from the utility in both cases. That's the wrong interpretation of what's going on there.
EMP: We had Frank Lacey on Season One, talking about this, what he called the subsidy advantage that utilities have in offering default service versus a competitive supplier. And it's a real problem. It's not taken into account by those who are actively working to deny residential customers choice today. This goes to my pet peeve which is that the markets outside of Texas are not structured properly to allow the full range of benefits to go to the residential customer. In Texas, they did what the Department of Justice and Federal Trade Commission have urged for decades, they've quarantined the utility from the supply market. The utility is a wires company. They don't supply the energy except to carry it on their wires on behalf of the supplier. We're going to have this argument to death. I got tired of it when I was at RESA. I got tired of trying to defend a model that I felt was not right. Until we get the model right, customers are going to continue to not get the full benefits of the market. And we see that in Texas in terms of innovation. In storage, they’re just blowing everybody's doors off in terms of installing storage. So I’m sorry to get on my soapbox here.
RS: You’re absolutely right. I’m going to push it even further than that. I'm deeply, if not more concerned, Bryan, I agree with you 100%. The problem is getting worse, not better because in the competitive states many times because the retail suppliers are still facing this this this headwind against the subsidy that we described. They're not able to offer you know, all this innovative stuff like electric-vehicle charging, or battery storage or, you know, all these other cool things that are awesome because they’re, you know, still fighting this uphill battle against the subsidy. And so what happens is it actually gets worse when the commission of these states – and I don't want to name any states, but you could, you could figure it out pretty easily – but when the state commission orders then the utility to offer an electric-vehicle charging rate or a time-of-use rate on the default-service side, and then they repeat the same problem with the subsidy. So like all the development costs that the utility will incur for developing a time-of-use rate or an electric-vehicle charging rate or whatever the thing may be, all those costs of development – the changes to the billing system, update the website, the communications and the marketing materials – end up in the wires charge. Again, so like even if we were to offer, we a retail supplier, would offer something comparable, our costs would need to be recovered from our commodity price for that service, for that product. And the utility will again have a competitive advantage because all their costs are in the wires charge to develop it. So it's actually getting worse, not better. So we’ve got to fix it. It's going to take a big effort to fix it. And we're going to have to, you know, all unify and work together, those who advocate for competitive markets, but at the end of the day, we're not trying to hurt the utility. The utility should recover their costs, for sure, they should just recover them in the proper place, which is not in the wires charge.
EMP: Rich, this has been a great conversation. I appreciate your making the time to try and break this down. And hopefully we haven't lost too many of our listeners by referring to graphs that are available on the RESA website. If they go into the transcript section of this episode, they'll be able to find links to all of these charts. As I do with all my guests, Rich, I'll leave it to you if there's anything we haven't discussed here so far that you think is relevant and should be brought up for the good of the order, please do.
RS: Well, just one last thing. First of all, I'm grateful, Bryan, for you letting me share this information. I'm excited about sharing it. I hope that was evident in my comments. I have been working on this for a number of years. But what I want to share with your audience is more of a philosophical thing and that is, you know, the people who brought competitive markets about – the Phil O'Connor's of the world, the people of his generation – most of them have retired by now or, you know, or have even passed away, you know, and I think, I was inspired by these folks. But I think it's kind of like my generations duty to encourage people who are still in the industry just like I am and have not retired, it's our duty to salvage and fix these problems. I mean, they introduced competitive markets, they got it off the ground. But now it's our job to fix the issues that have now emerged so that competitive markets will continue to thrive and continue to produce these benefits that've already been produced. These are problems that can all be fixed. These are all – and the markets are still working better. Despite all these problems and all these issues we brought forward, the data that we just got done talking about shows that competitive markets are still doing a great job. But they could be doing an even greater job if we could fix some of these new problems that have emerged. So I just want to encourage everyone who's listening to get engaged in these efforts and help us to bring these ideas forward to fix the problems that we have and then to open up new markets to competition.
EMP: Yeah, it's a tough order in this age of disinformation that we live in. People don't read past the headline, if they read the headline at all. And you mentioned the institutional knowledge gap that we have today. The regulators and policymakers who are dealing with these issues today, they don't have the depth of knowledge going back decades as someone like Phil O'Connor had. We need to educate people about what's going on now, but also what's happened in the past, and how this is the only industry still standing with monopolies. Really full monopolies. I mean, you've got monopoly problems in railroads. You've got monopoly problems in airlines. But for the most part, they are price deregulated. To try and meet the climate change threat 25 years into the 21st century and we're still allowing monopolies to hinder progress is a real problem. And lastly, I'll say Phil was just a wonderful communicator. He was a terrific advocate for competitive markets because he used facts and he demonstrated facts in a way that were accessible to the average person, and I congratulate you for walking in Phil's footsteps and trying to keep facts up rather than disinformation. Rich Spilky, with us today on behalf of the Retail Energy Supply Association. Thank you very much.
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