PowerFacts

Regional Markets Benefit Consumers; Latest APPA Paper Misses the Mark Again

In May 2009, the American Public Power Association (APPA) released yet another report, The Deregulation Penalty: Losses for Consumers and Gains for Sellers, by Edward Bodmer, which makes the claim that today's electricity markets are harming consumers. To the contrary, overwhelming evidence shows that restructured regional power markets have led to increases in the efficiency of power plant operations, shifting of risk away from end-use customers toward company investors, incentives for the development of renewable resources, and record amounts of demand response resources. With the recent drop in commodity input prices leading to much lower wholesale electricity prices and tighter company margins, competitive markets have once again shown to be reflective of market fundamentals as fuel cost savings are promptly passed on to consumers.

The APPA Report Includes Factual Errors in its Calculations and Conclusions

The report's basic premise that consumers lose when companies succeed is invalid. Competition is not a zero sum game: higher profits do not necessarily mean higher prices, unjustified prices if higher costs occur, or prices above competitively-derived levels (as market monitor reports from the RTOs attest). The companies that have succeeded in competitive electricity markets have done so primarily because they lowered costs by substantially enhancing the performance of plants that ran poorly under the old monopoly system and have made wise investments both in existing facilities and in new developments.

For example, in Table 9 on page 13 of the APPA report, the "Generating Segments" Cash Flow from Operations for 2006 to 2008 for PSEG and Exelon mistakenly includes the results for the entire holding company, not for just the generating companies. Applying the wrong data, for example, overstates Exelon Generations Cash Flow from Operations by almost $6 Billion, a 160 percent error.

In the 2003 to 2008 Free Cash Flow results listed in Table 10 on page 14, the significant amount of shareholder dollars reinvested in generation facilities is omitted from the calculation of capital expenditures, resulting in a $13.4 billion overstatement, an error of almost 300 percent.

Competition Has Created Incentives for Improvements in Efficiency

Prior to the adoption of competitive markets, inefficiently run nuclear power plants were routinely shut down over one quarter of the time with some nuclear plants operating less than 50% of the time. More recently, those same plants safely operate around 90% of the time, generating tremendous amounts of clean, reliable, affordable electricity without the higher upfront capital costs associated with new plants until that new capacity is actually necessary.

Today, investors in competitive companies largely bear the risk of poor power plant operations and outages. If equipment fails, if power plants shut down or run inefficiently, investors, not consumers, lose money. Properly aligning risks and rewards through competition has incented an unprecedented era of efficient power plant operation. Rate-base utilities are paid a guaranteed profit by captive customers regardless of whether power plants operate efficiently, or even operate at all.

Data from the Energy Information Administration (EIA) shows that on average for both residential and wholesale customers, from 1997-2008 rates have increased more in states outside of organized competitive markets (non-RTO states) than in states in these markets (RTO states). In this ten year period the average increase for all customer classes for non-RTO states was 46%, but in RTO states it was 42%.

Policymakers and Consumers Want the Benefits that Competitive Markets Provide

Nationally, key governmental leaders and policy organizations attest to competitive market's critical role in reducing greenhouse gas omissions. President Obama observed that "markets make decisions about these technologies better than we do."

Businesses with almost one million employees, 10,000 facilities, and well over half a billion in annual electric purchases have recently sent letters to Governors in five states strongly endorsing competitive market policies.

Consumers favor choice and value the benefits of competitive markets. Consumer surveys conducted in Texas, New England and Maryland show that nearly 80 percent of respondents in each survey support consumer choice and electric competition.

Competitive Markets Facilitate the Development of Renewable Energy and the Growth of Demand Response Resources

Nationwide over the last 10 years, RTO states have generated three times as much energy from wind generation as has been generated from non-RTO states. In 2008 over 80% of the wind capacity installed was constructed in RTOs.

As a result of its recent electricity capacity auction for the 2012/2013 planning year, the PJM Interconnection will see demand resources within the RTO-operated region increase by more than 400 percent, an increase of 5,682 MW over the previous years auction.

Following the beginning of the Forward Capacity Market transition period in New England in 2006, demand-resource participation in the region's wholesale electricity markets increased 138 percent in 2007 and an additional 28 percent in 2008.

Regional Markets Benefit Consumers; Latest APPA Paper Misses the Mark Again

CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660

EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.