Position Statements

EPSA Memo on the Benefits of Competition

EPSA staff has conducted a literature search on the benefits associated with the introduction of competitive forces into wholesale and retail electricity markets. The available literature sources vary considerably between consulting firms, government reports, and annual reports of ISOs, RTOs and state PUCs. The benefits encompass economic savings for consumers and economic development for states and regions, as well as general reliability and environmental improvements. Most consumers and policymakers equate competitive benefits with lower prices; however, risk management, reliability, efficiency and environmental benefits are also noted, as well.

In its final rule on Regional Transmission Organizations, Order No. 2000, FERC said unequivocally that “Competition in wholesale electricity markets is the best way to protect the public interest and ensure that electricity consumers pay the lowest price possible for reliable service.” While there was widespread consensus at the time on the validity of this statement, events since then have called it into question. Still, there is a significant body of evidence in support of it.

There are few comprehensive, empirical assessments of the value of competition in national power markets. Most of these studies or articles have focused on specific regions or states, and describe a particular RTO market or state customer choice program. Nevertheless, there is a fair amount of empirical and projected information. EPSA’s intent is to complete an annotated bibliography that will be placed on its website as a separate link. What follows is Step 1 in that process: salient selections from the search, as well as a list of sources.


I. Prior Restructuring in Other Industries

An early study by Robert Crandall and Jerry Ellig done in 1997 looked at other industries that restructured before electricity did. The introduction of competition into the natural gas, long-distance telecommunications, airlines, trucking and railroad industries clearly has shown the benefits from competition.

• In percentage terms, real, inflation-adjusted prices in each industry declined substantially. Ten years after competition entered the natural gas market (1984-1994), real prices were down 27 to 57 percent. The price of long-distance phone calls declined 40 to 47 percent, saving consumers about $5 billion over the same period.

• From 1977 to 1987, consumers saved $19.4 billion as the real price of an airline ticket declined 29 percent. During the same period, trucking prices came down 28 to 58 percent, saving consumers $19.6 billion. Railroad shipping costs declined by 44 percent from 1980-90.

II. General Economic Benefits - The Electricity Industry

• The Electricity Journal recently published an article by Craig Roach, principal of Boston Pacific Company. It was titled, “The Case for Competition in the U.S. Electricity Business,” and is an excellent overview on how competition should evolve in the power industry. Its primary theme was that a retreat to cost-plus monopoly regulation of power generation would not benefit either consumers or the U.S. economy. However, it highlighted two key consumer benefits: lower consumer prices and risks.

• An independent analysis done by Boston Pacific for EPSA covering the introduction of competition from 1985 through 2001, found inflation-adjusted electricity prices declined, on average, by 31 percent for residential customers, while commercial/industrial customers have saved 35 percent .

• The 2001 Department of Energy study of the nation’s transmission grid confirms that “today’s wholesale electricity markets save consumers nearly $13 billion per year in electricity costs.” The study also found relieving congestion in California, PJM, New York and New England could save consumers as much as $500 million per year.

• A third study found implementing a nation-wide system of regional transmission organizations (RTO) could allow consumers across the country to save as much as $60 billion by 2021 (in 2000 dollars).


III. Regional Benefits: PJM Interconnection/ISO-New England/New York ISO/ERCOT

Several studies have looked specifically at the PJM Interconnection. They found competition has helped sustain downward pressure on prices.

• The Center for the Advancement of Energy Markets, in a report published in September 2003, noted that “ultimate customers in the PJM region saved about $3.2 billion in 2002 from current restructuring efforts.”

• Within PJM, the average system-wide locational marginal price was 12.6 percent lower in 2002 than in 2001, at $28.30 per MWh vs. $32.38 per MWh, and approximately the same as in 2000 ($28.14) and 1999 (28.32). PJM enjoyed lower prices in 2002, yet warmer weather brought three new record peaks with PJM’s highest demand topping 63,762 MW.

• PJM’s leadership estimates that just bringing the resources of Allegheny Power into the RTO has saved wholesale consumers over $100 million in the year it has been in operation.

• One analysis profiling a combined PJM, Midwest Independent System Operator (MISO) and Southwest Power Pool (SPP) wholesale power market found that such a common market would save consumers $7 billion over a10-year period following the creation of this single market.

• A 2001 report by the Pennsylvania Department of Revenue – its most recent study – showed that price reductions brought by competition in electricity markets from 1997 to 2005 were forecast to boost gross state product by $2.3 billion, increase overall employment by more than 40,000 full- and part-time jobs, and increase nominal personal income by $1.8 billion. The report also noted that Pennsylvania could expect to attract 56,000 residents looking for better economic conditions.

Other ISOs publish annual reports whereby consumer benefits are identified. Here are three examples:

• In its Annual Markets Report: May – December 2002, ISO-New England noted that economic and reliability benefits accrued to regional consumers in 2002. Specifically, the “all-in” market price for electricity (which includes energy, capacity, ancillary services and uplift costs) declined 11.8% from 2001 to 2002, and 19.4% from 2000 to 2002. During the same time frames, energy clearing prices declined 12.8% and 18.3%, respectively.
• In the same report, ISO-New England stated that competitive markets had stimulated generation investment in the region: “New England continued to attract investment in new generation capacity during 2002. Sufficient capacity is available to keep pace with the region’s steadily growing demand for electric power.”
• The New York ISO’ independent market advisor, Potomac Economics, in its 2002 State of the Market Report, noted that while the significant increases in underlying fuel costs (natural gas and fuel oil prices rose 80% in 2002) had commensurate impacts on electric energy prices, “market prices have been consistent with underlying cost factors …” Further, “total electricity costs in New York in 2002 remained at levels comparable to total costs in 2001.” In fact, the “all-in” price of electricity fell by approximately 3 percent in 2002.”
• ERCOT’s competitive market has resulted in significant consumer benefits since the wholesale and retail markets opened in July 2001 and January 2002, respectively. According to the Texas PUC, in its report to the legislature for the 2002 market performance, residential consumers have saved nearly $1.54 billion in comparison to regulated utility rates in effect during 2001, while commercial/industrial customers saved $645 million.
• Furthermore, the competitive market has elicited an extraordinary amount of infrastructure investment since 1999, when the ERCOT ISO was formed. A total of 47 new generating plants entered service between January 1999 and August 2002. Further, the report states that “a significant amount of new transmission investment has also been undertaken to ensure that the transmission grid can accommodate the power flows needed to facilitate retail and wholesale competition.”

IV. Lower Cost States

Some worry that expanding competition in regions that currently have lower cost power will raise their costs to benefit others. Recent data, however, show the opposite. As competition has spurred the development of new sources of generation, prices have come down.

• Boston Pacific examined Entergy Corp.’s service territory, which covers much of Louisiana and Arkansas, along with portions of Mississippi and Texas. Between 2000 and 2002, average peak power prices declined by 41 percent while 10,912 megawatts of new merchant generation came on-line.

• While gas prices also declined 22 percent in that time frame, the analysis found Entergy’s customers are undoubtedly seeing significant savings from the increased availability of competitive generation. Equally important, Entergy increased its purchases from the wholesale market, buying 21 percent of the power it needed to meet retail load in 2002.

• Similarly, at the Palo-Verde hub in Arizona, a second Boston Pacific analysis found more than 7,000 megawatts of new competitive generation were added between 2000 and 2002, resulting in a 72 percent decrease in wholesale power prices. Natural gas prices declined 31 percent during this same period.

V. Savings from Retail Competition

According to the Alliance for Retail Choice, competitive retailers now serve approximately 49,000 megawatts of demand in the United States, which is more than the entire demand served by either ISO New England, the New York ISO, or the California ISO. Several reports have documented the benefits of retail competition at the state level:

• The Pennsylvania PUC found that “residents have seen $6 billion of savings since electricity competition became law in Pennsylvania,” according to a PUC spokesman.

• “…Massachusetts has experienced considerable stability and success in its restructuring efforts thus far in comparison to other states, most notably California. … All consumers have saved $1.7 billion through December 2000 (latest data available).”

• “Retail electricity customers in Texas have saved more than $1.5 billion since deregulation began in January of last year, according to a new report to the Texas Legislature by the state Public Utility Commission.”

• The Michigan retail choice program got underway during 2002, and according to the Michigan PSC, in its 2002 report, consumers had 25 licensed alternative energy suppliers from which to choose by year-end. “Throughout 2002, there was continued growth in the number of customers and suppliers participating in competitive electricity markets …” From a reliability standpoint, the PSC noted that transmission capacity into Michigan increased by 2,000 megawatts during 2002, while nearly 2,300 megawatts of new generating capacity began operation.

VI. The Federal Government

Uncle Sam has saved from competition in electricity markets, as well. The federal government is the largest buyer of electricity in the United States and in the world. What follows are excerpts from reports and studies documenting actual and projected savings for the government as an energy consumer, as well as reports on the benefits of competition generally.

• The Defense Energy Support Center tracks the Department of Defense’s “cost avoidance” achieved under its competitive electricity program, which is designed to get the “best value” for the taxpayer. From Fiscal Year 1999 to Fiscal Year 2002, the taxpayers saved $36,035,000 in the California, PJM, ME and TX procurement markets.

• In an earlier report, the General Accounting Office estimated that if the federal government purchased its electricity on a competitive basis, it could cumulatively save from 1.0 billion to $8.2 billion during the 18-year period from 1998 to 2015 if it purchased the same quantity of electricity it otherwise would have bought without retail competition.

• The GAO also analyzed the savings the Department of Defense could achieve in a report the following year. It found that the Pentagon could cumulatively save from about $190 million to $3.6 billion during the 23-year period from fiscal years 1998 through 2020 if it bought the same amount of power it would have purchased without retail competition.

• In its May 2002 transmission grid study, the U.S. Department of Energy found that current competitive wholesale markets save consumers nearly $13 billion per year in electricity costs. Further, average wholesale electricity prices at that time were roughly 12 percent lower as a result of interregional transactions.

VII. Great Britain

Consumers have enjoyed savings, along with improved services and choices, overseas, as well. Great Britain has implemented competition, with significant success, at both the wholesale and retail levels. The latest White Paper on electricity from Britain’s Department of Trade and Industry explained the benefits:

• “As in other markets, vigorous competition in energy stimulates innovation and ensures the efficient allocation of resources, improving service quality and driving down prices.”

• Vigorous competition improves efficiency and drives down prices. This has already been seen in energy markets. For domestic consumers, average prices in real terms fell by 10 percent for gas and 19 percent for electricity between 1997 and 2002. For industrial users, between 1997 and 2001, electricity prices fell by 22 percent in real terms, even when the climate change levy is included…Our industrial gas and electricity prices were the second and third lowest respectively in the EU in 2001. Our domestic gas and electricity prices were the second and fourth lowest.”

• Traded wholesale electricity prices are around 40% lower than in 1998. The market has now seen a significant increase in liquidity and trades.

• The UK Market is also increasingly competitive. The number of companies generating electricity has risen considerably from six at the time of privatization to more than 30 by October 2002. Competition is also forcing companies to work harder to attract and retain customers.

• By June 2002, 8.3 million domestic electricity consumers – 34% of total domestic customers – had switched from their incumbent electricity supplier. So had 7.1 million domestic gas consumers – 36% of the total. Although switching continues to take place at a high rate – 115,000 electricity customers change their supplier every week – the market is not yet mature.”

VIII. Environmental Benefits and Operational Improvements

An analysis by the Department of Energy and the EPA suggests that the introduction of competition into electricity markets could achieve significant environmental benefits. The two agencies studied emissions from electricity production in the United States.

• “Competition provides the incentives to generators to improve their own efficiencies, and create new markets for green power and end-use efficiency services, all of which will reduce greenhouse gas emissions,” the report found.

There are signs in the last couple of years that the introduction of competition has set the stage for a cleaner, more efficient industry, with a reduced impact on the environment.

• An analysis done by Platts Research and Consulting/RDI found that nearly 80 percent of new fossil-fueled generating capacity installed between 1999 and the end of 2002 was built by competitive suppliers. What’s more, the plants that are being brought into service are emitting CO2 at rates that are roughly 36 percent lower than national averages, based upon data through the first half of 2002.

• Older plants have also boosted their operational efficiencies and improved their environmental performance under competition. Generators have a pronounced incentive to generate greater quantities of power out of their existing resources. For example, in the PJM Interconnection, the performance record of generators has improved by nearly 35 percent since 1997.

• The nuclear industry has also undergone a renaissance under restructuring. The ability to produce low-cost power has made the industry more competitive in terms of operational availability, with the additional benefit of discharging no CO2 emissions. The marketplace has also provided both the incentive and discipline for nuclear operators to maximize the use of their existing assets. The net capacity factor for all units in the U.S. nuclear industry rose from 79.5 in 1997 to 90.7 in 2001. Likewise, the average duration of nuclear refueling outages in the U.S. fell from 64 days in 1997 to 37 in 2001.

IX. Conclusion

A recent report from Standard and Poor’s analyst Peter Rigby gave an independent view from Wall Street on how competition has benefited consumers.

• Power plants formerly owned by utilities, especially the older nuclear and coal-fired facilities, are now operating at much higher availabilities and capacity factors under their new owners. Wholesale power costs have fallen, although they are more predisposed to volatility than before. And ratepayers are not paying for the tremendous overcapacity in generation that characterizes the industry as they did in the past; lenders and equity investors are now shouldering those costs.

Rigby suggests that it would be unlikely for the merchant generation industry to return to the former cost-of service, rate-of-return structure of the past. Two of his reasons are:

• Vertically integrated utilities already get about 51 percent of their power from the competitive wholesale market, according to Platts data.
• Public power and cooperatives also procure about 44 percent and 73 percent of their power, respectively from competitive wholesale markets.


<center>-EPSA-</center>


Bibliography

• Alliance for Retail Choice, Newsletter, Vol. 2, Issue 2, November 2003.

• Associated Industries of Massachusetts Foundation Report, Winter 2003

• Carbon Dioxide Emissions from the Generation of Electric Power in the United States, U.S. Department of Energy and U.S. Environmental Protection Agency, October 15, 1999.

• Citizens for Pennsylvania’s Future, “E-Cubed” publication, Jan. 6, 2003.

• Crandall, Robert and Ellig, Jerry. Economic Deregulation and Customer Choice: Lessons for the Electric Industry. Center for Market Processes, Inc., 1997.

• Dismukes, David. E., The Power of Generation: Continued Economic Benefits from Independent Power Development in Louisiana, Louisiana State University Center for Energy Studies, April 2003.

• Economic Assessment of RTO Policy, ICF Consulting, February 26, 2002.

• Electricity Competition: The Story Behind the Headlines, A 50-state Report, Citizens for Pennsylvania’s Future, September 16, 2002.

• Electricity Generation Customer Choice and Competition, A Report to Governor Ridge and the General Assembly, Pennsylvania Department of Revenue, August 1, 2001.

• Electricity Industry Restructuring in Massachusetts: After the Revolution, the Evolution, Polestar Communications & Strategic Analysis for the Associated Industries of Massachusetts Foundation, Inc., Winter 2003.

• Estimating the Benefits from Restructuring Electricity Markets: An Application to the PJM Region, Center for the Advancement of Energy Markets, September 22, 2003.

• Federal Electricity: Retail Competition Could Create Government Savings, General Accounting Office, September 1997.

• Federal Electricity: Retail Competition Could Create Savings for the Department of Defense, General Accounting Office, February 25, 1998.

• Harris, Philip, President and CEO, PJM Interconnection before the Senate Committee on Energy and Natural Resources, March 27, 2003.

• Hirst, Eric, Expanding U.S. Transmission Capacity, August 2000.

• Impact of the Creation of a Single MISO-PJM-SPP Power Market, Energy Security Analysis, Inc. July 2002.

• Keystone Competition: Competition News in Pennsylvania, Autumn 2003, a periodic newsletter.

• Kiesling, Lynne, Getting Electricity Deregulation Right: How Other States Have Avoided California’s Mistakes, Policy Study No. 281. Reason Public Policy Institute, April 2001.

• Market Monitoring Unit, PJM Interconnection, 2002 State of the Market, March 5, 2003.

• Michigan Public Service Commission, Status of Electric Competition in Michigan, February 1, 2003.

• National Transmission Grid Study, U.S. Department of Energy, May 2002.

• The Ohio Retail Electric Choice Programs, Report of Market Activity, 2001-2002, Public Utility Commission of Ohio, May 2003.

• Potomac Economics, Ltd., State of the Market Report, New York ISO, June 2003.

• Public Utility Commission of Texas, Report to the 78th Texas Legislature - Scope of Competition in Electric Markets in Texas, January 2003.

• Real Savings for Residential Customers, Bill Comparisons: Today and 2001, Association of Electric Companies of Texas, Inc., August 22, 2002.

• Regional Transmission Organizations, III FERC Stats. and Regs., Regs. Preambles 31,089 (1999) (“Order No. 2000”)

• Remedying Undue Discrimination through Open Access Transmission Service and Standard electricity Market Design: Wholesale Power Market Platform White Paper, Comments of the staff of the Bureau of Economics and the Office of the General Counsel at the Federal Trade Commission, Docket No. RM01-12-000. June 27, 2003.

• Report to Congress: Impacts of the Federal Energy Regulatory Commission’s Proposal for Standard Market Design, U.S. Department of Energy, April 30, 2003.

• Review and Assessment of New Competitive-Market Sources of Power Generation, Platts Research and Consulting/RDI, February 5, 2003.

• Rigby, Peter. Merchant Energy Hangs on FERC’s Blueprint for Market Design, Standard and Poor’s RatingsDirect, March 3, 2003.

• Roach, Craig R. The Case for Competition in the U.S. Electricity Business, The Electricity Journal, July 2003, page 18.

• Rough Estimate of the Effects of Merchant Generation in the Entergy Service Territory, Boston Pacific Company, 2003.

• Rough Estimate of the Effects of New Merchant Generation in the Cinergy and Palo-Verde Market, Boston Pacific, Inc. 2003.

• Scope of Competition in Electric Markets in Texas, Report to the 78th Texas Legislature. Public Utility Commission of Texas, January 2003.

• Still Waters Run Deep, Research on price volatility in short-term electricity markets and the implications of that research for FERC’s Standard Market Design, Boston Pacific Company, Inc., 2002.

• The Truth About Electric Competition in Texas: An Early Assessment, The Perryman Report, May 2002.

• United Kingdom Department of Trade and Industry, Energy White Paper: Our Energy Future – Creating a Low Carbon Economy, February 2003

• Wellenius, Kevin and Adamson, Seabron, Is the Restructuring of Alberta’s Power Market on the Right Track? Evaluating Alberta’s First Two Years of Deregulation, Tabors, Caramanis & Associates, July 2003.

ISO Web Sites Examined

ISO New England
New York ISO
ERCOT ISO
Cal-ISO
PJM Interconnection

State PUC Web Sites Examined

Arizona
California
Connecticut
Delaware
District of Columbia
Illinois
Maine
Maryland
Massachusetts
Michigan
Montana
Nevada
New Hampshire
New Jersey
New York
Ohio
Oregon
Pennsylvania
Rhode Island
Texas
Virginia