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What can Texas, California and Pennsylvania teach Nevada about energy deregulation?

Riley Snyder
Riley Snyder
EnergyLegislature
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A trio of energy experts from Texas, California and Pennsylvania all delivered similar messages on Wednesday to a committee grappling with how to restructure Nevada’s energy market: You’re not alone.

While Nevada would be the first state in several years to move from a monopolized energy generation market to a competitive retail market, experts including a former Federal Energy Regulatory Commission chairman told the 25-member energy choice committee on Wednesday that each of their individual states faced significant challenges in adopting retail electric choice, but also achieved several benefits through effective market design.

But policy makers on the committee still have an entire mountain of issues to climb, and even had to punt a discussion on the fiscal cost of compiling a report with so many questions — from what to do with NV Energy’s power plants, to how best to inform and advertise the change to consumers to protecting low-income residents from wild price swings — unresolved as to how the state should proceed.

Experts generally applauded the committee, which met for the first time in April and is charged with building a list of non-binding deregulation recommendations, for taking proactive steps in determining how the state should tackle the likely market restructuring. Question 3, which passed on an overwhelming 72-28 percent margin in 2016 and is up again in 2018, would constitutionally require lawmakers to establish an open and competitive retail market for energy generation by 2023.

Here’s how experts from those three states say they dealt with moving from a monopolized to competitive market, and their recommendations for Nevada:

Texas

Texas is well-suited to a competitive energy market, former Federal Energy Regulatory Committee chairman and Texas Public Utilities Commission member Pat Wood said. The state has plenty of oil reserves, abundant wind energy, and nearly 20 years of stable energy policy thanks to Govs. George W. Bush and Rick Perry.

Texas lawmakers approved a measure deregulating wholesale power in 1995 and the rest of the market four years later in 1999. The change came in the form of Senate Bill 7, which essentially unbundled the existing vertically integrated utilities into three parts; generation (energy creation), transmission (power lines) and retail (who customers purchase electricity from).

The state continues to allow transmission markets to be monopolized to avoid jungles of power lines, but the generation and retail portions of former utilities were unbundled and new businesses were allowed to enter the generation and retail markets. Wood said that Texas lawmakers were spurred primarily by a desire to cut prices.

“In a competitive market, the little margin we get on selling power is substantially less that what you get in a monopoly,” he said. “A competitive market will not retain such a markup.”

Electricity costs for Texans in deregulated parts of the state exceeded the national average in 2014, though the average price sunk below the national trend in 2012 and 2013.

Wood stressed that the change was done gradually, with a five-year rate cap and requiring customers to start with an affiliated retailer. He said the state initially allocated $5 million as part of customer rates to advertise and develop an online portal — powertochoose.org — for consumers to shop for electricity providers, but a combination of budget cuts and unexpected need meant Texas consumers needed more time than anticipated to adjust to the newly opened market.

“If you couldn’t go to a website and click and get this done, or make a call and say I want to switch, then it really wasn’t going to work,” he said.

Wood stressed that even though few states have adopted a deregulated model in the last decade, Nevada was well-suited to a competitive energy market because of widespread adoption of smart meters and the likely creation of a wholesale market made up of western states. He suggested the state might consider adopting rules that would ease it into a competitive market ahead of the 2023 deadline.

“In some states you’ve got to decide the rules, drop the curtain and get it going,” he said.

Nevada does contain some underlying market difference from Texas — the state has a much smaller population, has little natural gas or other carbon-heavy fuel reserves, and isn’t big enough to form its own in-state wholesale energy market. And unlike Texas, Nevada’s move to retail electricity generation is being driven by a constitutional amendment, not legislative action, so it legislators are working on a tighter schedule with few options out if the measure passes again in 2018.

Democratic Assemblyman Chris Brooks, who’s pushing for a measure raising the state’s Renewable Portfolio Standard to 50 percent by 2030, asked Wood how Texas balanced its renewable energy generation goals with an open market. The former FERC commissioner said that Texas’s RPS standard, which is a goal of 10,000 renewably generated megawatts by 2025, was essentially just a “welcome mat,” and said renewable standards in a competitive market could work but cautioned against requiring incumbent utilities to develop new power plants when they’ll likely be required to divest all of their assets as part of the move to a competitive energy market.

“The main thing you don’t want to do with a renewable plan now is create additional stranded costs that you’ll have to undo in a few years,” he said. “(But) by and large, the things should work together.”

NV Energy CEO Paul Caudill reaffirmed that the utility planned to divest of all assets save its transmission capacity if Question 3 were to pass again, but another question for legislators is how to reimburse the utility for power plants that will likely be auctioned off.

Wood currently serves as chairman of Houston-based Dynegy, which operates a number of gas and coal-fueled power plants, but said he was present in Carson City to “educate, not advocate.”

California

Nevada’s western neighbor could be a lifeline for a newly opened state energy market looking to latch on to a larger wholesale market, but joining up with California could come with its own issues.

Nicolas Chaset, the chief of staff to California’s Public Utilities Commission chairman, said the state was dealing with its own marketplace issues including the growing adoption of “Community Choice Aggregators,” which are legal nonprofit entities formed by cities and counties as quasi-electric coops as opt-in alternatives to standard utilities. These alternative power providers already cover close to 1 million people, and are under consideration by enough large cities and counties that close to 15 million people would receive power from a CCA.

“At the end of the day, it’s cheaper and greener,” Chaset said.

Those unresolved questions to potentially large structural changes to California’s energy market could pose difficulties for Nevada, which will likely have to join an intrastate wholesale electricity market — a system where power plant owners and utility companies that are connected to the grid buy and sell energy at auction. Nevada probably isn’t large enough to form its own wholesale market, and could either start a new market with other southwestern states or join up with California’s Independent System Operator Corporation, or California ISO.

Chaset said he believed Nevada could be comfortably nestled into California ISO, with the close proximity of Las Vegas to the state and the physics and infrastructure of a merger matching up. He said the biggest potential hurdle was the likely political and governance issues that would come from latching Nevada onto a much larger state’s wholesale energy market.

Several committee members expressed concern that Nevada could become a “blip” on the radar to the market, given the vast difference in size between the two states. Chaset said he was confident some sort of shared governance structure could be found.

“I don’t think anyone would want to join us if it’s just ‘We’re going to be along for the ride with California’,” he said.

Pennsylvania

Like Texas, Pennsylvania legislators approved a bill in the late 1990s breaking up energy monopolies and separating them into separate distribution and generation suppliers.

And just like Texas, former Pennsylvania PUC commissioner John Hanger said, the state eased into a competitive market by placing rate caps on utilities until 2011. He said keeping the rate caps in place helped ensure that rates were stable enough to ensure former monopolies were able to recoup their investments on “stranded assets,” including power plants and other assets they’re required to divest as part of the “unbundling” process.

“People can disagree, but at the end of the day all our cases settled,” he said.

Hanger said the state spent about $15 million through a small surcharge to customers to promote the new program, including an ad campaign and creation of a website for consumers to compare rates, including the option to “lock in” a certain rate or choose an electricity supplier that’s powered only by renewable energy, for example.

Pennsylvania’s PUC estimates roughly 45 percent of residential electricity customers and 85 percent of industrial customers have picked an alternative energy supplier.

Hanger recommended that policymakers institute strict regulations, including the ability to strip a license from an electricity supplier and levy huge fines, for businesses that try to gouge customers or break the rules.

“As an electricity customer, I feel more protected when i shop for electricity than I do for anything else I do in our economy,” he said. “Don’t get me started about airlines.”

He added that Pennsylvania lawmakers also created programs designed to protect low-income power customers from volatile price swings, including upping a budget for energy efficiency programs for poor people and creating a program capping certain ratepayers electricity bills at a certain percentage of their income.

But Hanger, who got his start as a community advocate, said he believed that through a well-regulated market, consumers would do better through personally choosing their energy supplier.

“At the end of the day, you know what’s best for you and your family better than what a regulator knows,” he said.

Caption: Empty coal cars is seen at the NVEnergy coal fired Reid Gardner Generating Station on Thursday, March, 16, 2017. (Jeff Schied/The Nevada Independent)

Updated at 9:46 a.m. to correct spelling of John Hanger.

Disclosure: NV Energy has donated to The Nevada Independent. You can see a full list of donors here.
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