Groups Form New Coalition To Reform Virginia Electric Industry, Adopt Retail Electric Competition

Groups Call For Phase Out Of Capacity Market

May 8, 2019

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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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A new group, the Virginia Energy Reform Coalition, has been formed to advocate for electric industry reforms in Virginia, including the introduction of retail electric competition

The Virginia Energy Reform Coalition (VERC) includes Appalachian Voices, Clean Virginia, Earth Stewardship Alliance, FreedomWorks Foundation, Piedmont Environmental Council, Reason Foundation, R Street Institute, Virginia Institute for Public Policy, and Virginia Poverty Law Center

Ken Cuccinelli, Former Virginia Attorney General and Director of the Regulatory Action Center of FreedomWorks Foundation, is among those leading the new effort

VERC’s policy goals include:

"• Establish a well-designed, competitive retail electricity market. Competitive retail electricity markets have been established in several states, leading to greater consumer choice, reduced energy bills, and higher levels of innovation. One of the most successful markets has been in the Electric Reliability Council of Texas (ERCOT) region, which covers most of the state. The principal reason for this success is that Texas decided to 'quarantine' the utility monopolies—limiting them to owning and operating the wires (the transmission and distribution grid). The grid is the only part of the electric system that can arguably be considered a natural monopoly. Virginia should enact a similar quarantine of the monopoly. Such a limitation would open up Virginia’s electricity market to a wide range of retail energy service companies, including those that aggregate customers hosting distributed energy resources (DERs) like solar and storage.

"• Establish an independent grid operator. To eliminate conflicts of interest, an independent grid operator with no financial stake in the grid infrastructure or the competitive markets should operate the electric distribution system. An independent grid operator, PJM, already runs the regional high-voltage transmission grid that includes Virginia and all or part of thirteen other states.

"• Establish streamlined and uniform interconnection standards. In Virginia today, utilities impose inappropriate restrictions on DERs, including facility- and system-wide size limitations and punitive interconnection charges. These restrictions should be removed. The independent distribution grid operator would adopt uniform interconnection standards to streamline the deployment of DERs.

"• Implement performance-based regulation. Virginia’s monopoly electric utilities are currently allowed to charge captive customers for the costs of providing service plus a guaranteed profit. This gives utilities an incentive to spend more money to earn higher profits, even when it is not in their customers’ interest. Virginia should correct this broken regulatory framework by switching to performance-based regulation (PBR), which ties the amount utilities can charge customers to the achievement of key outcomes such as reliability, cost, customer satisfaction, and others

"• Establish a low-income bill assistance and weatherization program. Low-income customers cannot escape spending a far higher percentage of their income on energy bills than the average customer. With the introduction of a competitive retail electricity market, low-income customers should be provided with a better safety net. Ohio’s Percentage of Income Payment Plan (PIPP) is an excellent model that Virginia should emulate. The program ensures that customers with a household income at or below 150 percent of the federal poverty guidelines have access to federal weatherization funds as well as ratepayer-funded bill assistance. Qualifying customers’ bills are limited to 6 percent of household income if they heat with gas and 10 percent if they heat with electricity.

"• Implement an 'all-cost-effective' energy efficiency standard. The cheapest energy resource is energy efficiency, but competitive markets may not deploy energy efficiency resources optimally. The independent distribution grid operator would implement an all-cost-effective energy efficiency resource standard by (1) assessing whether all of the cost-effective energy efficiency resources are being deployed across its system, and (2) soliciting private sector bids to remedy any significant discrepancy.

"• Ensure additional consumer protections and education. A competitive retail electricity market will require additional built-in consumer protections. To ensure reliability, the independent distribution grid operator would facilitate the transfer of a customer account to a predetermined 'provider of last resort' if a customer’s retail provider can no longer provide service. The operator would also implement consumer protections against unfair or deceptive practices in the retail market. Further, as 21st century technology deploys, customers will own the data associated with their electricity service. Customers should determine if and how that data is shared. Finally, consumer education programs are needed to ensure consumers understand how the new system works and what products and rates are available.

"• Fully integrate grids, markets, and operations. The independent distribution grid operator should enable the transmission and distribution systems to operate seamlessly, rather than separately. The two principal goals are integrated system operations between the wholesale and retail levels and seamless pricing. Integrated operations could enable the grid to become more modular (i.e., with multiple ways to generate and distribute to consumers), allowing DERs to proliferate. Seamless pricing means that wholesale electricity prices could be transmitted down to the distribution level, sending more accurate price signals and allowing for more informed customer decision-making and energy savings.

"• Phase out wholesale capacity markets. Wholesale capacity markets are intended to ensure there is more than adequate electricity supply to match predicted future demand. However, capacity markets are no longer necessary in the 21st century, given the availability of more flexible and distributed energy resources, as well as the information technology that allows customers to respond to prices easily and nearly automatically."

Further discussing capacity markets, VERC says, "Capacity markets are intended to ensure that enough generating capacity (or demand-side management capability) is available to match supply with anticipated future demand to a standard level of reliability. The goal, however, is not simply adequacy, but adequacy at least cost. Capacity markets work by ensuring investors receive the full amount of money that should be available to them in the energy market, but is not for various reasons (e.g., price caps). The capacity markets provide this 'missing money' through out-of-market capacity payments to the investors. While this might address investors’ concerns, it diverts attention from fixing the underlying problem of inadequate energy market prices. It is energy market prices that provide information and opportunity for numerous distributed resources, including responsive loads, that can dramatically reduce the cost of achieving adequacy. The reality is that the amount of capacity needed to achieve adequate power supplies at least cost depends very much on customer ability to respond to prices when they rise in response to tight system conditions and the value of lost load to customers. The reserve margin target is mandated in the absence of these variables and does not allow customers to choose their desired level of reliability. Capacity markets are not designed to reflect these often ignored customer preferences."

"Capacity markets are no longer necessary in the 21st century given the availability of more flexible and distributed energy resource options, as well as the information technology that allows customers to respond to prices easily and nearly automatically. Capacity markets are also causing over-investment in generating resources, excess costs (which are passed on to consumers), and unequal treatment of energy resources in current capacity market constructs. These problems are created primarily by the imposition of mandatory and inflated reserve margins, as well as a persistent tendency to over-estimate future peak demand. By phasing out wholesale capacity markets, a vibrant, more diverse, and robust energy market can emerge that would result in lower costs for consumers," VERC says

"While it remains critically important to ensure sufficient investment to comply with expected levels of reliability, the reality is that there is a better approach than mandatory capacity markets. Wholesale energy prices that fully reflect the marginal cost of energy, including the opportunity cost when the demand for energy causes the level of reserves to fall below what’s needed to comply with reliability standards, are at all times capable of driving a level of investment consistent with consumers’ choices about reliability and operational needs of the system during periods of system stress," VERC says

"This does not mean abandoning reliability entirely to 'the market,' but rather enabling the market to do what it was meant to do and reflect the level of reliability chosen by electricity customers through consumption decisions at different prices. This means relaxing arbitrarily low caps on wholesale energy prices and acting through energy pricing that reflects system conditions and the value of load to consumers rather than opaque capacity markets. Independent system operators do this by adjusting energy prices, if necessary, to ensure that they reflect the cost to customers of producing more energy whenever using resources to do so creates a shortage of resources providing critical system reliability services such as operating reserves. This ensures that the effort of empowering customers at the distribution level is not wasted – the wholesale prices incurred by their suppliers more accurately reflect the cost of energy consumption in time and place, prompting innovation in contracting strategies and technology deployment that increase choice and reduce the cost of the power system for all customers. The ERCOT market has used this resource adequacy approach for many years with operational results similar to capacity markets, but with less capacity leading to lower costs," VERC says

In further comments concerning consumer protections, VERC says "Because the role and scope of public utility regulators will be significantly different in a competitive market, such a market will require built-in consumer protections to, among other goals, ensure reliability and continuity of service, protect against predatory marketing and pricing, protect data privacy, and enhance consumer education and awareness. For continuity of service, an IDSO (with PUC oversight), should be required to track relationships between retail electricity service providers and customers, as well as facilitate the expeditious transfer of a customer account to a pre-determined 'Provider of Last Resort' (POLR) in the event that the customer’s chosen retail provider is no longer able to provide service. The POLR responsibility may be assigned to one or multiple retail service providers. Consumers would also be protected against unfair, misleading or deceptive practices by retail electricity service providers and have the right to an impartial and prompt resolution of disputes with their service provider and/or transmission and distribution utility. Consumers would own the data associated with their electricity service. Additionally, advanced metering technology would collect and retain no more data than is necessary to bill a consumer unless the consumer has consented to such data being collected."

"[T]he utilities commission, or other appropriate regulatory body, would offer consumer education programs and set standards for how retail energy providers market and inform consumers about product and rate offerings," VERC says

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