Comments to the Maryland Public Service Commission Concerning New Generating Facilities
COMMENTS OF THE COMPETE COALITION
Pursuant to the Maryland Public Service Commission’s (“Commission”) December 29, 2010 Notice of Comment Period On Request For Proposals for New Generating Facilities (“Notice”), the COMPETE Coalition (“COMPETE”) respectfully submits these comments.
COMPETE is composed of more than 530 electricity stakeholders, including customers, suppliers, generators, transmission owners, trade associations, environmental organizations and economic development corporations, all of whom support well-structured competitive electricity markets for the benefit of consumers. COMPETE members in Maryland such as Big Lots, Leggett & Platt, PetSmart, Safeway and Wal-Mart operate over 600 facilities, provide 29,600 jobs and spend $61 million annually for electricity.
COMPETE strongly urges the Commission not to issue the draft Request for Proposals (“draft RFP”) described in the Notice and to abandon the idea of requiring electric distribution companies (“EDCs”) to enter contracts for unneeded generating facilities as proposed in the Notice and the draft RFP. The proposal is unnecessary and will harm Maryland commercial and industrial customers by imposing a wholly unwarranted, unjustified and unfair tax on all Maryland electricity consumers. It will put at risk the broad benefits of competitive electricity markets for Maryland consumers, and will distort prices in the PJM market, bringing further harm to consumers in Maryland and the entire PJM market region.
The proposal is not warranted
According to the draft RFP, it is directed at procuring generation resources to avoid a potential capacity shortage in 2015 caused by reactive deficiencies at the Pleasant View 500/230 kV transformer that will limit the amount of electricity available for import into Maryland. The draft RFP cites to certain PJM studies identifying the transformer problem. However, the transformer problem is being fully addressed by PJM itself. PJM has ordered construction of a new substation to resolve the Pleasant View 500/230 kV transformer contingency. The new substation has an in-service date of June 1, 2014.
The draft RFP also notes that “market forces have not produced new generation in our region,” presumably meaning within Maryland. However, given that Maryland is within PJM -- a large and well structured regional wholesale market that contains 26% of the generation in the Eastern Interconnection -- physically locating resources within Maryland is not necessary to ensure adequate and reliable service to Maryland consumers. PJM’s capacity auctions, based on its Reliability Pricing Model, procure resources from across the broad multi-state region needed to assure reliable service, taking into account locational constraints. It is clear that the capacity auctions have procured capacity in adequate amounts and at the appropriate locations to assure a targeted reserve margin for all load in PJM.
The proposal will have significant adverse effects
Maryland policymakers, like many other policymakers around the nation, wisely abandoned the monopoly form of regulation a decade ago in response to its numerous failures, uneconomic outcomes and vast inefficiencies. In its place, Maryland’s electric industry was restructured with a competitive market. A competitive market is the most effective way to provide affordable, reliable and clean electricity, and provides the choice, flexibility, and innovation needed by job-producing businesses in Maryland.
Competitive electricity markets are delivering considerable benefits to consumers in Maryland and around the country, including reliability in excess of 20 percent reserve margins. The markets keep prices affordable -- average prices in PJM in 2009 declined more than 40% from 2008 levels. Renewable resources are attracted disproportionately to competitive markets, and demand resources thrive in markets because of clear price signals and fair rules. Innovators, such as those providing state-of-the-art storage and demand resources, are choosing to install their advanced technologies in markets. Markets produce significant efficiencies that benefit consumers and allow market participants to squeeze more from existing resources. And the PJM market, of which Maryland is a part, is well monitored by professional market monitors independent of generators and the regional grid operator.
In addition, one of the most significant benefits of competitive electricity markets is that investors, not consumers, bear the financial and operating risks associated with the construction of new power plants. In a competitive market, the consequences of a power plant investment becoming uneconomic are borne by investors rather than forced on consumers. If the Commission proceeds with the RFP as drafted, Maryland consumers once again will bear these serious, multibillion-dollar financial risks.
The Commission’s proposal is an unnecessary step backward to the failed policy of guaranteed no-risk returns to investors resulting in increased risk to consumers. Under the Commission’s proposed contract-for-differences between EDCs and generators, investors would be guaranteed a revenue stream paid by consumers for the life of the contract, regardless of the value of their generation resources as measured by the prevailing prices in PJM’s competitive and strictly monitored power markets. In other words, electricity consumers will bear the financial cost of the guaranteed returns to generation owners that this proposal contemplates. Such a return to the protected-monopoly policies of the past will unnecessarily expose ratepayers to increased costs. For Maryland businesses, this means diminished competitiveness and the erosion of market benefits.
Paying for the revenue guarantee to contracted generating plants will act as a grossly unfair tax on EDC customers. This impact will be immediate and will raise the cost of power for customers. To the extent this tax is allocated unfairly to customers that have chosen a competitive supplier, such customers will be forced to pay twice -- first for the power they have purchased and, second, they will pay a tax to guarantee cost recovery for power plants they do not want and do not need. Additionally, in considering guaranteed cost recovery contracts for generating facilities, the Commission should consider the potential impact on rates charged to the segment Standard Offer Service customers for whom this supply is procured. It is clear from Severstal Sparrows Point, LLC v. Public Service Commission of Maryland, 194 Md. App. 601, 5 A.3d 713 (2010) that, when considering Standard Offer Service, it is unlawful for one class of customers to subsidize the cost of service to another class of customers for a service. This decision is consistent with the treatment of competitive transition costs, which under § 7-513(a)(2) Public Utilities Company Article instructs that such costs:
Shall be allocated to customer classes in a manner that, as nearly as reasonably possible, does not exceed the cost of providing the service to those classes of customers, avoiding where reasonably possible any interclass or intraclass subsidies.
As a result of the established precedent that the cost of serving a particular class of customers be recovered appropriately from the cost causing class, the Commission should carefully consider the cost impact to Standard Offer Service customers associated with issuing the proposed RFP.
In addition, over the longer term, the revenue guarantee for contracted generators will chase competitive suppliers from the market, thereby decreasing the competitive pressures that keep costs down and spur innovation, and losing the jobs those suppliers create. The existing stability and certainty that Maryland’s electric power market needs to continue to attract necessary investment, promote competition, and increase jobs will be negatively impacted.
Such an unwarranted and unwise return to the policies of the past is especially unfortunate because the economic and environmental benefits of competitive electricity markets are increasingly bearing fruit for Maryland consumers. Competition and customer choice are providing Maryland businesses with the ability to achieve lower prices and better manage and control costs. Competitive markets provide a variety of flexible products and services, and clean energy, that customers want. For example, Maryland businesses can get fixed market prices for electricity for multiple years under contractual terms that fit their specific operations. Lower costs mean lower prices for Maryland consumers and more dollars for the innovation that is needed by businesses that provide Maryland jobs.
A rather clear proof of the beneficial impact of competitive electricity markets is in the numbers. Recent statistics show that competition continues to expand in Maryland. For the first ten months of 2010, the number of customers in all classes that have chosen a competitive supplier almost doubled, with increases in each class. The percentage of peak load served by competitive suppliers increased by over 12% for all customer classes and by almost 20% for small commercial and industrial customers. And over 75% of the peak load for Maryland’s commercial and industrial customers is served by a competitive supplier. Consumers are voluntarily turning to the competitive market for a very persuasive reason -- because it produces a wide range of economic and environmental benefits. The Commission’s proposal would erode these substantial benefits.
The Commission’s proposal will also distort prices in the PJM capacity market and cause further and more widespread adverse impacts. Although PJM has lowered annual capacity costs by $3 billion, the proposal seems to be aimed at artificially lowering prices in the PJM capacity market. Under section 3.1b of the draft RFP, a supplier must offer its capacity into the PJM capacity market “so it will clear and be committed, subject to the direction and timely notification of the Commission.” While the meaning of “the direction and timely notification of the Commission” is unclear, the only way of ensuring that capacity will “clear and be committed” in the auction is to bid it at a low price, perhaps even a below-cost price. Of course, below-cost bids are possible under the Commission’s proposal because a bid that is committed at a market price that is below costs will be subsidized by a tax on Maryland consumers.
Such a subsidy and tax would lead to a number of negative impacts, the effects of which would be felt in Maryland and the entire PJM market area. Subsidized capacity bids would depress PJM capacity auction prices below the efficient level that would be produced by the competitive market. As a result, revenues to all generators in the PJM market would be depressed, likely resulting in less investment in new and existing capacity in the PJM market. Reduced investment by independent investors would mean that additional future capacity may need to be built under guaranteed payment stream arrangements similar to the Commission’s proposal, thereby creating a need for even further subsidies by consumers and increases in the “tax” on customers.
Artificially depressing capacity prices will also decrease the incentives for customers to invest in demand-side management equipment and thereby decrease the supply of demand resources that reduce the need for costly new generating plants, help keep prices down and balance variable renewable resources. Demand resources in PJM increased by almost 5,700 MWs from 2008 to 2009. This represents the capacity of about ten new baseload generators. Fewer demand resources will mean more new generators, further increasing the subsidies required from Maryland businesses and consumers.
Conclusion
Electricity competition is working in Maryland. The scores of customer members of the COMPETE Coalition can state unequivocally that well-structured competitive electricity markets provide the broad range of benefits to consumers that were identified earlier. COMPETE urges the Commission not to erode these benefits by taking this step backward into an era of subsidies, taxes and price distortions.
For the many compelling reasons stated above, COMPETE urges the Commission not to issue the draft Request for Proposals described in the Notice, and to abandon the idea of requiring electric distribution companies to enter guaranteed cost recovery contracts for generating facilities.
Respectfully submitted,
COMPETE Coalition
By: William L. Massey, Counsel
1317 F Street, NW
Suite 600
Washington, DC 20004
| Attachment | Size |
|---|---|
| COMPETE_MD_9214.pdf | 652.53 KB |
