U.S. Government & Regulatory Affairs Year-end Summary
Vice President of U.S. Government & Regulatory Affairs, Direct Energy
It is fair to say that 2008 has been a difficult year for the economy and a volatile one for energy commodities markets. As we move into 2009, we expect more change, as a new U.S. president and other newly-elected federal and state officials assume their positions. The overall condition of the economy, a new political dynamic and the impact of government stimulus initiatives, will largely drive policymakers’ decisions relating to energy policy in the coming year.
Looking forward, the Obama Administration will likely first try to set the economy on the road to recovery and then move to address other issues. How long that takes is an open question. But, during his campaign, Obama cited energy as a top issue for his Administration. On energy policy issues where there is greater consensus—like energy efficiency and conservation—there is a greater likelihood for some form of federal action. Topics such as climate change and carbon regulation are likely to be much more difficult and take longer to tackle.
At the state level, local governments are expected to address energy efficiency, conservation, demand response and other issues designed to help customers decrease energy usage and potentially save money. Also on the agenda may be changes in tax or other government policy designed to raise revenue for ailing state budgets, as projections are showing significant budget shortfalls for many states. There will also be significant activity around retail market issues in states like Texas, Pennsylvania, California and Maryland.
Throughout the year, the Direct Energy Government & Regulatory Affairs team works closely with legislators, policymakers and key decision-makers, along with state and local governments and public interest groups, to advocate on behalf of our customers and in favor of competitive energy markets.
Looking back, the following is a summary of the key issues that have taken place this year in the markets where we serve business customers:
CALIFORNIA
Direct Access Reopening
With respect to continued retail choice opportunities for customers, we have seen notable progress from the California Public Utilities Commission (CPUC) in the Direct Access Reopening Proceeding. On Nov. 21, 2008, the CPUC issued a final decision in Phase 2 of this proceeding where they directed the Department of Water Resources (DWR) to end energy supply contracts that have prevented a re-opening of the California retail market by Jan. 1, 2010. Taking a positive view of the California market, if a number of other market structure issues are handled expeditiously, direct access could reopen as early as 2010. The upcoming year will be a very active one in this proceeding and Direct Energy Business will work to ensure the best outcome.
In 2008, Direct Energy Business’ Government & Regulatory Affairs (G&RA) team worked to defeat several major efforts in the California State Legislature that intended to place limitations on the ability of California electric customers to switch their electricity suppliers. While the California market has been closed to incremental competition for years, customers who were being served by a competitive supplier when the market closed in 2001 are still able to switch. It is anticipated that the issue of direct access reopening could arise in the state legislature again in the upcoming months and Direct Energy Business will continue to work to advocate for open, competitive markets for our customers.
California Independent System Operator (CAISO)
The year started out with much anticipation of the CAISO’s implementation of its Market Redesign and Technology Update (MRTU) and yet, as we head into 2009, we’re still anticipating its implementation. The MRTU is supposed to provide better price signals and enhanced market liquidity. While the CAISO has made a great deal of progress on the MRTU, its implementation is not expected until early 2009.
Utility Rate Volatility
This year customers saw volatile utility rates, mostly as a result of unanticipated rises in natural gas prices, the utilities’ implementation of their General Rate Cases, as well as adjustments in various balancing accounts and their respective Energy Resource Recovery Accounts (ERRA). The majority of the generation rate increases will go into effect early in 2009. On the other hand, as anticipated, Southern California Edison’s (SCE’s) Direct Access Cost Responsibility Surcharge (DA CRS or “exit fee”) will go away by the end of 2009, thus eliminating the additional 2.7cents/kWh charge that direct access customers pay in the SCE territory.
Environmental Policy
Since 2002, California has had a mandate to increase the use of renewable generation to supply 20 percent of retail electricity sales by 2010. The 2008 legislative session involved a great deal of work on how to increase this mandate and encourage the state to pursue aggressive greenhouse gas emissions standards. On Nov. 17, 2008, Governor Schawarzenegger signed Executive Order S-18-08 which raises California’s renewable energy standards to 33 percent by 2020. The Governor believes that this enhanced target will help California meet the aggressive goals of reducing greenhouse gas emissions to 1990 levels by 2020 and then to 80 percent below 1990 levels by 2050.
It is anticipated that transmission infrastructure, coupled with significant policy reform, must take place for these aggressive goals to be achieved. Heading into 2009, the priority will be to identify the obstacles to reaching these goals and determine how to overcome them. In 2009, it is expected that a great deal of focus will be placed on how to develop an appropriate package of policy reforms that will help the state get on track for meeting the 33 percent target, while continuing to deliver reliable and affordable power to Californians. This will be no small task and Direct Energy Business’ G&RA team expects to be engaged, once again, in the development of this dynamic policy.
CPUC Reappointments
In late November, Governor Arnold Schwarzenegger reappointed CPUC President Michael Peevey and CPUC Commissioner Rachelle Chong. In the past, both incumbents have been in favor of retail competition in the state.
CONNECTICUT
While the Connecticut Legislature eschewed further energy legislation this year, state energy agencies continued to implement the provisions of the comprehensive energy bill passed last year. The Department of Public Utility Control (DPUC) oversaw the award of contracts for cost-of-service peaking units to several developers, including a joint venture of United Illuminating and NRG Energy. The Connecticut Energy Advisory Board and the DPUC also neared completion of the State's first Integrated Resource Plan, which was called for under last year's legislation. In the meantime, retail competition continued to be strong, with a majority of C&I customer load having switched and a growing number of residential customers choosing competitive supply over standard service.
ILLINOIS
Retail electric competition continues to grow in Illinois. About half of the electricity consumed in the State of Illinois is purchased under contracts with competitive electric suppliers. The Illinois Commerce Commission’s (ICC's) Office of Retail Market Development spent much of the year working informally with stakeholders to implement a product offering for suppliers—POR-UCB— (Purchase of Receivable Utility Consolidated Billing) that should foster greater retail electric competition for residential and small commercial customers.
As a result of the informal meetings, Ameren filed a tariff with the ICC to establish its POR-UCB product in its Illinois service territories. The Ameren filing will be formally reviewed by the ICC and suppliers anticipate that they will be able to make use of POR-UCB in Ameren's service territory by mid-summer 2009. ComEd's POR-UCB tariff filing is expected to be made at the ICC in late December or early 2009.
This year also saw a bill pass out of the Illinois General Assembly (SB 1987) that establishes renewable portfolio standards for retail electric suppliers. SB1987 also presents the possibility that all electric suppliers in the state—including utilities—may be required to purchase the output of a proposed Integrated Gasification Combined Cycle (IGCC) plant in Taylorville, Illinois. Both the new RPS requirements and the IGCC plant (if eventually approved by the General Assembly) can be expected to raise retail electric in Illinois. SB1987 currently awaits the Governor's signature.
MAINE
Maine saw retail activity hold relatively steady through the year, even as the state continued to assess the alternatives available to it for withdrawing from the New England Power Pool (NEPOOL). The Maine Public Utilities Commission (PUC) and the state legislature remain interested in either establishing a single state regional transmission organization (RTO) or joining forces with several Canadian provinces to form a cross-border RTO. The PUC has also moved to implement a 2006 law that requires it to solicit proposals for long-term contracts for energy and/or capacity, which would be executed by Maine utilities. If such contracts are signed, cost recovery remains undecided, although the PUC has indicated that it would likely be on a competitively-neutral basis.
MARYLAND
Maryland continued down the path of retail competition, though the idea of re-regulating has been discussed every year. In compliance with the Maryland Public Service Commission (PSC) Order in Case 9117, the four Maryland investor-owned utilities (IOUs) filed their Integrated Resource Plans (IRPs) and related analyses in early October. The results of the independent analyses showed that if utilities provide longer-term contracts covering full Standard Offer Service (SOS), it probably would be harmful to customers. The findings reflected in the IOUs’ IRPs are a positive development for competitive retail markets because they show that market-reflective pricing provides the consumer with the most efficient pricing.
MASSACHUSETTS
Building on a growing state and regional demand for energy efficiency and renewable generation, the Massachusetts Legislature passed a comprehensive energy bill this summer that also included measures to open its power market to mass market competition. Looking ahead, the next challenges will involve implementing this significant and complex law, which includes provisions related to achieving all cost-effective energy efficiency, having utilities sign long-term contracts with renewable generators, and requiring utilities to purchase the accounts receivables of competitive electric suppliers.
MICHIGAN
After more than a year of debate, the Michigan Legislature passed an energy package in October that limits electric choice participation to 10 percent of the total market. Also, all electricity providers, including competitors, will have to provide 10 percent of their customers’ energy from renewable sources by 2015 (currently, about 3 percent of the state's electricity is generated by these sources). In addition to limiting consumers’ ability to take advantage of alternative energy suppliers in the market, the package of bills also allows the utilities to recover certain cost overruns associated with new utility-owned generation from consumers.
NEW YORK
New York continued to justify its status as one of the most well-designed and competitive markets in the United States. The state saw positive developments in the appointment of Garry Brown as chairman of the New York Public Service Commission (PSC) and the continued use of market-reflective pricing consisting of monthly prices for most customers and hourly prices for large customers in many utility service territories. One source of concern was the promulgation of consumer protection standards that extended regulations to C&I customers for the first time—although this aspect of the rules has been the subject of pending petitions for reconsideration.
Retail access programs received a comprehensive review by the PSC, which determined that all programs of substantive importance to retailers should be continued. The PSC also moved to aggressively expand spending on energy efficiency programs by more than an additional $350 million annually, which is to be split roughly evenly between utility-administered programs and programs administered by the New York State Energy Research & Development Authority (NYSERDA).
OHIO
Ohio electric stakeholders spent much of the second half of 2008 digesting the recent re-write of the industry set forth in Senate Bill 221. As widely anticipated, the Public Utilities Commission of Ohio (PUCO) rejected First Energy's Market Rate Offer proposal filed pursuant to the new law. Electric Security Plans (ESPs) for First Energy, Duke and American Electric Power (AEP) are still pending before the PUCO as of December 2008. For non-residential customers in Duke's service territory, if a settlement is reached and approved by the parties, shopping opportunities look to continue. However, in the First Energy and AEP service territories, if the utilities’ ESP plans are approved as filed, this could present several hurdles to the further development of retail choice.
PENNSYLVANIA
This year has been a very dynamic year for the Pennsylvania Public Utility Commission (PUC) and for the state legislature with several key issues at stake, including the future of electric choice and how the utilities are going to manage the portfolio of assets that ultimately make up the price customers pay for power. The PUC continues to be supportive of competitive electric and gas markets, and through various proceedings that Direct Energy Business is involved in, are working on new initiatives which will foster competitive markets. Several utility rate cases were launched in December and Direct Energy Business remains actively involved in these cases to introduce many competitive opportunities.
At the close of the 2008 legislative session, several bills passed and Gov. Ed Rendell signed them into law, including how to manage utility portfolio design and facilitate energy efficiency, demand response, and the use of renewable energy. These bills require utilities to work with customers to cut electricity use by 1 percent by 2011 and 3 percent by 2013, and are aimed at helping Pennsylvania residents and businesses get a better handle on their electricity bills in advance of the rate caps (which are set to expire between 2010 and 2011) and creating a fund. Another important bill passed in 2008 that creates new rules for utility default service supply, mandating a portfolio mix of short- and longer-term contracts. While the passage of the bill has a relatively neutral immediate impact on Direct Energy Business customers, the real impact is yet to be determined by the ensuing regulatory proceedings to implement this bill.
Looking ahead, an important energy-related technology bill, with approximately $640 million of funding, will begin to be implemented in March 2009. This bill provides customer rebates for energy efficiency and funding mechanisms to foster clean coal and renewable technologies. Beginning in January 2009, further legislation which may propose to extend rate caps, and/or mitigate the impact of the expiring rate caps, will make 2009 another active legislative session. Policymakers will have to consider comments from both sides in the upcoming legislative session—those who want competitive options in Pennsylvania and those who don't.
RHODE ISLAND
Rhode Island electric competition has remained steady at a relatively low level. Longer-term prospects for competition have improved as the Rhode Island Public Utilities Commission (PUC) has convened a series of collaborative stakeholder meetings to consider options for standard offer service (SOS) procurement for the post-2009 period. During this period, SOS will no longer be sole-sourced by pre-existing National Grid contracts that use a base price plus fuel index adder rather than a true market-based price.
TEXAS
Legislative Activity
Since the Texas Legislature was not in session during this past year, no new energy legislation was enacted; however, there is much anticipation of the 2009 Legislative Session, which is set to kick off in January 2009. As has been the case in recent Legislative Sessions, electric competition is expected to be a hotly debated issue. It is expected that a variety of different bills, including those that address core issues for retail electric suppliers, will be submitted and potentially considered. Some key issues up for discussion could include price regulation, Provider of Last Resort (POLR), expansion of the System Benefit Fund, and a review of the effectiveness of existing customer protections. Direct Energy’s Texas Government & Regulatory Affairs team has been actively preparing for the upcoming session to protect and advance retail competition and issues that affect our customer base.
Market Activity
The Texas electric market remains the most active market for competition in the United States, with retail customers having many electricity products and providers from which to choose. Currently, residential customers can choose from over 25 retail electric providers (REPs) offering more than 80 different service plans. Overall, switching activity remains strong, as evidenced by the fact that more than four out of five eligible ERCOT customers have exercised a choice in the competitive market. In addition, 44 percent of all residential customers are now being served by a competitive retail electric provider (non-incumbent retailer).
Public Utility Commission of Texas (PUCT)
In response to the exit of five REPs from the Texas market this past summer, the PUCT opened three key rulemakings which remain active at year-end. The three rulemakings address (1) strengthening the requirements for what REPs must disclose to customers, (2) determining the requirements for the certification of REPs in ERCOT (Electric Reliability Council of Texas), and (3) determining the requirements to ensure that customers will be served in case their current REP goes out of business. All three of these rulemakings are expected to be completed within the first quarter of 2009. Also, in response to the damage seen from various storms that have hit the Texas coast over the past several years, the Commission is evaluating various methods to strengthen the transmission system. The PUCT is also actively involved in an implementation project for advanced meters. They are leading a stakeholder process which is looking at the issues of security, access to data, web portal, standardization of functionality, home area network, retail transactions, settlement, and customer education.
Innovation
The level of interest and investment in electric demand response and advanced metering infrastructure (AMI) increased significantly during the year Oncor Electric received approval in August authorizing the deployment of advanced meters to approximately 3.4 million customers within Oncor’s service territory. Initial deployment is expected to commence in early 2009. CenterPoint Energy is also close to receiving authorization for its deployment of 1.5 million advanced meters in the CenterPoint service territory. These deployments will lay the groundwork for technological change moving forward and will allow retailers to develop innovative pricing and services and provide consumers the ability to lower their total energy costs and increase their control over energy costs. The PUCT also adopted new energy efficiency goals in 2008 that require utilities to offer energy efficiency programs to reduce annual growth in demand by 20 percent in 2009. They also require the PUCT to study whether an increase in the energy efficiency goal of 30 percent by Dec. 31, 2010 and 50% by December 31, 2015 is achievable.
Growth of Wind Generation in Texas
Texas has moved ahead of California to lead the nation in wind generation. In ERCOT, there is currently 6,234 MW of installed wind generation capacity. ERCOT expects a total of 8,066 MW of wind generation by the end of this year. In addition, the PUCT’s decision in the Competitive Renewable Energy Zones (CREZ) proceeding has the potential to allow more than 18,000 MW of wind capacity in ERCOT.
The Direct Energy Government & Regulatory Affairs team contributed to this article.
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