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EMP WHITEPAPER

By Derrick Williams,2014-05-19 02:29
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3 Mar 2008Created in 1975 by the New York State Legislature, NYSERDA's focus is on energy research and development centered on energy efficiency.

    Big Risk, Small Reward

    Why States Should Say No to Power Authorities

    Prepared by the

    PJM Power Providers Group (“P3”)

    March 3, 2008

I. Executive Summary

    Facing an array of big problems, and pondering a need for big government solutions,

    some state legislators and regulators have decided it may be time

    The challenges of to create another big bureaucracy - the public power authority. increasing energy demand,

    rising infrastructure costs

    Power authorities establish government control over and environmental

    concerns are faced by many

    states. energy markets through newly created agencies or publicly owned

    utilities. The notion is that only aggressive government oversight can ensure system reliability,

    advance renewable energy development and, most importantly, usher in a new era of low energy

    prices for consumers.

    The approach is well-intentioned. Policymakers and office holders have been buffeted by

    a host of intractable challenges related to energy, the environment and the economy. They’re

    under intense pressure to lower energy costs while simultaneously upgrading reliability and

    environmental measures, a nearly impossible task. One appeal of the power authority concept is

    that it brings this complex and politically thorny problem in-house. Government experts, under

    government authority, will administer a host of government-approved solutions.

    This paper will argue, however, that the power authority approach, no matter how well-

    intentioned, is fraught with peril for energy consumers and regulators alike. It represents a

    flawed and tarnished model, one that has the great potential to increase the price of energy, stifle

    investment in renewable innovation and compromise system reliability. The financial burden

    energy customers face today would be dwarfed by A power authority that constructs, owns or

    operates generation resources should not be the commitments associated with a state government considered a silver bullets for states’ energy

    infrastructure challenges. agency overseeing all aspects of power generation

    construction, operation and transmission. History suggests these bureaucracies would be

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inefficient, understaffed and poorly suited to managing real-time transactions in the global

    energy marketplace.

    Unless they are severely limited in scope, power authorities do not represent a policy

    solution. This paper will illustrate they represent a high-stakes policy gamble…one policymakers would be wise to avoid.

II. Introduction

    Power authorities, also known as “publicly owned utilities,are common in the United States. In 2005, there were more than 2,010 publicly owned utilities in operation, 883

    cooperatives and 9 federal power agencies. While the ranks of these entities is nearly 3,000

    strong, many are quite small. Approximately 1,400 serve communities with populations of

    10,000 or fewer. There are far fewer investor-owned utilities 217 in 2007 but this model

    1covers 68.8 percent of the US customer base, as opposed to 26.8 percent for power authorities..

    Several models for authorities exist:

    (1) An energy efficiency utility (EEU) or power authority to facilitate the

    development and delivery of energy efficiency in the residential, commercial

    and industrial sectors, replacing current energy efficiency delivery

    mechanisms. This model relies upon Efficiency Vermont (EV) as a model.

    (2) A more traditional state power authority based upon established federal

    models such as the Tennessee Valley Authority (“TVA”). This model would

    encompass a broad range of responsibilities, including potentially owning

    and/or operating generation and transmission infrastructure.

     1 See American Public Power Association, January 2007 newsletter, http://appanet.files.cms-

    plus.com/PDFs/PPFactSheet.pdf

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    (3) An authority focused on research and development of emerging technologies,

    such as the NYSERDA (“NYSERDA”).

    The remainder of this paper examines the question of whether a state should form a

    power authority. The central question

    addressed by this paper is ? Section III defines a power authority and whether states should

    form power authorities. offers a comparison of major power authority

    types.

    ? Section IV addresses the question of why a state would consider forming a

    power authority.

    ? Section V addresses the question of whether power authorities are exempt

    from the challenges facing private companies.

    ? Sections VI and VII address whether power authorities have met their stated

    policy goals.

    Detailed overviews of several existing power authorities can be found in the Appendix to

    this paper.

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III. What is a Power Authority?

    Originally, power authorities had limited scope and

    Power authorities were

    originally developed for rural responsibilities. The first were used for rural electrification or to develop

    large natural resources such as electrification or to protect and develop large natural hydroelectric power.

    resources such as hydroelectric power. Over the years, however, the role of some agencies

    expanded, and they branched into new areas of the policy arena, such energy efficiency and

    renewable power. Others took on the full responsibility for owning and operating generating

    facilities and serving load.

    The breadth of authority of state power authorities is quite divergent. Only 9.5 percent of

    electric generation in the United States, in megawatts, is A variety of power authority models

    exist ranging form large federal owned by publicly owned utilities, 4 percent by power authorities such as the

    Tennessee Valley Authority to 2cooperatives and 6.8 percent by federal power agencies. smaller public benefit corporations

    such as the New York State Energy

    Research and Development Agency.

    The matrix on the following page provides a comparison of some features of these

    various types of power authorities. The Appendix to this paper provides an overview of existing

    power authorities.

     2 See http://www.appanet.org/files/PDFs/nameplate2005.pdf, American Public Power Association, 2007-2008 Annual Directory & Statistical Report compiled from Energy Information Administration Form EIA-861 and EIA-

    906/920 and EIA-860. Data does not include U.S. territories.

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    Comparison of Power Authority Types

     TYPE CREATED FUNDING RESOURCES

    3Federal power 1933 to provide electric Self-funding 30,000 MW of Tennessee Valley Authority

    authority power to Tennessee Valley generation resources

    area

    State public benefit 1931 to develop New York Bond sales to private 8,000 MW of generation New York Power Authority

    corporation State hydropower resources investor resources

    State public benefit 1925 to focus on energy Systems Benefit Does not own generation New York State Energy

    corporation R&D Charge resources Research & Development

    Authority

    Joint action agency 1979 to buy & sell Through member Owns & contracts for Vermont Public Power

    wholesale power municipalities ~120 MW. Supply Authority

    Non-profit 2005 to provide efficiency Charge on utility Does not own Efficiency Vermont

    services customer bills generation, transmission

    or distribution resources

     3 Although self-funded since 1959, TVA still makes annual payments to the U.S. Treasury to pay back the U.S. government’s initial financial investment.

IV. Why Form A Power Authority?

     Although specific reasons may vary, the prime objective for forming a power authority

    typically has been to provide for electrification, develop natural resources, or fill a perceived gap

    in utility services or competitive market outcomes. Historically, policy makers have faced a

    basic question: how best to ensure that needed utility services are provided to customers in a

    reliable manner and at a reasonable price. The answer Supporters of power authorities

    contend that a governmental agency, has generally taken one of two approaches direct with no stockholders, will be able to

    simply flow savings from not needing government services through an entity such as a power to turn a profit straight to the citizenry.

    authority, or state regulation of private utility companies whether fully regulated or lightly

    regulated in competitive markets. Those that have taken the direct government approach have

    done so under the premise that the benefits would flow directly to the citizens. In the electricity

    supply business, customers would theoretically enjoy lower rates as the government-owned

    utility harnessed economies of scale and increased sales to greater numbers of people and

    businesses. This approach presumes that since government has no stockholders demanding

    dividend payments or returns on investment, savings could be simply passed through to citizens.

    Some states believe they can better manage the energy needs of their constituents than

    private companies. Government often examines the barriers faced by the private sector and

    considers whether it can minimize those barriers for the public good or fulfill the role better than

    private entities that operate in a regulated scheme. One particular focus of late has been with

    respect to the ability to capture price benefits through long-term contracting. Another focus has

    been to seek to retain the benefits of local natural resources such as renewables for local

    consumers.

    Other reasons that have been cited as the basis for forming a state public power authority

include: promotion of energy efficiency, development of renewable or other specific types of

    generation supply, economic development and job development

V. Are Public Authorities Truly Exempt from the Challenges Facing Private Entities?

    While some state public power authorities have the benefit of having access to low-cost

    financing and bonds through guaranteed taxpayer backing,

    The recent escalation in

    construction costs is a risk faced in all other respects they face the same challenges as private

    by both power authorities and

    private companies. entities investing in the energy industry. Where a power

    authority is formed for limited purposes, for example to stimulate investment in areas such as energy

    efficiency, a power authority can have some benefits. Where a power authority is formed for larger

    purposes, such as building generation at a low cost, the risks are significant. It is questionable

    whether government can improve upon the private sector approach and it unquestionably saddles

    ratepayers with significant price risk.

    The recent escalation of construction costs in the power industry illustrates the risks inherent

    in building and/or contracting for new generation. Prices of materials needed to build generation

    plants have increased substantially, with some estimating that prices of materials have increased 25

    430 percent over the last 18 months. The effect is significant on developers. Duke Energy recently experienced the impact of these increases when constructing coal-fired generation in North Carolina.

    In 2005, Duke estimated that it would cost $2 billion to construct two coal-fired 800 MW generation

    plants. Eighteen months later, Duke increased the estimate to $3 billion. In early 2007, it was

    announced that Duke would build only one of the units at an estimated cost of $1.83 billion an

    increase of more than 80 percent from the original estimate. Id. These price increases are impacting

    all generation types from nuclear to wind.

     4 Costs Surge For Building Power Plants, New York Times, Mathew Wald, July 10, 2007.

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    Other challenges faced by both private industry and potential power authorities include:

    ? Portfolio management In order to be successful, a state power authority must properly

    manage its portfolio whether the portfolio is limited to energy efficiency or broader in

    scope to cover energy supply. State power authorities such as NYPA and LIPA must

    engage in full “portfolio management,” which includes the full range of measures that a load-serving entity may employ to satisfy ever changing load-serving obligations in the

    most economical manner. Portfolio management may include hedging of congestion and

    fuel costs but it also includes other measures such as choosing the optimal sources for

    energy transactions to maximizing FTR values, choosing the most economic sources for

    energy and capacity purchases (while balancing the impacts of those choices on FTR

    values), and making the decisions for self-scheduling or bidding into markets of

    generating units. Actively managing a portfolio involves making a myriad of decisions

    in a dynamic market context and the exercise of judgment over many complex issues. It

    is not an activity that can be performed well or consistently by an organization without

    substantial resources, knowledge and experience and that participates in the market on a

    daily basis. Governmental agencies do not always

    Players in the industry face a have the necessary depth of resources to perform

    myriad of challenges including this function. portfolio management, regulatory strategy, risk ? Regulatory Strategy - Power authorities do not management, environmental operate in a vacuum. Just like private entities, concerns, long-term contracting power authorities are impacted by federal and questions, and risks associated

    regional energy policy and activities. Power with direct generation ownership.

    authorities that provide traditional utility services

    such as LIPA and NYPA are active participants in regional power pools such as the

    NYISO and PJM and are active in legal and regulatory proceedings at the Federal Energy

    Regulatory Commission and Department of Energy. Managing these proceedings is

    resource intensive and expensive. Activities such as participation in RTO/ISO

    stakeholder meetings and the submittal of filings before regulatory agencies are

    additional responsibilities of full-fledged state public utility companies. The depth of

    resources necessary to fully and adequately staff these functions are significant.

    ? Risk Management and the Assumption of Risks Value (price) of the portfolio is not the

    only consideration that must be managed. The risk (volatility) of the portfolio is an

    additional consideration. The predicted lowest cost mix of supply options may pose

    unacceptable volatility. The state agency (or the commission that oversees it) must

    identify and measure supply risks and then make a determination of the proper level of

    risks for ratepayers to assume. Again, this takes a significant amount of resources and

    significant expertise in risk management and energy markets.

    ? Environmental challenges Any state power authority would be subject to the same

    environmental restrictions/requirements as private entities. To the extent a state power

    authority is used to develop new generation for example, it will need to address numerous

    federal and state environmental requirements. All new power plants whether owned by a

    private developer or a power authority would be subject to stringent air pollution

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    standards. There is also the challenge of quantifying the risk of federal legislation on

    emissions these risks and challenges apply equally to private and public investors.

    Generation plants located in Regional Greenhouse Gas Initiative (“RGGI”) states face the

    challenge of operating economically and meeting RGGI goals. Again, meeting these

    environmental challenges will take a significant amount of resources and expertise.

    ? Long-term contracts Some power authority models focus on long-term contracts with

    suppliers to acquire “low-cost” supply. As history with PURPA contracts have illustrated,

    there is significant risk to entering into long-term contracts. Locking into a price based on

    inadequate information or poor market timing can lead to years of above-market prices

    and pain to consumers. Again the necessary amount of resources and expertise in risk

    management and energy markets to manage these contracts is significant.

    ? Risk/Reward of Financing or Direct Ownership of Generating Resources. Financing or

    direct ownership of generating resources can, in theory, result in lower costs to

    consumers. State agencies could have access to low cost capital and do not earn a return

    on investment. This option, however, also exposes ratepayers to an array of risks they

    can be insulated from under full service procurement models. Notably, financing or

    ownership of plants by a state agency would expose ratepayers to construction and

    operational risks. In the private sector, these risks are borne by stockholders. Ratepayers

    also assume the risk of stranding the asset at some remote future point after its

    construction if prices do not materialize as predicted. Finally, and perhaps most

    importantly, the impact of financing or direct ownership of generating facilities by a state

    agency on competitive markets must also be considered. If the state power authority

    constructs plants under this model, the willingness of the private sector to construct will

    likely be adversely affected. Any savings to consumers associated with the state-owned

    or state-financed plants may well be exceeded by the additional returns required by the

    private sector to invest. Again, managing this risk/reward equation will require a

    significant amount of resources with expert knowledge of the industry.

VI. Do Power Authorities Deliver What They Promise?

    The appeal of a power authority structure is the premise that through government control

     not private control consumers will get a better deal. The rationale has been that without a profit motive and the need to show a profit to shareholders, a power authority could operate at

    less cost and return some of the savings to consumers. As states ponder the creation of a power

    authority, the question must be answered have power authorities been a better deal for

    consumers?

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