Clark Hill Attorney Steven Shparber Discussed Energy Market Reform in the Carolinas

by | Jun 22, 2022 | Uncategorized

A broad array of stakeholders believe that market and utility reform are needed in the Carolinas. South Carolina passed a law empowering legislators to engage experts, review options, and draft reform legislation for the 2023-2024 SC legislative session. In North Carolina, Governor Roy Cooper’s Executive Order 80 stakeholder process called for a study of RTOs, EIMs, and measures to make electricity more cost competitive and utilities more transparent. 

CCEBA interviewed new member, Clark Hill attorney Steven Shparber, to gain insight into what joining a Regional Transmission Organization (RTO) and other reform options might look like. The questions and his answers are provided below.

  1. How many states or what percentages of the country have an energy market as opposed to one that is regulated?  

Deregulated wholesale markets comprise approximately two-thirds of all wholesale markets in North America, including ERCOT in Texas, which is not regulated by FERC.

Regional Transmission Organizations and Independent System Operators (collectively, “RTOs”) came about beginning in the1990s to respond to FERC’s policy to encourage open access to transmission and competition.  RTOs grew from regional power pools that had coordinated utility operations for decades (most notably, PJM Interconnection, LLC (“PJM”). 

Approximately one-third of the United States maintains the legacy, vertically integrated monopoly utility model, including states in much of the Southeastern United States, and of course, the Carolinas.  

2. How do savings compare in RTOs or EIMs vs. Vertically Integrated Monopoly Utilities? 

There are many studies examining the potential savings for customers in an RTO, and even an Energy Imbalance Market (“EIM”) structure, compared to the vertically integrated monopoly utility structure.  For example, modeling done by Vibrant Clean Energy has shown the immense potential for savings should the Southeast restructure. The study found that an RTO in the Southeast would save $384 billion by 2050 and create 285,000 full time jobs. Another report from The Brattle Group noted that customers in North Carolina alone would save $600 million annually if Duke Energy joined an RTO like PJM.  

3. How do emissions compare? Adoption of renewables?

Those same studies highlighted above show an RTO in the Southeast would reduce emissions by 37 percent compared to 2018 levels, and 45 percent compared to an IRP scenario in which emissions increase. Other major pollutants impacting human health, such as NOX, SO2, and PM2.5, drop dramatically, largely as a result of eliminated coal generation. Emissions reductions are driven mostly by the deployment of renewable energy resources replacing coal.

4. Can you briefly describe SEEM? How does the transparency of a market like PJM compare to the proposed SEEM? 

SEEM is a bilateral trading platform between participating utilities. SEEM is not a deregulated market or even an EIM like the Western Energy Imbalance Market. In general, it enables the participating utilities to manage excess transmission capacity that they may have but does not function as a true market. There is no nodal pricing or liquid market where market participants can freely transact, nor is there an independent market monitor function or centralized transmission operations like there are in RTOs. 

5. If South Carolina votes to join PJM next year as it appears it might, what is the process?

At a high level, PJM would need to study the integration of South Carolina’s utilities from a technical and operational perspective, and FERC (and likely South Carolina regulators and/or legislators) would eventually have to approve the integration of the utilities into PJM.  PJM’s study process would also likely provide important information on potential costs and benefits of the integration.  

There is precedent where a utility within an RTO’s territory is not geographically contiguous with the rest of the RTO, such as Con Edison in Illinois not physically bordering the rest of PJM. This would occur if South Carolina utilities were to join PJM but North Carolina utilities do not.

6. Duke Energy recently suggested it would divide its North and South Carolina operations into two companies if South Carolina moves into a competitive wholesale market. 

  1. Can Duke Energy do that?

Most likely yes, subject to regulatory approvals and assuming that no state laws or regulations would bar this from occurring.  There is significant precedent across the country where utility parent companies have different subsidiaries operating in separate markets and states.  

  1. What permissions would Duke Energy need from FERC? 

At a minimum, Duke Energy would likely need to submit a filing (or filings) under Section 203 of the Federal Power Act (“FPA”) (related to disposition of property and consolidations), and Section 205 (related to rates). Duke Energy may also need to submit a filing or filings under Section 204 of the FPA (if any securities are issued in connection with the transaction). These filings and reviews are routine and occur in connection with utility mergers, acquisitions and divestitures, although exactly what regulatory approvals would be needed by FERC would depend on the precise nature of whatever Duke Energy would actually propose. 

  1. If Duke Energy did manage to keep North Carolina as a monopoly while South Carolina moved into a competitive market, how would it affect North Carolina ratepayers?

It would be hard to know for sure, but on a high level, North Carolina customers would lose the benefits of being part of an RTO’s larger geographic footprint. Those benefits include participation in a competitive market, and a more efficient operation of the transmission system. That said, the exact impact on North Carolina ratepayers would need to be studied further, and would depend on exactly what South Carolina utilities did (i.e. a full-scale integration into PJM, establishing an EIM operated by PJM, or something else).   

7. Even if the political will exists, it’s a long road to join or form a RTO or EIM. What are some significant market reforms that could happen more quickly?

Having full state level electric retail deregulation does not work without a deregulated wholesale market. However, there is some potential limited retail competition that South Carolina could consider that would not be dependent upon having a deregulated wholesale market.  For example, some retail competition has been present in Georgia since 1973, in which customers with manufacturing or commercial loads of 900 kW or greater are eligible for a one-time choice of their electric supplier. Another option is to do a green tariff or a buyer’s side tariff.  

8. What else should readers know or consider about utility and market reform in the Carolinas? 

RTOs certainly have their problems and challenges, but in my opinion, at the end of the day they are better for consumers and renewables compared to the alternative, vertically integrated monopoly model. Competition is better than no competition, more geographic diversity and scale is better than less, and the ability to work with multiple utilities and power providers is better than only working with one. That said, it is a major potential change that needs to be looked at and studied carefully, as South Carolina is in the process of doing.  

The views and opinions expressed above are Mr. Shparber’s alone, and do not necessarily represent the views of Clark Hill, its attorneys, or their clients.