The Federal Energy Regulatory Commission – or FERC – recently ruled that wholesale electricity grid operator, PJM, must set a new price floor for bids to supply electric capacity to PJM’s 13-state mid-Atlantic/Midwest region. State utility regulators in the region are unimpressed by the rule and Maryland, New Jersey, Illinois, Ohio, and Pennsylvania have even threatened to leave the PJM market altogether. Such threats are premature.
Motivated by recent power plant subsidies in Illinois, New Jersey and Ohio, FERC’s new pricing rule aims to prevent subsidized power plants from bidding artificially low prices and distorting the electricity-supply market – and to deter neighboring states from following suit. The new rule and subsequent regulator overreaction has broad implications for other electricity markets from New England to California.
Special interests poised to benefit from hard-won subsidies understandably oppose FERC’s effort to curb state-sponsored favoritism. And those same special interests are now pressuring states to leave PJM in order to save their subsidized revenues. During a February earnings call, executives of a Chicago-based electric utility opined that “states are right in looking at what their alternatives are to continued participation in [the markets].” Another utility CEO said that as state legislators review energy policy this year, “we’ll be at the table helping where they want help.” Expect utility executives in other states to be similarly “helpful” in the coming months.
The stubborn fact is that state power plant bailouts were escalating out of control and risked a dangerous market distortion. Several PJM states directly or indirectly subsidize various forms of renewable energy to the tune of nearly $1 billion per year, and taxpayer subsidies for nuclear and coal plants in New Jersey, Ohio, and Illinois will annually cost about $735 million. Proponents often tout such subsidy schemes as saving local jobs, preserving carbon-free power sources, and raising local tax revenue. But state-backed subsidies made it increasingly difficult to find true market prices at auction, and the schemes’ inherent unfairness pressured other states to adopt their own subsidies.
Enter FERC, which took action designed to maintain some semblance of market efficiency. FERC’s attempt may or may not work, but before state regulators storm out of PJM in a huff, they should keep a few things in mind.
First, consumers benefit from participating in PJM. The regional market helps keep electricity supply reliable and affordable. Access to power across state lines makes for a more dependable grid, and allowing customers to get electricity from the lowest-cost providers across a broad region keeps a lid on utility prices. A joint academic study found that market competition reduced electricity prices in Pennsylvania, Illinois and Ohio by about 16 percent from 2009 to 2014 versus their vertically integrated neighbors – Indiana, Michigan and Wisconsin. Ohio alone saw roughly $3 billion per year in total savings.
Second, exiting the regional market will require states to replace PJM’s infrastructure for power plant procurement. And replacement costs aren’t cheap. PJM’s independent market monitor estimated that replacing PJM’s infrastructure in Illinois’ ComEd region, for instance, would likely cost customers at least an additional $414 million per year.
Third, electricity prices significantly affect state economies. Electricity is critical to production, and especially to energy-intensive manufacturing. The Buckeye Institute’s Economic Research Center found that if Ohio’s renewable energy mandates raise electricity prices by just two percent, the state’s industrial sector employment would drop by more than 10,000 jobs and output would decline by up to $1.4 billion by 2026.
Finally, the new FERC rule allows power plants to apply for an exemption. In a nutshell, if a subsidized plant shows that it would be competitive even without the taxpayer-funded subsidy, it may bid below the rule’s price floor. Thus, power providers have the opportunity to demonstrate that they can provide cheap energy even on a level playing field. They should take it.
FERC’s approach may or may not be perfect. It is simply too soon to tell. And that makes any rush to exit PJM and the regional market a premature move. States and their utility regulators should give the new rule a chance, and avoid a messy, costly divorce that will undoubtedly harm consumers, state economies, and taxpayers.