Energy Suppliers vs. Utilities: Playing Field Tilts Toward Suppliers

Earlier this year some HB 2020 opponents claimed that the Clean Energy Jobs bill created an unlevel playing field between electric utilities and Energy Service Suppliers, when the opposite is true.

First, though, what are Energy Service Suppliers (ESSs)? Customers with large electric loads can choose to purchase their power in the wholesale market, rather than from an electric utility. Power marketers, called ESSs, are companies that buy power in the short-term wholesale market and resell it to large industrial customers such as Boeing.

As CUB recently pointed out, this wholesale market is low-cost because it is subsidized by residential and small commercial customers who pay for the fixed costs of large generating assets (their capital investment) while the wholesale market only needs to cover the variable costs (primarily fuel). This is an initial factor in why the playing field for electric utilities and ESSs tilt in favor of ESSs.

Other advantages for ESSs, though, are due to a series of state and federal mandates that apply to electric utilities, but do not apply (or do not fully apply) to ESSs. While California and some other states collect most state mandates through non-bypassable charges, which require ESS customers to pay those costs, Oregon currently does not do so. Below are some of the major costs that utilities and their customers are required to pay, but ESSs and their customers are exempt.

Phase Out Coal: ESSs are free from any statutory requirements to eliminate coal from their energy mix, and so their customers do not have to pay costs associated with phasing out coal in Oregon. Customers of Oregon’s major electric utilities, however, are paying coal phase-out costs because when coal plants were built decades ago, they were considered a necessary and prudent investment to meet retail customer load. As prudent investments, utilities can recover the cost of their capital investment over the life of each plant. Due to the legislative mandate for these utilities to stop using coal to serve load after 2030, Oregon has limited the plants’ useful life. For coal plants that were originally expected to operate beyond 2030, this meant utilities had to raise rates in order to recover these investment costs before 2030.

Community Solar: Electric utilities must purchase the output of electricity from community solar projects at above market rates. ESSs are not required to purchase community solar.

Small Scale Community-Based Renewable Projects: Electric utilities must ensure that 8 percent of their electric capacity comes from electricity generated by small scale renewable energy projects. ESSs do not have a similar requirement.

Net Metering: When someone puts solar power on their roof, Oregon law requires the utility to purchase excess electricity from that homeowner and use it to serve other customers. The price is based on the retail rate which can be 2 to 3 times the cost of the wholesale market. ESSs purchase wholesale power and avoid this requirement.

PURPA: Under federal law, electric utilities are required to purchase the output of generation from independent power producers under multi-year contracts. This power is purchased at the utility’s “avoided cost” (the cost of alternative power sources). Because of the falling price of renewable power and the required multi-year contracts, utilities pay more than current market prices for PURPA power. ESSs, on the other hand, are free to purchase power at or below market price.

Renewable Portfolio Standard (RPS): While both electric utilities and ESSs have similar RPS requirements, ESSs have more flexibility and lower costs in complying with the RPS. ESSs can purchase Renewable Energy Credits (RECs) in the market rather than building renewable projects. As the RPS increases, this will change and ESS requirements will more fully parallel utility requirements, but those changes are in the future. Even then, utility customers will continue to pay for renewable investments that were required of utilities, but not ESSs, between 2011 and 2021.

Cost Effective Energy Efficiency: Due to pre-HB 2020 legislative mandates, electric utilities must acquire all cost-effective energy efficiency available to them. ESSs are under no equivalent statutory obligation. While the electric utility can place some of the costs into a non-bypassable charge to ESS customers, the costs that ESS customers pay is capped at less than half of what residential and small commercial customers pay.

Transportation Electrification: Electric utilities are required to develop and implement plans to accelerate transportation electrification. ESSs do not have a similar requirement.

Demand Response Programs: Electric utilities are required to plan for and pursue demand response programs. These programs shift customer demand to balance load and resources. Examples include PGE’s peak-time rebate program that offers customers rebates for reducing their usage during the hottest and coldest days. ESSs are not required to plan for and pursue demand response.

Integrated Resource Planning: Every two years, an electric utility must develop an Integrated Resource Plan (IRP) that looks at its ability to meet electricity demand over the next 20 years. IRPs are serious undertakings, requiring extensive modeling of loads and resources, and consideration of various market and regulatory conditions. But they are a key part of ensuring that our utility system has the capacity to ensure reliability. ESSs do not have the same requirement. They are not required to plan for future capacity needs. And if they end up with a capacity shortfall, the electric utility is required to step in and ensure that the regional grid is reliable.

To summarize, right now there is not a level playing field between electric utilities and the Electric Service Suppliers that serve big industrial companies. But the playing field is tilted in favor of the ESSs. Claims that HB 2020’s treatment of electric utilities was unfair to ESSs ignored this reality.

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