The Regulatory Compact
A few decades ago, electricity systems were nearly all vertically-integrated; that is, singular companies owned every aspect of their region’s energy supply chain. These monopoly markets were characterized by high barriers to entry—given the expense of building large plants and long-term transmission lines—as well as large economies of scale. The enormous size of these economies created a logical reason for one large company to cover the entire market, rather than having multiple companies competing across a region.
As part of these monopoly structures, vertically-integrated utilities entered into a “regulatory compact,” an agreement between the utilities and customers granting protected monopolies so long as the utility provides reliable, least-cost energy to everyone in their region. This agreement also gives the utility a right to earn a profit from all its investments. Thus, the compact is overseen by a regulatory structure (i.e. a state-based public utility commission), which sets rates and a minimum monthly fee to cover all debt incurred from building assets and provide a rate of return to investors.
With the evolution of our country and its needs, however, U.S. energy systems began to restructure. Monopoly setups, while reliable, tend to stifle innovation as utilities must recover their enormous sunk costs in preexisting technologies. Over time, the benefits of competitive markets have come to overshadow the vertically-integrated system, and a large number of regions now operate within the wholesale markets of regional transmission organizations (RTOs). RTOs stimulate competition, reduce the transaction costs of communicating distribution needs between utilities, more easily maintain a long-distance transmission grid, and help provide reliable, least-cost energy to consumers.
A Sluggish Southeast
Lagging behind in this transition is the Southeast, which still operates under the vertically-integrated model. The lack of competition often creates an impetus for utilities to constantly raise rates and expand their rate base without limits; Duke Energy, one of the largest electric power holding companies in the country, has often drawn questions and criticism for attempts to do just that. Though electricity rates in the Southeast are relatively low, energy bills are high in comparison to consumer income. What’s more, many states in the region have dealt with failure or stranding of significant utility expenditures, as well as pollution disasters and cleanup, and customers have been forced to foot much of the bill.
A transition from a monopoly structure to a market-based system with competition could help center customers as a main part of the discussion, versus a focus on utilities’ interests and profits. A 2020 study from Duke University’s Nicholas Institute for Environmental Policy solutions indicated that creating a large southeastern power market would be the best bet for generating competition and encouraging cleaner energy production. Converting to such a market, in conjunction with policy change ensuring long term flexibility, a low-emissions grid, and continued customer savings, would weaken the monopoly on power sales. It would provide nonincumbent generators with easier system access, lowering wholesale costs, and improving power system flexibility and efficiency.
Southeastern Energy Exchange Market
Utilities in the Southeast, including Duke Energy, have proposed a Southeast Energy Exchange Market (SEEM) that would make it easier for utilities to efficiently share power. Though utilities can currently buy and sell energy from each other, the process is bulky and antiquated; SEEM would utilize an automated algorithm that would allow participants to submit bids to provide or purchase power from each other.
Though SEEM may streamline utility cooperation and generate some savings for customers, the model is considered to be more “pro-utility” than other reform options. Customers would not necessarily have more choice in generation, and studies have suggested that benefits would be negligible, versus competitive market structures providing greater savings. A number of nonprofits have criticized the SEEM proposal for its lack of transparency and detail, noting that it may bar smaller developers and power producers from entering the market. SEEM also provides less impetus for companies to reduce energy consumption or move toward cleaner energy.
The Federal Energy Regulatory Commission (FERC) flat out rejected the proposal, putting forth a long list of detailed questions to fill in for the initial proposal’s “deficiency.” FERC noted that the SEEM plan, as submitted, may actually increase utilities’ strength and market stronghold. The proposal was not clear as to how it would include external stakeholders, save customers money, set pricing, impact the existing Southeastern market, or interact with RTOs.
A Southeastern RTO?
Evaluations have shown that creating a Southeast RTO would likely produce the most benefits when compared to other options. The RTO would spread over a large geographic region, giving participants authority over transmission and grid reliability. Those engaged could balance supply and demand in their day-ahead and real-time energy markets by using the least-cost resources, thus saving consumers money.
After major monetary losses in their utilities platform (notably the failed VC Sumner nuclear project) and rising rates, South Carolina enacted a study bill to create a committee examining the possibilities for electricity market reform in the state. The results will illuminate which type of structure (RTO, an energy exchange market like SEEM, an energy imbalance market, etc.) will be best for reducing costs and bettering consumer benefits.
North Carolina has since looked to mirror South Carolina’s study. Given that Duke Energy operates in both states, it is reasonable that the two cooperate to align and push for cooperative market reform. As with South Carolina’s bill, the North Carolina study would work to determine the best structure for the state in terms of connection to different existing market arrangements, other regional markets, and the costs, benefits, and risks to stakeholders. Many support this research-based route as a logical move, given that other big financial and energy market decisions have been similarly studied before enactment. South Carolina’s results deadline, originally in 2021, has been pushed to 2022 to align with North Carolina’s release; from there both states could pursue reasonable and informed market updates.
Duke Energy Opposition
But in North Carolina, bill progress has recently ground to a halt. Where Duke Energy has supported South Carolina’s study, they now are offering staunch opposition to similar North Carolinian advancements. A Duke spokesman noted that the company does not see a need for a study at this time, calling the study bill “counterproductive.” The statement implied that the utility feels it has already done enough on clean energy progress in working with North Carolina Governor Cooper on the state’s Clean Energy Plan. (Note that a Clean Energy Plan stakeholder report has recommended the introduction of such a study).
A non profit group run by former Duke Energy executives and with hundreds of thousands in donations from the utility has released attack ads: “tell [North Carolina] Rep. Larry Strickland [the bill’s primary sponsor] not to raise my power bill.” The ads also point to a website which claims to tell “the ugly truth” about RTOs. The ads have since been pulled under the assertion that bill sponsors have agreed to not push the study bill in this legislative session, and that the study will not be included in another major energy bill that is anticipated to emerge soon. The assertion that the bill sponsors will not continue pushing the study bill is false.
South Carolina Senator Tom Davis, a leading sponsor of his state’s study bill, is disappointed but not surprised by Duke Energy’s opposition. It seems strange that the utility would support a study in one state but not another. However, Sen. Davis cites a differing political climate—and Duke trying to appease customers after its VC Sumner loss—as a potential reason. He also says he expects opposition should the South Carolina study recommend an RTO or competitive market reform.
Duke Energy’s Dealings
It seems that Duke Energy does not want to risk lending more evidence to what others have already suggested—their monopoly market is not the best for the Southeastern region or its customers. They would rather push their own agenda with SEEM, a haphazard proposal with missing details and the potential to further utilities’ aims.
The utility recently reported its first-quarter earnings for the year, which were better than expected and showed an increase from the previous year. Adjusted profits sat at $1.26 per share, with a bottom line improved by 10.5 percent on a year-over-year basis, and 3.4 percent revenue growth over the 2020 ($6.15 billion). Duke Energy’s stock has a total market capitalization of $79.8 billion.
These huge earnings are driven by the regulatory compact, as the utility continues to pursue massive project investments and, in turn, rate increases across its customer base. Duke Energy’s 2020 integrated resource plan (IRP) detailed multiple paths that it could take over the next 15 years, all pursuing varying levels of reducing its carbon footprint and resultant costs. The IRP was more renewable energy-friendly than previous plans, setting goals for halving emissions by 2030 and net-zero carbon by 2050. These goals are ambitious and will prove costly, both in terms of new tech investment and in attempting to recover costs as coal plants come offline before the end of their planned useful life. Meeting the IRP’s targets is important in the scheme of combating climate change; nevertheless, Duke Energy customers can expect their rates to reflect these changes over time.
Beyond expenses necessary for reducing emissions, however, the IRP contradicts itself. While setting goals for clean energy progress, the utility has also planned for up to 9,600 megawatts of new natural gas plants. In terms of going net-zero, natural gas hardly fits into the picture, and could leave customers responsible for paying the costs of $4.3 billion in stranded assets after 2050. Further critiques have emerged in public service commission hearings on the IRPs. One testimony cited an analysis showing that if Duke replaced all proposed new gas plants with renewables, battery storage, and energy efficiency programming, the cost would be $7.2 billion less than it currently stands. This approach would not only accelerate the utility toward its neutrality goals, but would also avoid wasted assets, resultant costs, and excessive customer burden.
Natural gas load coming from natural gas power plants further constrains the supply in North Carolina, which will increase interruptions and costs of natural gas for industries that rely upon this fuel. Organized markets such as RTOs relieve the need for more natural gas when the entire system is under stress.
Another cost coming down the pipeline is Duke Energy’s grid modernization project. The plan was originally set to play out over 10 years at a price tag of $13 billion, and many described it as simply “gold-plated routine maintenance designed to pad the company’s balance sheet,” versus something that would meaningfully modernize the grid. The utility sought to use a bill rider to pay for the program, which would have allowed circumvention of regulatory scrutiny. After the rider failed, Duke Energy again tried to push legislation in North Carolina (HB 559) that would have allowed multi-year rate hikes (without utility commission approval) for projected projects, including the grid modernization plan. HB 559 saw intense bipartisan opposition, who claimed the bill would only help the utility claim excess profits and would put an unchecked burden on consumers. The bill also ultimately failed.
The initial grid modernization plan was ultimately rejected, and was scaled back as a “grid improvement” 3-year pilot project that sat at around $2.5 billion. Settlements with environmental groups pushed the project toward more climate and resiliency work, including deploying sensors to speed problem detection and repair, software to dispatch power, grid hardening in hurricane-prone areas, voltage optimization, electric vehicle charging infrastructure, and energy storage deployment. As of April 2021, the Duke Energy settlements with stakeholders were approved for future grid improvements, the costs of which will be evaluated in future rate requests. And while costs for future grid improvements are still planned, grid modernization is only the beginning. Further cost increases are expected.
Even if Duke Energy’s proposed spending will be distributed into projects that are overall beneficial in terms of climate and clean energy, the onus for payment falls on customers, with an accounting method that allows the utility to profit from investments without fail. And considering the company’s history—pushing for unchecked ratemaking, unnecessary spending, plans to build assets that will strand in the near future, lack of transparency, requests for billions in cost deferrals, payments for pollution cleanup, and the recent backlash against informed market reform via study bills—it is hard not to question the utility’s expenditures. All of these issues are falling onto consumers at once. Rates are already increasing by three to four percent in 2022 (which is less than the utility originally proposed), and on top of this, Duke and yet Duke Energy still sees higher-than-normal earnings. It all begs the question—does the utility really feel that these burdens will not negatively impact its consumers, and further, the region’s economy?
Highly impacted are industry consumers, particularly in terms of manufacturing. These businesses are immense energy users as they run equipment 24/7, and as costs increase, their burden will be substantial. Many of the states operating in Duke Energy’s domain are huge in manufacturing industries, with North Carolina ranking as the fifth-largest manufacturing state in America as of 2019. If the utility takes many pricey actions all at once, as they have recently, and continues to oppose considerations for energy reform, it stands to reason that manufacturing will move to regions with different, competitive market structures and lower rates.
CUCA is a non-profit organization founded in 1983 to support the unique energy needs of large industries, and we call on Duke Energy to consider the ramifications of the cost burdens they have created. We also advocate for a reversal of the utility’s opposition to North Carolina HB 611, as a market reform study would support all Carolina consumers – in North and South Carolina. The bill has bipartisan support – a rarity these days. It was filed and moved to the N.C. House Rules Committee, where it has remained for over a month. Supporting this bill, and remaining open to feedback and critique on our markets and clean energy progress, is the responsible way to seek what’s best for North Carolina’s future.