Who Pays in Deregulated Energy Markets?

Who Pays in Deregulated Energy Markets? A Panel Analysis of Cross-Subsidization from Ohio Complete Bill Data Noah Dormady (Ohio State), Matthew Hoyt (Exeter Associates), Alfredo Roa-Henriquez (Ohio State), & William Welch (Ohio State) Fall 2017 IAEE/USAEE Annual Meetings Houston, TX

Select Literature Review Bushnell, Mansur, & Novan (2017): Arguably, the most fundamental question regarding restructuring relates to its impact on consumers electricity prices. Here, again, the empirical research is somewhat muddled (p. 11). Early Price Studies: Recent Price Studies: Cross-Subsidy Studies: Apt (2005): No impact on (Ind.) price from retail restructuring. Joskow (2006): (Res.) and Ind. customer savings from retail competition. Kwoka (2008): Early studies flawed by empirical limitations, confounding changes. Swadley & Yücel (2011): Retail price mark-ups decline relative to wholesale price. Su (2015): No impact on Ind./Comm., short-term savings to Res. Ros (2017): Savings to all classes, but benefit greatest / lasting to Ind. Hartley, Medlock, & Jankovska [HM&J] (2017): Res. and Ind. price decreases. Nagayama (2007): Developing countries, ind. prices decline fastest and subsidy decreases along with reform. Erdogdu (2011): Developed countries, subsidy to res. increases with reform. Su (2015) / HM&J (2017): Attributes change to shifts in inter-class subsidy.

Benefits to using complete bill data (instead of EIA 826 data) Not included in EIA, but included in our data (Deflates the numerator) Revenue to: r d r c r g Distribution company Parent corporation Arms-length genco Bill = r d + r c + r g c SSO + c CRES Consumption of Electricity by c SSO c CRES SSO Customers (unswitched) CRES Customers (switched) Included in EIA, but excluded in our data (Inflates the denominator)

History of Deregulation in Ohio

Table 1. Data Definitions, Units and Source Data Sources Variable Name Description Unit Source Price_ Monthly indicative residential marginal price by metro area based on complete bill and usage fixed at 750 kwh /kwh PUCO Price_ Price_ NatGasDeliv_Price CoalDeliv_Price LMP Monthly indicative commercial marginal price by metro area based on complete bill and usage fixed at 300,000 kwh Monthly indicative industrial marginal price by metro area based on complete bill and usage fixed at 6,000,000 kwh Monthly wholesale fuel price for natural gas inclusive of cost for delivery to Ohio Monthly wholesale fuel price for coal inclusive of cost for delivery to Ohio Hourly PJM and MISO LMPs weighted by hourly load and aggregated into monthly rates /kwh /kwh $/mmbtu $/mmbtu /kwh PUCO PUCO EIA, EPM, Table 4.10.A EIA, EPM, Table 4.10.A PJM, MISO Div_Com_Stock Dollar amount of dividends issued to common stock holders Billions FERC Form 1/ 3-Q Div_Pref_Stock Dollar amount of dividends issued to preferred stock holders Billions FERC Form 1/ 3-Q Tot_Op_Expn Dollar amount of operations for the reporting electric entity Billions FERC Form 1/ 3-Q Res_Sales_MWh Megawatt-hours provided to residential customers by the reporting electric entity Million MWh FERC Form 1/ 3-Q Comm_Sales_MWh Ind_Sales_MWh Megawatt-hours provided to small commercial firms by the reporting electric entity Megawatt-hours provided to large commercial firms by the reporting electric entity Million MWh FERC Form 1/ 3-Q Million MWh FERC Form 1/ 3-Q

Theoretical Contribution: Deconstructing Cross-Subsidization Type I (Inter-class) Consumption side Type II (Inter-firm) Production Side Parent Corp. Distribution Utility Riders & Surcharges Cross-subsidy Arms-length Genco

1 Price Ratio 1.2 1.4 1.6 Type I: Price Ratios (pre- & post-restructuring) Marginal Price Ratio 2004m1 2006m1 2008m1 2010m1 2012m1 2014m1 2016m1 Date / Ratio / Ratio Vertical line indicates implementation of retail electric deregulation beginning January 2009

Theoretical Contribution: Deconstructing Cross-Subsidization Type I (Inter-class) Consumption side Type II (Inter-firm) Production Side Parent Corp. Distribution Utility Riders & Surcharges Cross-subsidy Arms-length Genco

p Econometric Approach (xtscc: Driscoll-Kraay estimator) d z d z z W C X T v gas gas coal it, i, t, gas i, t, gas t, coal it, it, it, i it, Alternative model specifications replace input fuels with load-weighted wholesale LMP

/kwh 5 4 3 2 1 0-1 -2-3 -4 Results: Retail Restructuring Retail Restructuring (total effect) First Energy AEP Duke DP&L Model 2 Model 4

/kwh LMP Results 0.06 0.04 0.02 0-0.02-0.04-0.06 Wholesale Load-Weighted LMP (Coefficients) First Energy AEP Duke DP&L Overall Effect Post-Restructuring Effect

/kwh 0.6 0.4 0.2 0-0.2-0.4-0.6-0.8 Natural Gas Price Results Natural Gas Price (Coefficients) First Energy AEP Duke DP&L Overall Effect Post-Restructuring Effect $/mmbtu

In Conclusion Type I Cross-subsidization (inter-class) Where customers observed savings greatest savings to industrial customers Where customers observed costs greatest costs to residential customers Type II Cross-subsidization (inter-firm) Market-based pricing construct of retail deregulation should have resulted in savings of historic low gas price and low wholesale prices being passed on to consumers Historic low gas prices/wholesale prices reduced revenues of arms-length gencos (predominantly coal-fired) Utilities used commission-approved riders and surcharges to offset losses of gencos Those cost pass-thrus more than cancelled out any benefit customers observed from retail restructuring

In Conclusion Implications for future research: Maintain a healthy skepticism of multi-state studies that lack details of state-level regulatory interventions E.g., Severe flaws of EIA 826 data E.g., Severe flaws of EIA s Status of Electricity Restructuring Reports E.g., Not accounting for holding company structures, affiliates, revenue flow thrus Implications for practice: Do it (deregulation) right Divestiture should be thorough no remaining vestiges of vertical integration Ohio is not alone Several states failed to require thorough divestiture Several states are still collecting transition revenues (whether they call it that or not) And federal data is not identifying it

Thank you

0 5 Constant 2016$ 10 15 20 Input Price Delivered Trends 2004m1 2006m1 2008m1 2010m1 2012m1 2014m1 2016m1 Date Price of Natural Gas Delivered ($/mbtu) Price of Coal Delivered ($/mbtu)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 LoadWeighted, Aggregated Locational Marginal Price by IOU 120 90 AEP 120 90 DP&L 60 60 30 30 0 0 120 90 Duke 120 90 FirstEnergy 60 60 30 30 0 0

.09.19.09.19.09.19.09.19.09.19.09.19.09.19 Time Series Plot of Marginal Price by Sector and Metro Area Price (Constant 2016$) Akron Canton Cinci 2004m1 2016m12 2004m1 2016m12 2004m1 2016m12 Cleveland Columbus Dayton 2004m1 2016m12 2004m1 2016m12 2004m1 2016m12 Toledo 2004m1 2016m12 Date Price_ Price_ Price_ Graphs by City

Statewide Aggregate Electricity Price.11.12.13.14.15 Jan 2004 Jan 2006 Jan 2008 Jan 2010 Jan 2012 Jan 2014 Jan 2016 Date

1 2 1 2 1 2 1 2 1 2 1 2 1 2 Time Series Plot of Marginal Price Ratios Marginal Price Ratio Akron Canton Cinci 2004m1 2016m12 2004m1 2016m12 2004m1 2016m12 Cleveland Columbus Dayton 2004m1 2016m12 2004m1 2016m12 2004m1 2016m12 Toledo 2004m1 Graphs by City 2016m12 / Ratio Date / Ratio

# of Intervening Attorneys in Recent AEP ESP Rate Case by Sector 10 Count of Intervening Attorneys 9 8 7 6 5 4 3 2 1 0 Industry Environment/Social Justice Regulated Utility Consumers Wholesaler (Unregulated Utility) Electric Retailer Commission Staff