Power producer: Deregulated markets are a 'veritable livestock auction'

October 11, 2013
Matthew Bandyk

Competitive electricity markets are fundamentally broken in a way that leads to higher costs and worse service for consumers and endangers the basic goal of keeping the lights on, Quantum Utility Generation CEO Larry Kellerman said Oct. 10.

Speaking at the SNL Energy Electric Generation Landscape conference in Houston, Kellerman argued that being in a market like the deregulated one in Texas means that customers are "living in an environment where the reliability of our supply is not in the hands of well-capitalized utilities and their highly intelligent teams of planners, but in the hands of thinly capitalized energy providers, traders and speculative developers."

What's more, tinkering around the edges won't solve the problem, he said. State governments in deregulated markets have at various times over the past few years tried to subsidize new generation, saying market incentives are not sufficient to get new plants built. For example, New Jersey Gov. Chris Christie advocated doling out millions of dollars of payments for two natural gas-fired combined-cycle plants to get them into the auction for capacity in the PJM market. Maryland enacted a similar subsidy program, but a federal district court recently ruled that it was unconstitutional.

These subsidies, however, are akin to "trying to build a house on a swamp" instead of dry land, Kellerman said in an interview after his remarks at the conference. The basic market structures in regions like the Mid-Atlantic and New England will still lead to worse results for consumers because they allow plants to drive up prices through bidding.

In the case of Texas, Kellerman cited a recent study by the Texas Coalition for Affordable Power which found that Texas electricity users have paid prices 8.5% higher than the national average in the decade since deregulation, as opposed to 6.4% below the average in the previous decade.

He acknowledged that his position might seem a bit contradictory given the fact that Houston-headquartered Quantum Utility Generation is an independent power producer participating in these markets. The company, which is the power plant investment arm of private equity firm Quantum Energy Partners, has recently acquired natural gas-fired plants in Florida and Mississippi, such as a 746-MW combined-cycle plant in Choctaw County, Miss. It also owns shares in two coal-fired plants in Virginia that sell power to Dominion Resources Inc. subsidiary Virginia Electric and Power Co. d/b/a Dominion Virginia Power.

But despite the contradiction, Kellerman said he wants to tell what he sees as the truth about electricity markets to help reverse a perceived degradation of the utility-customer relationship, also a result of the markets. "What you do every day is really detached from end customers," he said of power generators. "Your role is fundamentally altered from being a customer-driven organization to being a commodity supplier of a rather undifferentiated commodity product in a veritable livestock auction in the power industry's equivalent of the county stockyards."

But a return to fully regulated utilities is no solution either, despite his deep misgivings about deregulation. Markets for energy, as opposed to capacity, are generally competitive and should be retained, Kellerman said. But competitive capacity markets, in which plants bid to have their capacity available at a certain time, should be scrapped, he advocated. To ensure that there is enough capacity to keep the lights on, individual state governments should partially regulate the process by doing regular requests for proposals in which they ask generators to provide the least-cost power to meet a certain level of supply, he said.

States should "reward the most efficient provider of megawatts," he said. In many cases, existing generators would gain the most from this process, because they are in the best position to most efficiently develop new plants at existing sites, according to Kellerman.

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