Senate Bill 221: Modernizing Distribution Systems and RTO Participation
Jeffrey Krismer
Electricity prices are the top priority in the Ohio Senate Bill 221. Lawmakers are
concerned with the recent increase in energy prices and wish to cover as much ground as
possible to understand if state regulation can mitigate the price increases.1 This paper deals with
the specific sections of Ohio Senate Bill 221 dealing with the transmission and distribution of
electricity in the state of Ohio including infrastructure necessary to get it into homes and the
opening of markets to permit more competitors. With the need to invest in the electric
infrastructure becoming more urgent every year, lawmakers feel it is necessary gain a clearer
understanding about the current rise in electricity prices and the future capital necessary to
maintain our aging power grid. Also, lawmakers want to understand how the deregulation of
electricity markets has contributed to price increases and what path they should take Ohio in the
future.
First, this paper considers the revisions to dealing with the modernization of Distribution
Systems for power in Ohio particularly in R.C. 4928.02 and 4928.111. The second section
changes gears in explaining R.C. 4928.68 by explaining RTOs and why the bill calls for the
formation of a federal energy advocate to investigate RTOs effects on Ohioans.
I.
R.C. 4938.02 and 4938.111 - Distribution Systems Modernization Plans
What are distribution systems and why do they need to be modernized?
The distribution system is the stage in providing electricity to retail customers involving
the flow of energy from a substation to the customer’s meter. The distribution system’s main
purpose is to deliver power to retail customer but it also involves metering, billing and other
Chavez, John. Tackling Ohio’s Electric Rates. Toledo Blade. June 17, 2007
http://www.toledoblade.com/apps/pbcs.dll/article?AID=/20070617/BUSINESS01/70617004&SearchID=732845609
11871
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infrastructure dealing with customer care while responding to the constantly changing customer
electricity needs.2 The new technology coming to market has set the stage to revolutionize the
distribution of electricity including the use of net metering, a smart grid and others which allow a
better picture of supply and demand and greatly increase the efficiency of energy distribution.
Unfortunately, the current distribution system needs to be heavily modernized in order to utilize
these technologies and the question facing many state governments is how to update the systems
while keeping the prices of electricity down.
What is Ohio doing to meet the need for modern distribution systems?
State government agencies, particularly the Public Utilties Commission of Ohio (PUCO),
are heavily involved in the electric distribution business, regulating prices and rates-of-return for
shareholder-owned distribution utilities. Ohio’s state policy is written in Sec. 4928.02 which is
significantly updated by Senate Bill 221 and lists such goals as ensuring “the availability to
consumers of adequate, reliable, safe, efficient, nondiscriminatory, and reasonably priced retail
electric service” and ensuring “the availability of unbundled and comparable retail electric
service that provides consumers with the supplier, price, terms, conditions, and quality options
they elect to meet their respective needs” among a host of others.3
The Ohio Senate tackles the issue in sections dealing with the next set of electric rate
plans to be approved by PUCO. Many of the current rate stabilization plans (RSPs) used by the
electric utilities such as AEP and Duke Energy will end December 31, 2008. RSPs were
designed “to minimize the effects of rate “sticker shock” and gradually transition customers to
market-based rates” by setting up plans whereby energy companies would increase rates in a
2
Gregory Basheda, et. al., Why Are Electricity Prices Increasing? An Industry-Wide Perspective (2006). Accessible
at http://energyohio.pbwiki.com/United+States+Reports
3
2007 OH S.B. 221, Sec. 4928.02[A],[B]
2
determined fashion but with a percentage cap.4 However these rates only corresponded to
generation rates while the distribution rates for many electric utilities were capped for around
three years and transmission rates could vary.5 Since distribution rates were frozen, little
incentive was created for utilities to update their systems and thus infrastructure development has
languished.6
To replace these RSPs the Ohio government and PUCO have devised in Senate Bill 221
electric security plans, or ESPs. ESPs serve a similar purpose in providing customers with an
assurance of stable and reasonable electric rates but with a few enhancements including the
ability for the electric company to ask for adjustments in the rates for increased material costs,
infrastructure development and other expenses cited in 4928.14. All of the plans would go
through a hearing for approval with opportunity for public comment.7
ESPs , however, are explicitly not to include the costs associated with transmission and
distribution of electricity.8 Section 4928.111 as revised under Bill 221 would require the electric
utility which has an approved ESP to further file with PUCO a "long-term energy delivery
infrastructure modernization plan or any plan providing for the utility's recovery of costs and a
just and reasonable rate of return on such infrastructure modernization" and “shall specify the
initiatives the utility shall take to improve electric service reliability by rebuilding, upgrading, or
replacing the utility's distribution system.”
The bill also permits the PUCO to consider rules
that may be necessary to spur development by electric utilities.9 The above said plan does
4
http://www.puco.ohio.gov/PUCO/Consumer/information.cfm?id=6102&terms=rsp&searchtype=1&fragment=False
http://www.puco.ohio.gov/PUCO/Consumer/information.cfm?id=6102&terms=rsp&searchtype=1&fragment=False
6
Alan Schriber Testimony
7
For a informed and concise summary of the Ohio Electricity Price regulation read Alan Schriber’s testimony to the
House Public Utilites Committee from February 27, 2007. Accessible at http://energyohio.pbwiki.com/Testimonyon-Energy-Legislation . For more in-depth treatment refer to other student reports at
http://energyohio.pbwiki.com/Student+Reports
8
2007 OH S.B. 221, Sec. 4928.14[B][1]
9
2007 OH S.B. 221, Sec. 4928.02
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provide that it is to be filed under the current revised code 4909.18 and therefore is subject to
public hearings if the plan is deemed unjust and unreasonable.10
The Senate hopes to create long-term plans rather than the three years in the RSPs and
asking the utilities to detail their future investments helps to achieve this goal. The state policy
behind this language is to ensure that all parties are aware of the capital costs necessary to
maintain the electric grid and that these costs are reasonably distributed to the end consumer who
ends up paying for the modernization in the form of increased rates.11 Electrical utilities have an
incentive to create detailed plans for the future in order to receive the necessary rate increases
approved by PUCO that will allow for distribution system modernization and recovery of capital
costs.
The added language places a condition upon a utility with an approved ESP to inform the
PUCO of what is necessary to modernize the infrastructure. Companies such Duke Energy and
AEP are planning huge investments in distribution systems including Duke Energy’s plan of
spending about $1 billion over the next five years just to digitize distribution systems. 12
The bill hopes to achieve a greater transparency of a utility companies plans for the future and
what to expect from the company as to how these investments are going to be utilized
What have other state done in regards to distribution system modernization?
Former Secretary of Energy Spencer Abraham has remarked how states need to adopt
procedures to accelerate the adoption of a smart grid, the distribution system of the future, in
order to combat the risk of blackouts such as 2003 Northeast Blackout.13 While the technology
10
OH Rev. Code Sec. 4909.18
2007 OH S.B. 221, Sec. 4928.02[I]. The state shall “ensure retail electric service consumers just and reasonable
rates and protection against unreasonable sales practices, market deficiencies, and market power.”
12
Duke Energy 2007 Annual Report . See also AEP’s expenditures which amount to around $200 million a year for
maintenance and upgrades - http://www.aepohio.com/News/releases/viewrelease.asp?releaseID=227
13
Bane, Phillip. “Can the Smart Grid save the Economy?”.
http://www.smartgridnews.com/artman/publish/article_413.html
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such as smart metering is slowly becoming available, state action hasn’t been as forthcoming.
California is often cited as at the forefront of facing the possible energy crises.14 For instance the
California Energy Commission has already held hearings in October 2007 to discuss the
problems and solutions for the distribution system.15 California is actively working towards a
“smart grid” which is the next generation of distribution systems allowing the remote control and
management of a consumer’s electricity.16
California’s government is taking proactive steps to implementing the modern
distribution systems. The response from Ohio government has been tepid until the measures
concerning distribution systems were announce in Senate Bill 221. This policy is problematic in
that most experts see state involvement in the form of incentives and policy as crucial to get
companies to update the distribution systems.17 However it should be noted that Duke Energy is
currently testing a Smart Grid system in Charlotte, NC which will be deployed in Cincinnati
towards the end of 2008. The PUCO has already been in discussion with Duke Energy and AEP
regarding its Smart Grid and development of a plan to recover the capital costs associated with
the technology.18
Is Passage of R.C. 4928.02 and 4928.111 likely?
The sections concerning the modernization of distribution systems are for the most part
noncontroversial. The demand placed upon the electric utilities is no different than previous rate
plans because of the same requirements in 4909.18. Even the Ohio Environmental Council
14
Steklac, Ivo. Bridging the Gap http://www.nextgenpe.com/currentissue/article.asp?art=271002&issue=215
California Energy Commission. 2007 IEPR Hearings. October 16, 2007
http://www.energy.ca.gov/2007_energypolicy/documents/2007-10-15_hearing/presentations/Kelly_LindaSugar_John_Californias_Distribution_System.PDF
16
AEP has good powerpoint presentation which contains a diagram of the future smartgrid in Ohio. It can be found
at http://energyohio.pbwiki.com/Ohio-Reports
17
Steklac
18
McNamara, Will and Smith, Matthew. Duke Energy’s Utility of the Future: Development a Smart Grid
Regulatory Strategy Across Multi-State Jurisdictions.
http://www.gridwiseac.org/pdfs/forum_papers/155_paper_final.pdf
15
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(OEC), a vocal critic of many aspects of the bill, has no complaints with the provisions
concerning electric infrastructure saying, "it appreciates the language included in Senate Bill 221
that is intended to facilitate, or at least, encourage energy infrastructure modernization."19 As
Mr. Shaner of the OEC points out the main purpose of the included language is to foster a
continuing dialogue between the electric utilities, consumers and the government in order to
make sure Ohio has the ability to meet the increasing demands for energy without stressing the
electric grid. The current language does just that without placing a heavy demand on any party.
The one concern mentioned by the Ohio Consumer Council is that “the way the law is
implemented by the PUCO and the attention state regulators give to protecting residential
customers will be key”.20
What are the consequences of R.C. 4928.02 and 4928.111?
Before the passage of this bill, lawmakers had not placed much emphasis on distribution
systems. Now with the added language in 4928.02 and the addition of 4928.111, there is a
concerted effort to increase the dialogue between the PUCO and electric utilities and to
formulate plans to ensure consumers will acquire modern, efficient and reliable distribution
systems while keeping prices reasonable. The most significant change is that distribution rates
will once again become a factor in electricity prices though it remains to be seen just want the
PUCO deems as “just and reasonable” in evaluating distribution system modernization plans
after an ESP has been filed. What is certain is that the updates to the distribution system will not
be cheap. For instance, the replacement of meters for smart metering will cost approximately
19
Testimony of Jack Shaner Before the Ohio House Public Utilites Committee December 12, 2007
http://www.theoec.org/PDFs/testimony_green_papers/12-12-07%20Energy%20_SB%20221%20testimony_.pdf
20
“Consumers’ electric rates in hands of PUCO after Governor Strickland signs energy policy legislation”
http://www.pickocc.org/news/2008/pressrelease.php?date=05012008
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$100 to $150 per meter which does not include operation and maintenance costs.21 Thus billions
of dollars will have to be spent by utilities companies in order to update the system. However
the cost of outages from a dilapidated infrastructure is much more severe (up to $52 billion per
year), especially with our reliance on digital technology for productivity.22 Repeating a view of
the Ohio Consumer Counsel the consequences of sections 4928.02 and 4928.111 will depend on
how the PUCO and electric utilities implement the distribution systems and the costs associated
with them.
II. R.C. 4928.68 - RTO participation and the Consumer Advocate
What are RTOs and what purpose do they serve?
Whereas distribution deals with the flow of electricity from the substation to the meter,
transmission covers the transfer of power from the source of generation to the transmission lines
and the wholesale market. Since the development of power plants the ownership and operation
of the transmission lines has been with the electric utilities. This arrangement was seriously
questioned when the government began to provide incentives for the development of smaller
scale power generators not owed by the utilities, creating extra electrical capacity. However this
capacity remained untapped because getting the energy to market meant crossing the utilities
path and their prejudicial transmission rates.23
The solution envisioned by federal regulators and experts was the formation of a
wholesale electricity markets where any generator could participate. The cornerstone of this plan
is the Regional Transmission Organization (RTO) which is an independent operator of
transmission systems and operates wholesale electricity markets. The purpose of RTOs as
21
Basheda at 66.
Id.
23
Tomain, Joseph P. and Cudahy, Richard D. Energy Law in a Nutshell. (West 2002).
22
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envisioned by FERC in Order No. 2000 is to begin the transition to a national competitive
electricity market in order to increase efficiency and reduce costs.24 FERC has been strongly
promoting RTOs since the early part of the decade and currently there are seven RTOs covering
two-thirds of the United States and responsible for two-thirds of the generated electricity.25 The
Ohio electrical utilities are members of PJM and Midwest Independent Transmission System
Operator (MISO) and both organizations have entered coordination agreements further entwining
the two. 26
Although the development of RTOs is still in its infancy with many formed in just the last
five years, many criticisms abound relating to the failure of the electricity markets to meet
expectations experts had promised. As stated above the state policy in Ohio is to provide just
and reasonable electricity rates for retail customers. The allure of cheaper and more available
energy made RTOs very attractive options for state regulatory commissions and customers.
However these benefits have yet to be realized in many states and lawmakers are concerned with
the increased costs associated with the formation and participation in RTOs.27 From this
skepticism and the concern of increasing energy rates Ohio lawmakers devised R.C. 4928.68.
The provision mandates that the PUCO employ a "federal energy advocate" who role is to keep
track of FERC and other federal agencies while furthering the interests of the Ohioan consumers.
While the duties of the advocate are broad the last sentence is specific: “… the advocate shall
examine the value of the participation of this state's electric utilities in regional transmission
organizations and submit a report to the public utilities commission on whether continued
24
18 CFR Part 35.
http://www.isorto.org/site/c.jhKQIZPBImE/b.2603295/k.BEAD/Home.htm
26
http://www.miso-pjm.com/
27
“Consumers in Peril: Why RTO-Run Electricity Markets Fail to Produce Just and Reasonable Electric Rates”, pg.
V. Accessible at http://energyohio.pbwiki.com/United-States-Reports.
25
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participation of those utilities is in the interest of those consumers”.28 However the section does
not mention any deadline for the report to be filed and does not instruct how frequently a report
must be made nor does it state how much influence the report will bring over state policy.
This skepticism of the newly for RTOs highlights the major thrust in Ohio's energy
policy to keep electricity prices down. Since the passage of Senate Bill 221 many organizations
have released analyzes of the electricity markets after the inception RTOs with different
conclusion. In a recently published report by the American Public Power Association the current
interation of RTOs “has been problematic”.29 The current guidelines for RTOs are producing
large market failures such as the lack of new competitors and substantial investment, the
withholding of capacity, and refraining from building new generation resulting in higher prices.
Alan Schriber, Chairman of the PUCO, notes in his testimony on Senate Bill 221 his hesitancy to
see current RTOs as electricity markets and his suspicions that RTOs aren't competitive as they
were intended to be by citing the experiences of Texas.30 However a study by LECG refuted
some of the APPA conclusions findings including the suggestion that increasing electricity prices
are the result of RTOs.31 Instead RTOs have helped ease the increase in prices which are
primarily driven by increase in fuel.32 Although the current RTO regimes may be imperfect the
end result is a benefit to retail customers by allowing competitive pressures to lower prices.33
Still both studies agree that the current model of RTOs needs to be revised to provide for more
efficiency and to allow the companies involved to behave more like a market.34
28
R.C. Sec. 4928.68
Consumers in Peril at V-VI
30
Testimony of Alan Schriber in front of the House Public Utilities Committee. February 28, 2007. Accessible at
http://energyohio.pbwiki.com/Testimony-on-Energy-Legislation
31
Harvey, Scott M. et al. Analysis of the Impact of Coordinated Electricity Markets on Consumer Electricity
Charges. June 18, 2007. pg. 1.
32
Id.
33
Id.
34
Id. at 47.
29
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What are other states doing?
Since the inception of RTOs, states have been divided on whether they want to
participate in RTOs. As stated about two-thirds of generated power is contained in RTO markets
and most states continue to work with the idea of RTOs. One of the most attractive features of
RTOs is the ability to coordinate the market with new alternative energy resources such as
biomass, wind and solar.35 The barriers to entry are significantly lower when the operation of
transmission lines is independent of major utility producers thus allowing the possibility of more
energy generation sources to connect to the grid and receive wholesale market prices. 36
Many states were skeptical of deregulated markets when FERC issued order No. 2000 and have
still chosen not to setup RTOs. States including Nevada and Mississippi debated RTOs and
commissioned studies to analyze the cost-benefits of RTO participation.37 However for various
reasons including the skepticism of pricing benefits the utilities in these states are not part of an
RTO. Still the idea is promising to some such as companies and state regulatory commissions in
the northwest who are actively attempting to setup an RTO encompassing Oregon, Idaho,
Wyoming, Montana and Utah.38
Is passage of R.C. 4928.68 likely?
35
Increasing Renewable Resources: How ISOs and RTOs Are Helping Meet This Public Policy Objective.
Retrieved from http://www.isorto.org/atf/cf/%7B5B4E85C6-7EAC-40A0-8DC3003829518EBD%7D/IRC_Renewables_Report_101607_final.pdf
36
Harnessing the Power of Demand: How ISOs and RTOs Are Integrating Demand Response into Wholesale
Electricity Markets. Retrieved from http://www.isorto.org/atf/cf/%7B5B4E85C6-7EAC-40A0-8DC3003829518EBD%7D/IRC_DR_Report_101607.pdf
37
“Nevada PUC Orders Sierra Utilities to Consider RTO” http://tdworld.com/mag/power_united_states_nevada/ ,
“FERC Pushing Mandating Regional Transmission Organizations: Outcome would be bad for Mississippians say
PSC commissioners”. Missisippi Business Journal. Retrieved from
http://goliath.ecnext.com/coms2/summary_0199-3233675_ITM
38
Northern Tier Transmission Group - http://www.nttg.biz/site/
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There is really no reason for the provision not to be passed. Since even the chairman of
the PUCO has voiced his criticism of RTOs, having a consumer advocate working full time to
uncover the problems and provide solution for RTOs seems to be a popular choice.
What are the consequences of R.C. 4928.68?
With the release of reports by the APPA and the LECG, the true impact of the consumer
advocate in terms of understanding the effect of RTO participation is difficult to understand.
However one benefit of the advocate’s research would be the acute focus on the effect of RTOs
on Ohio. Also, there will be an individual dedicated to researching federal policy and advocating
the views of Ohio. Further the position would complement the Ohio Consumers' Counsel in
supporting the interest of retail electricity consumers on a Federal level. However there seems to
be some overlap between the OCC and this position which may make it redundant.
In looking at the strong language of skepticism towards RTOs one of the major
consequences of the provision would be if the consumer advocate concluded that RTOs are not
in the best interests of Ohioans. It would be difficult to convince utilities that they should opt out
of RTOs especially after spending so much time and resources in the transition. Further many
studies studies agree that RTOs and market deregulation is good for retail customers, but only if
the market failures can be addressed.39 Although some naysayers doubt the ability to develop a
competitive market, most experts agree that RTOs have some place in the future albeit in some
form which provides the benefits promised by FERC.
Conclusion
The language in Senate Bill 221 in regards to the distribution and transmission of
electricity in Ohio addresses the concerns stemming from the aging electrical infrastructure and
the deregulation of utilities. A modern distribution system is necessary to accomadate the rise in
39
Consumers in Peril at VII.
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digital devices and further to efficiently use the energy generated from a wide array of sources.
RTOs hold some promise but their benefits remain fully unrealized under their current
conditions. Both of these areas were vitally important for Ohio lawmakers to address and they
have done so without attempting to radically revise the Ohio regulatory system concerning
electricity. What remains to be seen is whether the Ohio government has done enough through
Senate Bill 221 to address the needs of the 21st century or too little that may need more
significant measures in the future.
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