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Laughable: FirstEnergy Exec Complains of "Government Interference" in Electric Business; Reaps Massive Capacity Subsidies
Addressing the U.S. Chamber of Commerce, FirstEnergy Corp. CEO Anthony Alexander complained yesterday of "intrusive and disruptive" government interference in the electric markets.
This from a company that has received billions of dollars in mandated capacity payments from customers.
"But quite frankly, the challenges we now face from government interference in the electric business are far more intrusive and disruptive, and I believe far more significant to our industry's future, and to your future. That's because whether it impacts our traditional regulated business or our competitive operations, government policy is now aimed at stifling the growth and use of electricity – and picking winners and losers in the competitive marketplace," Alexander said.
We wish to stress Alexander may have legitimate arguments on certain points. Our point, however, is that Alexander's company has profited handsomely for years from an artificial subsidy in the capacity market that favored FirstEnergy's merchant fleet -- formerly incumbent, largely depreciated assets with lower going-forward fixed costs -- at the expense of new competitive entrants who, with newer, more efficient plants, can provide greater value to customers on an all-in cost basis, but whose high upfront costs keep them out of the market through the artificial capacity product definition (and attendant lack of scarcity pricing preventing any merchant build based on the energy market alone). Alexander apparently has no problem with these subsidies, but sees them slipping away, and now is on a crusade against government interference.
ADVERTISEMENT Alexander continued:
"To help put this in perspective, consider the following questions:
• "Would you want to compete in a market in which the government can and does suppress the demand for your product?
• "Or, would you want to compete in a market in which the government subsidizes your competitor?
• "Or, would you think it is fair to face competition from a supplier who can be indifferent to price… since all of its costs, including a return on investment, are guaranteed?"
On point #1, Alexander doesn't seem to care that customers are forced to participate in a market in which the government does the opposite -- artificially creates demand for a product (capacity).
On points #2-3, that exact situation occurs today with generation units which do not clear the capacity market due to the government picking winning and losing plants (the government picks plants based on an artificial metric, lowest going-forward fixed costs, rather than total value or cost to customers). The incumbent competitors of new entrants receive a subsidy solely because they are the government's (not the customer's) preferred resource (chosen through an artificial, non-market definition of capacity), and the existence of such subsidies acts as a barrier for truly merchant units to enter the market without first clearing the capacity market, which is tilted in favor of incumbent, largely depreciated units with lower going-forward costs (even if they have a higher all-in energy production cost).
Alexander continued:
"In the electric utility industry, energy efficiency, renewable power, distributed generation, micro grids, roof-top solar and demand reduction are examples of what 'sounds good' – and while they may all play some role in meeting the energy needs of customers, they are not substitutes for what has worked to sustain a reliable, affordable and environmentally responsible electric system. And, the mandates and subsidies needed to force their use have far-reaching consequences for our customers and our economy."
We agree that mandates and subsidies -- including those loved by FirstEnergy for capacity -- have far-reaching consequences for customers and our economy, which is why policymakers must move away from jobs-killing capacity markets in favor of customer-driven choices for generation.
Alexander implored policymakers to consider, "that electric customers are being forced to pay additional costs for subsidized, unneeded generation."
While we take Alexander to mean either state-contracted capacity, or capacity built to meet renewable mandates (or to "firm" such renewable capacity), we must emphasize that the sacred capacity "market" also forces customers to pay for "subsidized, unneeded generation".
And we don't just mean capacity to meet an artificial reserve margin (though, that is wasteful as well), we specifically mean in PJM where the capacity market demand curve routinely clears, and subsidizes, capacity in excess of the reserve margin. If the reserve margin has any meaning, such mandated additional capacity purchases in excess of the reserve margin are simply a waste, and amount to corporate welfare provided to generation owners. Yet this over-procurement in the capacity market is accepted by federal policymakers (not customers) as somehow providing "incremental" reliability benefits. This doesn't even take into account chronic over-forecasting of load which forces customers to pay additional costs for subsidized, unneeded generation in the capacity market.
Even as Alexander railed against government interference, it is clear from his desired policy he wants government interference -- just interference that benefits FirstEnergy's generation portfolio. Because centralized planning, or some other form of government-directed subsidies or investment, is the only way that the industry will get the "fuel diversity" espoused by Alexander.
Specifically, Alexander said of the polar vortex, "The regional grid was under severe stress during this weather event. And the lesson learned should be obvious: We need to maintain a diverse fleet – including real generating assets such as coal, nuclear and natural gas – to ensure reliable, affordable service over the long term."
"But, perhaps more important, we need to develop a national energy plan that will allow us to take advantage of our vast supply of domestically produced resources – both coal and natural gas – and our superior electric system to stimulate and support our economy," Alexander said.
National Energy Plan? We can't square such an idea with a truly competitive market driven by customer choice.
"We need to reaffirm this nation's long-term energy policy in favor of diversity of supply and reliance on the market, not the government picking winners and losers among energy technologies and customer choices," Alexander said.
Again, true reliance on the market is not expected to produce fuel diversity, so Alexander is obviously fishing for some government interference, just interference that has different priorities than the current interference.
If Alexander really wants to get the government out of the electric business, he can start by leading the crusade against the market-distorting capacity market, which is simply a government-created demand for one of his company's products. Until then, his defense of markets rings hollow.
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April 9, 2014
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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