A Paper Presented to Round Table 10-B The 18 th World Energy Congress

1. The Role of Regulators inEnergy RestructuringThe United States Experience:A view from the State of New Jersey A Paper Presented to Round Table 10-B The 18th World Energy Congress By Commissioner Frederick Butler Buenos Aires, Argentina October 27, 2014

2. United States The Early Regulators

3. Beginnings of Regulation in the United States • First appeared in the states of the Great Plains (Midwest), where railroads dominated economic life • Continued to spread to East and South • Eventually concentrated on electric, gas, and telecommunication sectors by early 1900’s

4. RegulatoryOrganizational Models Theory of Command and Control prevailed during most of 20th Century

5. Theory of Command & Control • All decisions both financial and operational needed to be approved by the regulator • Return on investment accomplished by rate-base rate of return methodology • Planning for redundancy was the accepted norm • Rate payers paid higher than efficient prices, but were assured reliability

6. The New Jersey Board of Public Utilities • Consists of five members, appointed by the Governor and confirmed by the Senate to six year terms • One Commissioner is designated as President by the Governor • Regulates investor-owned utilities in the electricity, natural gas, telecommunications, water, and cable television sectors

7. Background and History • Established in 1911 by Governor Woodrow Wilson • Oldest consumer protection agency in New Jersey • Empowered to set rates, approve financing and set standards for the utilities • Originally had jurisdiction over railroads, buses, canals, subways, pipelines, gas, electric, light, oil, sewer, waste disposal, telephone & telegraph • Board today has jurisdiction over electric, natural gas,telecommunications, cable television, water and waste water companies

8. Theory and Process of Deregulation/Restructuring from the Regulator’s Point of View • Growing movement in 1990’s to allow competition among suppliers of electricity, natural gas, and telecommunications • Local distribution systems to end-users would remain a monopoly and fully regulated

9. Inefficiencies in Supply Market Would Be Eliminated • Prices would fall as a result of new efficiencies and competition • Almost half the 50 states in the United States have adopted some level of deregulation/restructuring of the energy sectors

10. Status of State Electric Industry Restructuring ActivityAs of August 2001

11. Restructuring Legislation Enacted Arizona, Arkansas, California, Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, and West Virginia Comprehensive Regulatory Order IssuedNew York Legislation/Orders Pending None Commission or Legislative Investigation Ongoing Alaska, Colorado, Florida, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, North Carolina, North Dakota, South Carolina, Utah, Vermont, Washington, Wisconsin, and Wyoming. No Activity Alabama, Georgia, Hawaii, Idaho, Kansas, Nebraska, South Dakota, and Tennessee Source: Energy Information Administration.

12. The Current Model Regulators as Generation Market Facilitators and Distribution System Overseers

13. In Restructured Markets, Regulators Have Abandoned Their Role As Command and Control Agents With Regard to Suppliers of Energy • Their new role is more of a market referee • Rules of market are established • Separation (unbundling) of supply, transmission, and distribution portions of the former vertically integrated monopoly • In supply sector, the regulator oversees the market and the adherence to market rules in much the same way as a referee in a sports contest • Penalties can be assessed (in states like New Jersey) both financial and punitive (license revocation)

14. Legislative Framework Enabling Legislation

15. New Jersey Board of Public UtilitiesEnabling Legislation • New Jersey Permanent Statutes • Title 48:2-13 Powers of the Board • The board shall have general supervision and regulation of and jurisdiction and control over all public utilities • Title 48:2-16 Supervisory and regulatory powers in general • The Board may require from any utility: • Compliance with laws and ordinances • System of accounts • Periodic reports • Notice of accidents

16. In Contrast, Regulators Still Act As Command and Control Overseers With Regard to the Local Distribution System to End-users. • Rate-base rate of return policies still in place for the distribution system • Unbundled services of incumbent utilities are viewed differently by the regulators • Need arises for new bifurcated thinking and staff resources, while we act as both market managers and delivery system controllers

17. BPU Organizational Chart

18. Problems Encountered in Obtaining the Desired Results Some Potential Solutions

19. Difficult to chart a course toward deregulated energy supply markets while avoiding twin obstacles of too heavy-handed market management and overly lenient deregulation

20. Balancing Act • Too heavy-handed: • Requiring full divestiture of generation; overly onerous environmental restrictions; or setting comparison supply kwh price too low • Too lenient: • Assuming a market will develop spontaneously and overnight; not having in place controls against gaming the system by suppliers or customers • California guilty of both excesses • “The Perfect Storm”

21. California Restructuring Law (AB1890) • Utilities directed to sell off thermal capacity – market dominance concerns. • The state backs refinancing of utility debt. • Power exchange (PX) created for wholesale power transactions, which utilities are required to buy through. (Spot market). • ISO created to manage grid operations and reliability. • Direct access for customers. • Electricity rates were frozen at a discount.

22. Market Flaws Deregulation design has been largely criticized for the perceived market flaws it created: • No time-of-day rates, therefore few, if any, price signals to users. • The utilities could only buy power on spot market. • Marketers did not enter the market due to public utility commission’s establishment of low capped rate for the three electric utilities. • Setting the comparison supply Kwh price too low

23. The Perfect Storm • Many commentators on the California situation have likened the confluence of events that caused this crisis to the “perfect storm”. • Lack of new generation – no new power plants built in the state in the past ten years. Reason include: 1) uncertainty over effect of restructuring on cost recovery. 2) environmental gridlock – NIMBY.

24. The Perfect Storm (Cont’d) • California is a net importer of its energy needs (in-state generating capacity is 75% of total demand). Much of that energy is supplied by the northwest. • The northwest region, which relies heavily on hydropower is experiencing the driest year in 75 years. • In 2000/2001 hydroelectric generation levels fell 23% below previous levels. A decrease of almost 9 million MWh. • Throughout the summer of 2000, imports into the California ISO significantly decreased by 40% due to growth in surrounding states and low hydro levels. • Additionally, California generator owners exported power from California to regions that were willing to pay much higher prices for their energy, contributing to the shortage of power in California.

25. Underlying Factors Demand has increased: • Peak demand has increased by 12% from 1996-1999. Peak demand increased by 5,522 MW from 1996-1999. • Only 672 MW of net capacity was added. Demand increased linked to California’s booming economy. • An unusually hot summer in 2000 and a colder than normal winter in 2000/2001, the coldest since 1911.

26. Underlying Factors (Cont’d) • The drop in hydroelectric power availability increases reliance on natural gas supply, prices and emissions costs. • In June 2001, natural gas prices increased from $2.30/Mcf to $9.00-10.00/Mcf. • 45% of California generation is fueled with natural gas.

27. Underlying Factors (Cont’d) Outages: Year 2000 planned and unplanned outages increased by 53% in June, 57% in July and 23.5% in august compared to 1999. Average megawatts out of service increased by 77% in June, 121% in July and 461% in august above the same period in 1999.

28. Solution • Strive to maintain a balance and a preference for slow, steady change • Evolution not revolution • Key points to remember • Markets develop slowly • Rapid, diametric shifts destabilize confidence levels of market participants (including end users) and can be profoundly counterproductive • Many laws can be repealed, but not the laws of supply & demand

29. While a balance between too heavy and too lenient direction must be achieved on the supply side, vigorous regulation of the distribution system must be in place to assure reliability Although price is a very key component, reliability is the most important value for customers Unless firm and vigilant regulation is being practiced by the regulatory body, the tendency will be to rest on the planned redundancies of the old era and not make the necessary investments to upgrade the distribution system The Problem of Assuring Reliability in the Distribution System

30. Solution: Reliability Assurance Techniques of New Jersey, PJM, New England States, Etc. • Oversight and monitoring of investment levels • Setting of performance goals • Consideration of incentive regulation and penalties

31. The Problem of Open Market Creation – Difficult to Assure and Disruption to Consumers May Threaten Achievement of the Goal • The competitive market can theoretically produce lower prices and greater choice of products for consumers • Volatility is a threat to consumers’ confidence, yet it is a reality in most competitive regulation-free markets • Consumers must be educated as to the benefits and new realities of the open market, and safeguards must be put into place to avoid wide market fluctuations • Solution: • A system of cross border trading and a market monitor such as the PJM Independent System Operator in the Mid Atlantic United States

32. PJM Independent System Operator (ISO) Membership: 200+ Members 100+ Transmission Service Customers

33. Independent System Operator Roles • Operates largest electric power system in North America • Administers the regional wholesale electric market • Controls a reliable transmission system • Provides market monitoring coordinated with states • Provides for comprehensive regional transmission expansion planning • Provides an information resource for regulators

34. PJM Statistics Complexity • 540 Generation Resources with Diverse Fuel Types • 8,000 Miles of Transmission • $5.5 Billion of Transmission Assets • Over 22 Million People Served Uniqueness • Single Control Area in NERC Region • Six jurisdictions ( PA, NJ, MD, VA, DE, DC) Energy Market Volumes: 2000 • Number of Energy Transactions: ~ 197,369 • Average Daily Transactions: ~ 539 • Annual Spot Market Purchases: ~ $1.3 Billion

35. New York 30,311 California45,000 PJM51,600 New England 22,523 ISO Peak MW % Generation MW % Generation PJM 51,700 8.4% 56,774 7.8% California 45,000 7.3% 45,000 6.2% New York 30,311 4.9% 36,358 5.0% New England 22,523 3.7% 27,170 3.8% Total ISO 149,434 24.3% 165,302 22.8% Non ISO 465,500 75.7% 558,698 77.2% Total USA 614,934 724,000 ISOs in North America PJM is the largest centrally dispatched Control Area in North America

36. Italy 41,300 MW PJM/PJM West 59,491 MW EDF (France) 70,000+ MW National Grid (England) 49,700 MW Tokyo Electric 64,300 MW WORLDWIDE ISO COMPARISONS

37. Two Tier Governance INDEPENDENT BOARD Members Committee Other Suppliers End-Use Customers Generation Owners Transmission Owners Electric Distributors

38. Independent System Operator(ISO)Energy Market • PJM operates the most liquid and active energy market in the United States, commonly called the PJM Spot Market. • The PJM Spot Market Consists of: • Real-time, bid-based energy market; • Power can be bought and sold on an hourly basis by PJM’s members; • Bids and offers for energy are accepted on a daily basis; and • Bid offers are capped at $1,000/Kwh

39. New Jersey Board of Public Utilities Commissioner Frederick Butler Two Gateway Center Newark, New Jersey 07102 Fred.Butler@bpu.state.nj.us Newark (973) 648-2027 Trenton (609) 777-3333 www.bpu.state.nj.us