Are power markets fit for purpose? The debate over reliability, affordability and who pays for the grid

25:15Amy Myers Jaffe:Agreed. Those are two different issues. I would like to focus, if we can, initially, perhaps on your second bucket, this question of what is actually better for consumers. And Stacey, you just um you were starting off to talk about some of those studies i mean what is the evidence what are the most recent studies if people want to go and look at the evidence for themselves what should they look at yeah it's a great question so first of all um and let me just respond to one thing you said amy um and i agree that these are different problems that we need and we need to make clear always you know when we're talking about these issues to kind of define the problem first and then talk about you know what the solutions are because some of these things are intention with one another.

25:55I will say, though, while the rest of the country, you know, over the last, call it 20 years, hasn't necessarily seen, you know, times of low growth, ERCOT has been steadily growing. So it is the one market that has been growing. And so I think you can point to that market in terms of the low prices that customers have enjoyed over time, as illustrating the benefits of competitive markets for customers, even in a low growth environment. And you can talk to any industrial customer in ERCOT and they will tell you that they will defend strongly the competitive markets there against re-regulation because they know what they experienced when that market was regulated versus the kinds of pricing they can get in a growing market today in a competitive market.

26:43So, you know, customers are the strongest voice on that. Now, you know, that brings up the question, Amy, I think you were alluding to in terms of there is also a question of cost allocation among large customers versus residential customers and other small business customers, that is a question that happens primarily, frankly, in the regulated poles and wires space. And those questions do need to be debated in terms of how are transmission and distribution costs allocated across the different customer classes. That's an important component of trying to address the affordability issue. But in terms of, Ed, your question around, You know, what is the evidence?

27:23So there are numerous studies out there that, you know, one of the more recent ones was conducted by FTI in 2024. There is a campaign that our trade association, EPSA, launched recently called Energizing Tomorrow. I highly recommend, you know, anyone who's interested in this topic to go to that website. There's a lot of information there, including this FTI study. That's the study that I'm citing to say that the evidence shows that restructured markets have seen a 30 percent lower rise in electricity prices than regulated states. That's one data point. The other is that the restructured ISOs themselves conduct an annual analysis of the cost savings that result from these competitive markets.

28:13And PJM's recent analysis shows that the competitive market in PJM saves customers$5 billion annually. So it's hard in these situations to study the but-for world, right? So we can show where costs have been in these restructured markets. But you have to be careful that you're comparing that to, yes, existing regulated markets. But also, what would these markets have looked like if they had remained regulated? And that is a hypothetical world. But obviously, there are lots of data experts and scientists out there who can do those kinds of studies. And those are two data points for sure that I would point you towards.

28:57Amy Myers Jaffe:Right. OK. So that's the consumer question. I want to get to the other issue raised by Amy, which is this point about does a competitive market set the right price signals to incentivize the investment that's going to be needed to meet growing demand in the future? I think an argument you'd hear quite a lot of people raise is that everything you say about benefits to consumers may be right. And if you look back over the past 20, 30 years, there have been clear benefits to competitive markets. People wouldn't dispute that, but they'd say, well, it's a very different world that we're in now. That was a world of essentially flat demand, very little growth in power demand across the United States as a whole.

29:42Amy Myers Jaffe:And the world we're entering into now is one where there is actually very significant growth, particularly because of data centers, but other forces as well driving that. And so the argument is made that this puts us in a completely new world and we need new kinds of market structures, new kinds of frameworks to make sure that we get the investment in generation that we're going to need. And if we don't have that, then the new generation just won't be there because, as I say, the price signals given by competitive markets aren't strong enough. Do you think there's something in that argument?

30:18Ed Crooks:I mean, hey, Ed, let me just add a nuance. Well, just the nuance to the question, because Stacey is, you know, one of the most informed people in the country. So here's the point. In PJM, the argument goes that the price signal for a capacity auction is only for one year. And people are being asked to make multi-year investments. And so some people are saying, hey, listen, the system's broken because the way the capacity markets function, they're not actually able to give the price signal that would create the demand to build new generation in that market in particular, for example. I agree with you.

31:00Ed Crooks:You have more generation being built in ERCOT, right? So the question then becomes, you know, what's the solution to that? And that's where I think there isn't really a good firm study about that. You know, you mentioned other companies. So as you know, we had this discussion on this topic with Exelon. and their argument was that in a structured market, they are given this return. And so therefore, since there's no risk, they will invest and they will make sure they meet the market. And then I think someone who is an advocate for competitive markets would say, well, that could really saddle the consumer if their forecast for the future is incorrect.

31:52Ed Crooks:that we're going to build capacity we don't need. And Stacey, you know, Vistra is a really interesting case point because you weren't in a regulated sense obligated to make these investments and you did and they paid out. But the question is, you know, you might be incented in a particular market if there's just this short capacity market. I'm not saying that's what's happening in PJM, But in a competitive market, if there's a limited number of players, there would be a incentive to do regulatory capture to keep different kinds of players out. So, for example, if there was a solution that was just a virtual power plant or sort of a battery aggregator, that would be cheaper over time for consumers or might solve the problem faster for consumers.

32:48Ed Crooks:but players are incented only to put in generation. I think Vistra is in a great place to weigh in on this because you have a whole fleet of different kinds of solutions. So be really interested in hearing your opinion. Yes. So there is a lot to unpack there in your two questions. So bear with me because I really want to try to keep this very data driven. So first of all, when sort of the hypothesis of these questions starts with, we need to build a lot of new generation because there's a lot of demand coming. And I would argue that, first of all, we have to start with sizing this problem correctly.

33:30the the how much yes demand is coming but how much of that demand is coming when it's coming and how much needs to be met with brand new resources versus serving it from the existing grid are important questions that many observers and commenters these days are skipping over the headlines tend to skip straight to the highest possible low growth numbers you can add up And then we assume that all of that growth has to be met one for one, megawatt for megawatt with new power generation plants. If that's the problem you were trying to solve, then it's true that we're not building fast enough to meet that demand.

34:10But that's not the problem that we should be trying to solve because that formulation of the problem both overstates the demand growth side and understates the capacity available right now on the grid to meet demand growth. So let's talk about the demand side for a second. So demand estimates, people sort of peg it to how much growth are we going to see by 2030? It's just a nice round number to talk about. It's now less than four years away. And we've heard a lot of announcements and sort of forecast by utilities of what they have in their load interconnection queues. And if you add all that up, it can amount to more than 700 gigawatts across the U.S.

34:52by 2030. That is not going to happen. There are not enough chips in the world to supply data centers to build that amount of data centers or other types of load growth in the U.S. At Vistra, we have been consistent now for over two years in saying we expect 2 % to 3 % load growth per year in PJM by 2030 and anywhere from 4 % to 6 % in ERCOT. And if you take that down to actual numbers, we see 17, around 17 to 18 gigawatts of load growth by 2030 in PJM and around 20 gigawatts, maybe as high as 30 gigawatts in ERCOT by 2030. And by the way, in ERCOT of that 20 to 30 gigawatts of load growth by 2030, only about 10 to 15 of that is what we expect to be data centers.

35:48There's a lot of other sources of load growth in ERCOT in particular with the oil and gas industry and the other industrialization efforts. So that means that the forecast people are seeing in the headlines every day are overstated by 10x or more. And those headlines and sensational framing of this issue are not helpful. It whips people up, misinformation spreads, and it isn't helpful for formulating sound policy, which has to be rooted in truth. And unfortunately, you know, in our view, some companies have an incentive to overstate this crisis and understate competitive market performance because rate-basing generation guarantees utility profit, whether the demand is there or not.

36:34So what we have argued for initially is let's raise the bar on these interconnection queues. Let's make sure that the customers who sign up to get into the queue to connect load on the grid, put down significant deposits, have true customer offtake agreements, have true site control. There's too many real estate speculators in these queues today, and it's causing unnecessary panic. And one data point on that is AEP put into place a new data center tariff. I think it was last year, sometime in the last, you know, recent history. Once they put in some additional requirements to show some of the things like site control and security deposits, their interconnection queue dropped from 38 gigawatts to 13 gigawatts that are moving forward in paid studies.

37:25That's just one example of how raising the bar can get us down to the numbers we're really talking about.

37:30Ed Crooks:So let me just take you out there for one second. So, but if I'm some tech company and I'm price insensitive, I could still go and get in the queue in more than one market, even though I only have one, well, not one project, but for more projects that I'm actually going to build. Right. So the fees won't really square that out. What do you think? Fees alone are not enough. You're right. That's why we've argued that these data center developers, they ought to have to show that they have an actual customer because you're right. I mean, the ultimate end-use customers, they have an interest in creating as many options as possible so that they have options.

38:11But it is important that we know what the real load is that's coming to the grid so that we can plan for it. So we should be doing things like requiring the data center developers to show a customer contract, for example, or requiring some certification that you don't have duplicative requests across markets or within markets. Texas has, you know, attempted to do some of those things as well. So it requires a lot of different provisions. The money's not enough, although it is somewhat helpful because, I mean, I can tell you.

38:43Ed Crooks:It's helpful for the private equity firms and so forth, these sort of speculative builders. That's right. That's right. So once we've sized that problem correctly, which I gave you what Vistra's numbers are, and frankly, even if Vistra's wrong by half, that's still a lot more manageable problem than you would think we have when you read the headlines. But once we've sized the problem correctly, then we go to, okay, well, how much new generation is really needed to serve this amount of load growth? And the fact of the matter is, is that our existing grid today during 99 % of the hours in a year has more than enough generation to meet this near term load growth, the growth I talked about by 2030.

39:26Our gas plants on average run at 50 to 60 % capacity factor. We think the grid as a whole is running below 50 % utilization, both from a transmission and a generation perspective, again, during 99 % of the hour. So the problem we're trying to solve is the super peak, the few hours of the year where you may have supply running all out and demand approaching that amount. There are lots of ways to meet those super peak hours in the near term while we build out more generation for the future. And those super peak hours, one of the good solutions for that is data centers are often bringing backup generation that they can turn on during grid emergencies and essentially provide demand response and emergency response.

40:18And they are doing that across the country. They are also solving with technology how they can be more flexible in their load. So I think the key is, is that, again, I go back to if there's one thing we can do to try to address reliability, affordability and resiliency right now, it's to get load connected to this grid as fast as possible to start spreading the cost across more customers and the largest customers in the world. And then in parallel, we can be building the right amount of generation that we need for the future. Now, let me address that part of your question about price signals. So first of all, when people say the price signal is not there to build generation, in PJM, what they're typically talking about is the capacity market.

41:07But there are multiple ways that companies like ours and other investors can get price signals. Okay, capacity market is one, and the capacity market has been rising, and that is sending an investment signal, even if the current capped capacity price is not enough to meet the cost of new entry. Secondly, though, energy prices have also been rising in PJM, unlike in ERCOT. The forwards are rising in PJM, and that is sending an investment signal to build new generation. And then third, the low growth itself, just the fact that low growth is coming is an investment signal because companies like ours want to be there to meet that coming demand.

41:51And a subcategory of that would be, you know, the bilateral contracting that's happening in the market, like our contract with Meta to put 433 megawatts of new nuclear on the grid by the early 2030s. Those are through up rates at our existing plants. Those are the lowest hanging, some of the lowest hanging fruit ways of bringing new generation to the grid. I think it is, unfortunately, it is just not accurate to say that the market is not responding to these signals. In fact, the data shows that competitive generators have announced or added more than 43 ,000 megawatts of capacity in PJM since mid 2024.

42:32There are 811 projects representing approximately 220 gigawatts of potential new generation that have entered PJM's latest generation interconnection cycle, underscoring the continued private sector investment in PJM. In fact, natural gas generation went from 569 megawatts in a generation cycle called TC Cycle 1 to in the most recent generation interconnection cycle, which is called Cycle 1, which I know is a little confusing. But it went from 569 megawatts to 102 gigawatts. So it's not accurate to say that the market is not responding. And that's where we have to start with that. Yeah.

43:20Ed Crooks:So, Stacey, I mean, this is why it's just so wonderful to have you on the show. But let me ask you a question. I mean, Vistra, even when you describe the history of the company, you know, it's really so interesting because, of course, I remember back in Texas when it was TXU, there were people talking about TXU going out of business. Right. So, you know, here here the company is, you know, rebuilt itself and has a vision. And and I think the interesting thing, though, is that you're finding people who will give you a PPA to add capacity. And therefore, you can do so with confidence without your shareholders, you know, punishing you and so on and so forth.

44:00Ed Crooks:Why isn't everyone in PJM doing that?

44:03Amy Myers Jaffe:That's a great question. Well, I think there are a lot of parties who are in those conversations about new build. Look, the truth of the matter is, is that these large customers, particularly the hyperscalers, they have, you know, what I think about as kind of a hierarchy of needs. Right. And they started these this sort of low growth trend with wanting to contract for the cleanest forms of generation possible. So you saw, you've seen the deal, most of the deals announced are nuclear because they're very committed to carbon free generation, which is awesome. And they're willing, you know, to sign up for contracts for it.

44:41However, it's, it takes a really long time to build brand new nuclear. That doesn't meet their, you know, speed to power objective, even though I think they will eventually invest in new nuclear as well. And so I think you're just seeing that now they're getting down to the next, you know, rung on the needs ladder, which is to sign up for gas contracts as well, whether new or existing. And you saw that with the recent Microsoft announcement with Chevron to build a new gas plant in Texas. That was the first time Microsoft had, in our view or to our knowledge, you know, sort of publicly associated with gas plants.

45:17And so I just think it takes time for the customers to work through their options. It takes time to build these resources. And again, in the meantime, while we're getting some of those new resources on the grid, the grid today, let me be really clear, the grid today can handle the near term load growth. And we should be doing things like having carrots, not sticks, to incentivize customer flexibility to solve the super peak hours of the year. We should be saying to these customers, if you bring backup gin and you can turn it on, you know, five or 10 hours a year when we need you, then we're going to get you connected.

45:55We're not going to slap your hand and say, unless you build a brand new CCGT for every megawatt of load that you bring, we're not going to let you get connected to the grid.

46:04Ed Crooks:Yeah, you raise this really interesting point, right? Because, of course, Texas had this alternative thing where they said, and by the way, we have the right to curtail you if we decide we need to, right? I was speaking to one of the biggest large language model developers, and one of the companies that's trying to get to what we call artificial general intelligence. So that's a lot of training. That's what's taken us to the gigawatt scale away from the 50 megawatt scale. And they're like, because the way the training load appears and disappears in sort of a rapid fashion over periods of time, it's a little bit of volatile load.

46:46Ed Crooks:They said to me, I need to stop worrying about it because everybody's going to be required to put in batteries. What do you make of that statement? I mean, is that what you think is going to happen? Is that these companies are going to, you know, commit to power? I mean, you also mentioned this thing about Microsoft and Chevron. I mean, that's an off-grid solution. And I don't know if it's I guess it's not covered in the governor's. I don't know how to describe his audit letter. His audit letter. Right.

47:20Amy Myers Jaffe:OK, we should be clear about what that is. Right. This is Greg Abbott, governor of Texas, saying essentially that no new large loads can be connected to ERCOT, the Texas grid, until the states had a chance to audit issues around potential strain on the grid. Is that right? Am I explaining that correctly? Yes. He has said that loads cannot be approved for final energization through the ERCOT interconnection process until they've answered the audit questions. But Amy's right that if you're building an islanded solution, you're not in the ERCOT interconnection process. So in that case, the audit questions wouldn't apply, which again, you know, I think if I'm remembering correctly, I think when Microsoft and Chevron announced that agreement, they announced that, you know, they have an intention to eventually connect to the grid.

48:14And that's how most of these islanded projects are being described because every customer we talk to starts with, when can I get a grid connection? They really want to be on the grid. They want to be on the grid because they know it's more reliable. they know it's a it's more cost effective it's ultimately going to help them be more sustainable as well but they need to get power and so they're they're feeling forced to explore these bridge power solutions until they can until they get on the grid and again you know we would argue that we should be getting them connected on the grid faster it it's never made sense to me we're not a transmission distribution utility so i can't i've literally cannot speak to and i don't understand why customers tell us that in some parts of PJM, they're quoted by the utilities that it will take five, six, seven, eight years in some cases to get their loads connected on the grid.

49:09That doesn't make sense to me. I don't understand why it would take that long. And I think we should be trying, as the Department of Energy said in the advanced notice of proposed rulemaking that they submitted to FERC last October, we should be trying to figure out how to get these loads connected much faster than that.

49:26Amy Myers Jaffe:Every business has priorities to protect, goals to reach, and decisions that need to hold up. Energy should support all of that, not become one more thing to manage. That's why Engie takes the time to understand your business before building energy solutions around it. Your operations, your goals, your pressures, your plans for what's next. Because while Engie knows energy, no one knows your business like you. And when that expertise comes together, energy becomes more than something that powers your business. It becomes

50:08Ed Crooks:So what about this idea, though, that we're going to require these companies? Because, you know, one of the things that people say about the diesel generators that are behind these centers, I'm going to add, you know, some of them have to worry about air quality, compliance in different locations. But also, I mean, honestly, now when you look at what's happening with Strait of Hormuz and the bombing of all these refineries by Ukraine and Russia and so forth, the diesel market is going to turn out to be a really difficult market to get sudden supply. So, you know, what about this idea? I mean, you know, you're kind of in the battery space in some of your investments.

50:49Ed Crooks:I mean, do you see this trend that the hyperscalers are coming and they're saying, hey, you know, we promise you our load isn't going to damage your equipment because we're going to put these batteries in too. And we can use them during these, you know, stress hours that you're talking about, but we could also use them to make our training load smooth out. Or you think there should be some places where you just can't have a training load? Yeah, I do think, no, look, if nothing else, the electric grid in America has shown over decades and decades that we can innovate and we can solve all of these new issues.

51:30I mean, think about when factories, you know, first started coming onto the electric grid. All of these same questions, you know, had to be addressed and we've addressed them. So I believe that we can accommodate these loads and we'll find the right solutions. ERCOT has a task force, a large load task force that focuses exclusively on these types of operations issues. NERC has similar working groups to do it. And yes, I think batteries will be an important part of the solution. I think, you know, batteries, diesel, gas, you know, natural gas backup, we're seeing more and more customers who maybe bring a mix of gas and diesel, which each have their own, you know, properties.

52:15So I think it's going to be, again, it's going to be sort of all of the above. You know, what do we need to do to accommodate these loads on the grid and protect the rest of the grid? And I'm confident in our industry's ability to innovate and to figure these things out. You know, we were, Vistra was a part of a press release earlier this year with NVIDIA and Emerald AI, because Emerald AI is a company that is trying to come up with technologies that will help these loads be more flexible. Those are the kind of things that we're going to see come to pass in the next five to 10 years. And we'll be looking back and saying, good thing that we figured out how to get these loads on the grid to spread cost for other rate payers, but also so that we can win the AI race.

52:59I mean, that's a really important objective that our country has for national security and competitiveness purposes. And I think we're going to figure out together how to do that. Yeah, Ed, I do want to circle back to, I think, part of your question that I didn't answer when I was talking about the load growth issue as well as the price signal issue. And then the final part of your question was asking our view of the idea that Kareem Kuzami from Exelon shared on your podcast a few weeks ago. And that is the idea that Exelon and others have been putting out there around regulated utilities being allowed to build rate-based generation in restructured markets like PJM.

53:45You know, my response to that is, first of all, something that those utilities don't talk about a lot is that Exelon and other regulated utilities can build generation today in many PJM states. They just have to do it through their competitive affiliates. They have to take the same risks that we take when we're building generation. In fact, I think PPL says they are going to do that in Pennsylvania through their joint venture with Blackstone. So they can build generation today, but that's not how they want to do it. They want to put it in rate base and charge customers for it with a guaranteed rate of return.

54:25And our view is, is that that's not going to end well for customers. But equally important to that is there's no reason to think, there's no evidence that even if utilities were allowed to build rate-based generation today, that they can do so any faster or more efficiently than IPPs can or other competitive power providers. Because a lot of the bottlenecks for building generation today do not have to do with price signals. They have to do with supply chain delays. They have to do with interconnection queue delays. I walked through earlier just a few minutes ago how many projects are actually sitting in the PJMQ waiting to get approved to connect.

55:07So I think it's a bit of a red herring because it doesn't actually solve the problem of getting generation built faster. And it will actually cost customers more at the end of the day because utilities want to do that in a way where they're taking no risk. whereas we are willing to build generation at risk, which we're doing, for example, in ERCOT right now, we're building a merchant peaker plant in West Texas. So I don't think that's the best answer for customers. And I think, honestly, you know, we would like to see the utilities continue to focus on their business of transmission and distribution build out because the system needs investment in those areas as well to accommodate this load.

55:50Amy Myers Jaffe:Yeah, so that raises a really interesting question, I think, of what the real bottlenecks actually are in terms of expanding generation capacity. And I was interested in that you talk about expecting 2 % to 3 % load growth per year in PJM, 4 % to 6%, I think you said, 4 % or 5 % in ERCOT. I think what quite a few people in the tech industry might say about that is that load growth would be higher if supply growth could be higher. And that if the power industry was able to add more capacity faster, actually, you would find there would be more data centers, more AI activity and so on going on there because it's the power supply that's the real constraint.

56:42Amy Myers Jaffe:And then, okay, so I'm interested in whether you think there is some truth in that or not, whether there are other constraints that you think are important. And then also then the question of, well, okay, so if it were to be the power industry that was a constraint, within that, what are the real issues? And it was very interesting, as he said, we had Roger Martella from GE Vernova on the show the other day. he pushed back against the idea that it was really all about equipment and equipment shortages as being the problem he said if you've got a turbine stand we'll find you a turbine for it we hate the idea that there's a turbine stand going empty anywhere in the country or anywhere in the world and so maybe it's not that um certainly as i say the g vernova's position would be that equipment shortages are not really the issue.

57:35Amy Myers Jaffe:So there are other things that have been identified, shortages in the PC industry, construction, labor force, skilled trades, that kind of thing. And then this whole question came up a couple of times of the interconnection queue and how long it takes you to get a grid connection. When you think about this, Stacey, what's your take on it, what do you think the real constraints are in terms of the industry's growth? Yeah, well, it's a very multifaceted, complex question for sure. But let me share a few thoughts. So first of all, I believe when the tech companies say publicly power is our number one constraint, what they really mean is interconnection is our number one constraint.

58:23And it's important to distinguish that because, again, power says to people in our industry that it means power generation. And as I've mentioned, no one has proven to me or shown me that we don't have enough power generation on today's grid to serve what is the near term load growth. So what I think what they really mean when they say that's our constraint is we can't get connected fast enough. And as I mentioned, I can't actually, and I wish someone could explain it to me because I can't actually explain why it takes, you know, four, five, six, seven, eight years to get a load connected in Ohio, for example.

59:03What I can tell you is that the most efficient and cost-effective way to connect load is actually to co-locate it with generation, whether that's existing generation or new generation. And that's because you avoid the need for building miles and miles and miles of transmission lines if you have the load right next to the plant. So luckily, FERC has recognized that and issued an order in June that very clearly states that PJM and other markets need to issue new tariff rules that accommodate co-location of generation with load because that's the fastest way we're going to get that load connected.

59:40And in terms of the supply chain, I happen to agree with Roger that turbines themselves are actually not, in my view, the constraint that is holding up power generation. However, there are other long lead equipment items, switchgear equipment, some of the high voltage equipment that can be, you know, it can take several years to get some of that equipment. So it's a lot of balance of plant materials that have to come together to build a gas plant, not just the turbine. So it's fair to say that turbines themselves are not necessarily the number one constraint. And then in terms of this idea that the tech companies would just have unlimited demand if only we could build power fast enough.

1:00:23Yeah, I'd take issue with that as well because there are other constraints in their world, things like chip supply, right? And we've seen analysis where you can take the expected chip supply that's coming into the world and then narrow that down to what share you think is coming to the U.S. And it's likely that only about 60 gigawatts of data center growth in the U.S. by 2030 could be accommodated with the current planned chip supply. So there are top-down ways of looking at that issue that kind of help you to all circle in around these same kinds of numbers that we've been sharing. Plus, if that's really true, if they just have so much supply that, you know, they can build an unlimited or so much demand that they can soak up an unlimited amount of supply, then you would be seeing them do, in addition to the grid-connected projects, you would be seeing them do more and more of these islanded solutions.

1:01:21And while we're seeing some of that, it's still a small percentage, I think, of the load that's coming.

1:01:25Ed Crooks:So, Stacey, let me ask you something sort of broad and way, way out for a minute, right? Because we've heard your very eloquent explanation about who can build power generation and why we went down the road we did and how that can potentially be helpful to markets and whether the power generation is really there or not is sort of a misinformation factual question, depending on where you are in the country, that one could go down a rabbit hole. and do the data. But in the end, when people first talked about restructuring, we talked about separating transmission and distribution from generation.

1:02:08Ed Crooks:And if we move away from this question, which I think we're all arguing about, maybe we're like not arguing about the right thing. So let me throw out a really controversial, weird statement. So let's say we all agree that generation should be competitive, right? Maybe the problem is that the people who own the transmission and distribution have not been investing their capital, right? And maybe some of that reason is that they were just taking the income that they were getting. And, you know, we used to say older people should invest in utilities because it's like a safe investment. So they had this safe investment in a non-growing market, and they weren't going to sit around like Vistra does and say, geez, load might expand because people are having electric cars, or load might expand because we're going to have AI.

1:03:09Ed Crooks:They didn't do any forward inventive thinking. And as a result, quite honestly, depending on where you are in the country, they didn't invest in anything like in some places i won't name names so i don't have people calling energy gang and complaining about me they literally have stuff under the ground switch gear and other kinds of equipment under the ground that's still there from 1925 you know i mean like they really haven't invested and so as a result you're getting the bottleneck is indeed not just the connection queue. It is the equipment and the investment that was not made at the distribution level.

1:03:49Ed Crooks:It is the equipment and investment that has not been able to be permitted for the transmission system. And that is where some of the innovation could have taken place. You've got companies like Line Vision and others that are trying to help the utilities use more of the existing infrastructure. You know, I saw a report, again, misinformation, disinformation, truth, I don't know. But I saw a report that Stanford had done a study that showed that PG &E only uses something like 30 percent of its line because it's so afraid of overtaxing the system. And now they're getting all kinds of new help in the state from new regulations that absolutely waxes out, you know, competitive pressures on them.

1:04:41Ed Crooks:And, you know, is that the right solution? Because, you know, there's an inclination in our intellectual community to just say, well, OK, let's take everything to the distributed level. Right. And get away from these not working transmission or distribution systems. Right. You're yourself mentioning co-location. Right. Which is another way of getting around the problem, which is having, in my view, what we're really saying is having transmission and distribution companies only is a problem. And so the question is not really, should the market for generation be competitive? The question is, should Vistra be able to invest in transmission and distribution?

1:05:25Ed Crooks:Or should somebody other, we have some other restructuring about how we dictate transmission and distribution investment? Because now what's happening is these guys didn't invest for years. Now they have to invest, which is immediately going to raise residential rates. So am I way off base here? What do you think?

1:05:48Amy Myers Jaffe:So I was about to jump in there because I was about to say, Amy, I think it's very unfair to be beating up on the transmission and distribution companies when there isn't a representative of that industry here to defend them. Yeah, well, that's probably true, too.

1:05:58Ed Crooks:We're going to have to have another show.

1:06:00Amy Myers Jaffe:We'll have to have another show. But yeah, I'm also very interested to hear your view, Stacey. What do you think? Yeah, look, Amy, I think you're asking a good question. I do think that, look, it's fundamental principles of economics that incentives matter. And it's not casting aspersions on particular companies to say that the regulated utility model incentivizes spending as much capital as you can within the boundaries of getting your guaranteed rate of return. And that's not the competitive model, right? We put capital at risk. So our incentive is to be as cost effective as possible. And I'll give you a great example of the difference between the competitive space and the regulated space.

1:06:46Our company built a brand new coal plant that came online in 2009.

1:06:50Ed Crooks:I remember that. There's a lot of controversy. Go ahead. Yes, it was called Sandow 5. And a mere nine years later in 2018, after Texas had enjoyed years of remarkable renewables growth that brought prices to a very low sustained place, we made the decision to retire that plant. It was only nine years old. It was well controlled. It was brand new. It was a billion dollars of investment. Our shareholders ate that billion dollars, not customers, because we had made that investment decision to build that plant at risk. That is the difference between a competitive model and a regulated model. I can't speak to the question in each particular market of underinvestment, but I think the broader question you're raising is if competition is good in general, and we in America still believe in competition.

1:07:46In fact, Governor Shapiro in Pennsylvania earlier this year was celebrating the 30-year anniversary of competition in the Pennsylvania energy market and touting the fact that we believe free markets are the best way to drive value for customers. And if that's good in the generation market, then why isn't it good in the transmission market? There have been very eloquent advocates for competitive transmission. It's a hot topic. It's a hot take. I'm not going to go into the details of it, but it's a fair question to ask. If competition drives innovation and cost savings in the generation space and in every other space in American life, then why not in transmission?

1:08:26Amy Myers Jaffe:Yeah, that is a fascinating question. Should we have competition? Could we have competition in the transmission and distribution industry? I feel like that's a whole other show, though. And I know we get a little bit short on time. And Amy, you have to go and teach a class, don't you? So a couple of things I'm really keen to get to before we end, though. One is to go back to this question of affordability then and price signals. And Stacey, as you were saying earlier, one of the reasons why there are these concerns in PJM about having adequate capacity to ensure reliability on the grid is that there was a cap put on prices in the capacity auction.

1:09:07Amy Myers Jaffe:That cap was not put there for no reason. It's there because politicians were very, very concerned about rising electricity prices. And I suppose my question about that is then, is that another challenge to the competitive market model that there is real tension between reliability and affordability? and a price signal that is high enough to sustain reliability and to get enough investment onto the grid to make sure that demand can be met in the future is going to be a price signal that is going to mean hardship for consumers, raise everybody's costs, create a lot of political pressure to do something about it.

1:09:50Amy Myers Jaffe:And it feels like, particularly in PJM right now, that's exactly what we're seeing playing out. And so I think going back to that question of, is there a challenge to the competitive market model? Isn't that at the heart of a lot of what these concerns are really about? Yes, look, I mean, there's no question that the, you know, the first capacity clear that rose significantly a couple of years ago was, seemed like it came as a surprise to people. And that, certainly raised some bills for customers. So we don't deny that. But I think that there's such an incomplete narrative around that capacity auction clear and what's happened in the capacity market since then.

1:10:32Because first of all, it ignores the fact that for years and years, there had been capacity clears in the dirt. I mean,$30 and less per megawatt day. And so no, you're not going to get new generation built with those kinds of capacity prices. You do need prices to rise to send the investment signal. But secondly, once that initial higher capacity clear happened, that got baked into customer bills and subsequent auctions that cleared around the same amount or not much higher due to the cap are not adding to exponential bill increases. And in fact, the fastest rising portion of customer bills across our markets is the T &D portion.

1:11:16That portion of the bill is rising at a much faster rate than generation supply. And you could argue, and not just argue, you can show that for all of those years where we had really low capacity and energy prices, the supply portion, the generation supply portion of the bill was actually moderating overall bill increases while the T &D costs were rising. And in fact, I do feel the need to set one record straight from Kareem of Exelon's podcast a few weeks ago, where I think he mentioned that, I think he was talking about Maryland, but in general, he mentioned that only 25 % of the bill is Exelon's and 75 % is generation supply.

1:11:57That's just not accurate. It's actually generation supply, If you do capacity and energy, it's right around 50 percent. The T &D portion is close to 40 percent. And the remaining 10 percent, frankly, are policy charges that states individually choose to add to the bill. So I just, you know, again, we need to make sure we're getting the accurate data out there. We're all contributing, you know, to price increases in some form or fashion. But the fastest rising portion of the bill are the T &D charges. And I think, again, the way to address the affordability issue for residential customers, who are the ones we're really concerned about, right, is get the large loads on the system so they can start sharing those rising T &D costs and then get cost allocation right.

1:12:45You know, reallocate those costs across customer classes in the right way.

1:12:49Ed Crooks:I mean, my feeling is we should do cost allocation first and then see what other parts of the problem just go away. Right. That that there's a huge problem in cost allocation in many different markets. and I've had people sit me down and pat me on the head and tell me I don't understand how costs get organized. We give this percentage to this and this percentage to that and there's a formula, Amy, you don't understand there's a formula. And my thing is sort of like, well, oh, if there's a formula, why couldn't we change the formula, right? So they make it sound like there's this formula and it's written in stone and therefore we can't etch a new formula into the stone because it'd be messy, as opposed to we could all agree that people shouldn't have their electricity cut off in the middle of a heat wave because they can't afford their bill, which a lot of states have said now you can't do.

1:13:48Amy Myers Jaffe:Great point. Great point. Again, a whole other show. There's a lot of interesting issues and points to debate around that, I think. But as you say, the thought that That is absolutely the heart of these issues that we're talking about, I think, is absolutely right. Just for a very final thought, what did you get you to reflect a bit on the future, Stacey, in the sense of what happens to the competitive market model from here? It feels like there was a wave of change in the 90s, essentially, in the United States. A lot of markets that were regulated, deregulated, became competitive. then since then since maybe the california power crisis 2000 2001 we've basically had star sits the markets that are regulated have stayed regulated and the markets that are competitive have remained competitive and no one model has kind of really made headway against the other now maybe we're facing this kind of pushback against the competitive market model which as i say, even if you think the arguments are wrong, the arguments are definitely cropping up.

1:14:53Amy Myers Jaffe:You know, you are hearing them in different parts of the country, couched in somewhat different terms. But that common theme is to say that maybe we should be moving back towards more regulation again. What's your expectation about how it might play out? Do you think we're going to continue with this period of kind of every market just sticking with what it's got? Or do you think it's possible Will we see the competitive market model rolled back in some places? Or do you think we might actually see a new wave of deregulation starting to catch on and some other markets starting to adopt a more competitive model?

1:15:29Yeah, it's a great question, Ed. And it's, you know, obviously it's hard to predict the future. And we're certainly in a moment of sort of maximum pressure, I would argue, on both models, frankly. It's on the electricity market as a whole. because I actually, I mean, yes, you hear the utilities talking about re-regulation. I haven't had, you know, a policymaker say to me that they are interested in that concept. In fact, as I mentioned, you know, Governor Shapiro's statement earlier this year when he was actually criticizing some of the utilities in Pennsylvania, he noted, and I'm quoting him here, he noted Pennsylvania's deep-seated belief that free market competition is the best tool for delivering customers the fair value they deserve.

1:16:15And I think that it continues to be just a fundamental value of America and customers in particular. I know customers, large and small, they like choice. They like choice. They like innovation. They want to be able to choose their providers. You know, we trust customers to choose among many complicated, you know, cell phone plans, for example, but somehow we don't trust them to choose their electricity plan. It doesn't really make sense. So look, I'm an optimist for free markets. And so we have some hurdles and we can always improve our markets and we should continue working on that to deliver the best value for customers.

1:16:55But I believe over time that competition wins. And we have lots of conversations with states that I won't name that have an interest in having more competition in their markets. We just don't go out and talk about that publicly all the time. But I think there's a lot of interest from customer groups and from some states in making sure that we can deliver the lowest cost, most reliable, and most sustainable product for customers. And that's what DISTRA is all about. Very interesting. Amy, what do you think?

1:17:26Ed Crooks:You know, I guess I would say that market design is really the critical thing. I mean, even in ERCOT, which is arguably the most competitive market in the United States because it's deregged all the way down to retail, because you have this sort of very thin forward market. One of the problems with that is that you've had these periods of time where a trader comes in and really games the system. Right. So I think and I see in some of the vertically integrated markets, the regulated utility is gaming the system to hold some kind of competitive competition out at the distribution level. Right. So I think it's going to take more debate.

1:18:07Ed Crooks:I like what I'm hearing from Stacey. I think that looking at cast allocation, like I was saying before, first helps us then think about where competition is going to be do best and whether it's too inefficient to allow someone to build a different distribution system or whether it's whether it is or isn't too complicated and too costly to have a second player in transmission. I think that if we get down to the cost allocation formulas first, especially since we can see large load coming and not just data centers, then the next piece of what is the most efficient way to do this that would produce the lowest system cost can be restudied.

1:18:52because the sort of academic, you know, literature on it is older and needs to be revisited.

1:19:02Ed Crooks:I mean, I've been meeting with people about, you know, how would you model that today? Because you have all these different technologies that you can apply that didn't exist in the past, and you have different levels of tolerance for first of a kind or not first of a kind. So it's a pretty complex question. But I really feel like if we would really actually explain to people how cost allocation works and have a true fundamental debate on that, that would help us with this affordability question before we get into the whole debate about how to get more generation or more transmission built and how to, you know, I think some of the things people have done to shorten the queue of work, as Stacey's talked about.

1:19:42Ed Crooks:But on these other places, I think if we started with cost allocation first, it might be an easier lift.

1:19:49Amy Myers Jaffe:Yeah, that is a fantastic point. I do definitely agree with that. As you say, Amy, the debate will undoubtedly continue. Unfortunately, we are going to have to leave it here for the moment, but it's been fantastic talking to you. Many thanks, Stacey, for joining us. Thank you so much. It's been great to be on and I've enjoyed being with you and look forward to the continued dialogue and listening in on your podcast. Well, that's very kind. Thank you. And thank you very much for sharing your thoughts with us. It's been great hearing from you. Many thanks, Amy. Look forward to talking again very soon.

1:20:17Ed Crooks:Look forward to see you soon, Ed. Climate Week. Let's plug our Climate Week live event at NYU.

1:20:22Amy Myers Jaffe:Exactly. Look out for that. More details coming soon. Many thanks to our producers, Stuart Duffy and Molly Mermin. And above all, as ever, many thanks to all of you for listening. If you really value your feedback, please do leave us a comment, leave a review, get in touch on social media, particularly if you want to complain or raise issues or engage in further debate, in particular about AB's points on the distribution industry and investment in distribution and transmission, please do get in touch on that one. And we'll be back very soon with all the latest news and views on the future of energy.

1:20:55Amy Myers Jaffe:Until then, goodbye.