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Electric Re-Regulation and Effects on Industrial Customers
Electric Re-Regulation and Effects on Industrial Customers
Robert A. Durham Central & Southwest Services Robert A. Durham Central & Southwest Services
Marcus O. Durham THEWAY Corp / U of TulsaMarcus O. Durham THEWAY Corp / U of Tulsa
Robert A. Durham Central & Southwest Services Robert A. Durham Central & Southwest Services
Marcus O. Durham THEWAY Corp / U of TulsaMarcus O. Durham THEWAY Corp / U of Tulsa
Introduction
Regulation began in 1935
Consumers see utilities as last monopoly
States are making rapid changes
Yipee!
Introduction
Process ties closely to dereg of oil
Many models, all have effects on consumers
Needs of small consumers must balance w/ industrials
?
History Utility Life Cycle
First “power system” @ World’s Fair of 1893
First “utilities” were large consumers
Consumers diversified to provide power to others
Some were created by cities
HistoryUtility Life Cycle
Companies started by technologists
Large conglomerates formed by Industrialists
Federal government created authority to regulate
Consumers see limited risk and demand change
Those that adapt do well, those that don’t fail
$
TimeConcept
Development
Growth
Regulation
Deregulation
TechnologicalGrowth
Figure 1 - Regulated Industry Life Cycle
HistoryFederal Regulation
Federal Power Act 1935– To restrict “undue discrimination”– “Natural Monopolies” due to geography
Public Utility Holding Company Act 1935– To regulate holding companies of local utilities– Unprecedented control & restrictions
History Federal Regulation
SEC: “purpose of PUHCA achieved. “ 1955
Public Utilities Regulatory Policy Act 1978– Promote domestic energy, particularly renewables– Utilities forced to buy “excess” power from cogen, etc.– Created Independent Power Producer (IPP)
History IPP
Generation to supply industrial heat & energy
Auxiliary power sold to utility at “avoided cost”– Utility: Price of fuel– IPP: Cost of new plant
Different interpretations = different rules in each case
HistoryAncillary Organization
State Commissions– Oversee utilities & approve expenditures
Quasi-government organizations– Provided service in underdeveloped areas– Some by mandate - TVA, SPA– Some by federal loans - Co-ops
Role will change under different set of regulations
Parallels to OilCorrelations
Both industries had large, vertical integrated companies
Generation Production
Transmission Pipeline
Distribution Refining & Marketing Many Independent Producers, few distributors
Parallels to OilHow Oil looks today
Fewer producers
Price dramatically reduced
Separate “common carrier” pipelines purchase & resell
Standards set by voluntary ad-hoc organizations
Parallels to OilDifferences
OIL ELECTRICITY
Multiple Outlets Direct to Customers
Distributed Investment Centralized Plants
Generally, electricity market will stabilize
once restrictions are released - just like oil.
Industry Reorganization
Utilities will organize themselves along three lines
Generation - Transmission - Distribution
Individual risks are limited
Each entity can draw support from othersG
T D
MARKETER
GENERATION
TRANSMISSION DISTRIBUTION
PRODUCT - MARKETER - CLIENT
Darkness and Light
Historically, one entity responsible for all of system
Now, each entity has its own competing concerns
As system is pushed, reliability will suffer
Observations from Western Outages
Transmission being stressed more than ever
Not enough dynamic reactive support
Events not been studied
No one had “big picture”
What We Can Expect from Future Operations
More stress on transmission as system is pushed
Less “spinning reserve” for volt / freq support
More conditions to study => more holes
Entities focus on own business, no one w/big picture
?
Energy Policy Act of 1992
Free Access to transmission
Wholesale generation allowed
Ownership of foreign utilities
Wheeling
Electricity from one system to another through third
Nebraska sells to Oklahoma through Kansas
Open Access
“nondiscriminatory access to transmission systems”
Has opened market to freer competition in transmission
Already seeing some effects
Exempt Wholesale Generators (EWG)
“Engaged exclusively in making & selling at wholesale”
Potentially more impact than wheeling
Exempt from oversight: NEC, FERC & state
Cannot sell to sister company w/o state approval
Ownership of Foreign Utilities
Now own or invest in foreign utilities
Major departure from vertically integrated history
Activities w/o SEC approval
Cannot “pledge or encumber” domestic assets
Affects profitability & financial stability
SEC Proposals
Limited Repeal of PUHCA - proper state oversight
Unconditional repeal of PUHCA
More authority to exempt companies
Maybe in 1998?
State Changes
More appropriate than Federales
Each area has different needs
Can respond quicker
Interest in local economy, not national consensus
State Changes
At least 45 states have begun
Two trends
Maintain regulator control of distribution
Release generation to market
Each has different time tables, Jan 1998 - ???
Areas w/ highest cost will move first
Independent System Operator
California & New England have implemented
Many other states following
Charged w/ “ensuring efficient use & reliable operation of xmission”
ISO Gains operational control of transmission network
Open Access Distribution of tariffs Resolution of congestion Continued reliability
PROBLEM: No financial motivation to improve control & ops
Power Exchange
Necessary for efficient trading of power
No need for government charter or run
NYSE, AMEX, Chicago Mercantile do this kind
Competitive markets form own arenas of exchange
Generation Models
Generators must be allowed free access to markets
Several approaches have been proposed
Direct Access
Pool
Hybrid
Figure 3 - Direct Access Model
GenerationCompany
Customer
GenerationCompany
GenerationCompany
GenerationCompany
Customer
Customer
Customer
Customer
Customer
Customer
Figure 4 - Pool Model
GenerationCompany
GenerationCompany
GenerationCompany
GenerationCompany
ISOControlledPower Pool
Customer
Customer
Customer
Customer
Customer
Customer
Customer
System Load
Price PerKWh
Marginal Payoutto Utilized Units
Figure 5 - Pool Model Pricing
Figure 6 - Hybrid Model
GenerationCompany
GenerationCompany
GenerationCompany
GenerationCompany
ISOControlledPower Pool
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Models Comparison
Direct access does not allow for daily swings
Pool cumbersome, no stability of prices
Hybrid most impetus for responsive, viable
Hybrid what will exist if market is left alone
Oil for ElectricityRoyalty Comes to Utility
Landowner gets royalty from production
Producer gets profit from remainder after expense
Key clause: producer uses oil / gas w/o pay royalty
Producer has “free fuel” even to make electricity
Oil for ElectricityCreative Idea
Proposal to OCC: direct exchange of oil for use
By-pass on-site investment, operating cost, taxes
Permit oil & utility to agree on “barter” rate w/o regs
Oil foothold into utility before others get access
Oil for ElectricityAn Interesting Twist in Last Year
Large gas pipelines
Formerly owned by holding co. & sole supply
Fell under OCC & PUHCA - no creative for sisters
New players: utility & pipeline can trade w/ anyone
OCC regulates oil & utility - approve in principle
Industry Models
Industry consortia of professionals develop standards
Multiple producers sell to transporters
Multiple transporters purchase from producers
Few marketers distribute directly to customers
Government regulation minimized to taxation
Industry Models
Segment companies
Suppliers, Transporters, Marketers
Regulate during transition
Market will dictate long term
Value of investment reduced after 3-5 years
Encourage free market agreements
Any transporter, any supplier, any marketer
Distribution by only a few
Most efficient because of geography
What About The Existing System?
Distribution: system will remain in place
Generation & Transmission: competition will balance out advantages
Aggressive companies:will enter overpriced market
What About The Existing System?
In the past, investments forced on utilities
Some recovery must be allowed
Must change accounting from single-year to long-term
How Will This Affect Me (Us) ?
Much of push to deregulation comes from industrials
No company can stay in business w/o profit
If revenues reduced to one sector,they must be raised in another
As competition takes over, production costs are reduced
What Happens To Costs?
Initially, upward movement
More entities in supply chain,each will have a margin
Greater risk demands greater returns
Trade-off:more efficiency by reducing size of entities
What Happens To Costs?
More options
Long term - more competitive market drive price down
New technologies from striving for competitive edge
ConclusionsRe-regulation is here
Regulation stymies
creativity, technology & economics
Competitive utilities
eventually lower costs
Must compensate old system decisions
Benefit utilities & customers
ConclusionsEntities
Supply: Generation Transportation: Transmission Marketing: Distribution Manage:
– ISO– Transporter
w/ industry standards & contracts
ConclusionsStandards
Technological & economic
Industry professionals - vs - govt
Regulation: state - vs - Federales
ConclusionsCost-based Pricing
Encourage efficiency
Reduce cost
Maintain economic viability
Keeps large customers in all segments
Key
Competitive utility benefits all parties
Be careful, ill-crafted legislation is a burden