David Loomis Definition is difficult Changes with technology and customer preferences Voice Video Data Wireline technologies Wireless technologies Technology / Internet Protocol Telecommunications Act of 1996 (TA ’96) Economics – reduce costs, increase revenues, maximize profits Landline voice High speed Internet Access Cable TV / Entertainment Wireless voice/data Long Distance Voice Local Voice Graph 1.1 Average Revenue Per Minute for Interstate & International Calls (Restated in 2003 Dollars), 1984-2003 $0.60 Average Revenue per Minute $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Graph 1.2 AT&T's Share of Total Toll Service Revenues, 1984-2001 100.0% Share of Total Toll Service Revenues 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Year 1994 1995 1996 1997 1998 1999 2000 2001 Graph 1.4 Total Monthly Charges for Local Services in Urban Areas, 1986-2004 $26.00 $25.00 Total Month Charges (in Dollars) $24.00 $23.00 $22.00 $21.00 $20.00 $19.00 $18.00 $17.00 $16.00 $15.00 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year Graph 1.5 Competitive Local Exchange Companies' (CLEC) Market Share, 1999-2005 25.0% 20.0% Market Share 15.0% 10.0% 5.0% 0.0% Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Date Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Graph 1.7 Number of Mobile Wireless Subscribers, 1984-2004 200,000,000 180,000,000 140,000,000 120,000,000 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 Date Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99 Dec-98 Dec-97 Dec-96 Dec-95 Dec-94 Dec-93 Dec-92 Dec-91 Dec-90 Dec-89 Dec-88 Dec-87 Dec-86 Dec-85 0 Dec-84 Mobile Wireless Subscribers 160,000,000 Graph 1.8 Mobile Wireless Telephone Service: Average Minutes of Use per Month, 1993-2003 700 600 Average MOU per Month 500 400 300 200 100 0 1993 1994 1995 1996 1997 1998 1999 Year 2000 2001 2002 2003 2004 Ju 87 nD 88 ec Ju 88 nD 89 ec Ju 89 nD 90 ec Ju 90 nD 91 ec Ju 91 nD 92 ec Ju 92 nD 93 ec Ju 93 nD 94 ec Ju 94 nD 95 ec Ju 95 nD 96 ec Ju 96 nD 97 ec Ju 97 nD 98 ec Ju 98 nD 99 ec Ju 99 nD 00 ec Ju 00 nD 01 ec Ju 01 nD 02 ec Ju 02 nD 03 ec Ju 03 nD 04 ec -0 4 ec D Average Monthly Bill (in Dollars) Graph 1.9 Mobile Wireless Telephone Service: Average Monthly Bill, 1987-2004 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 Date Graph 1.10 Average Monthly Rates for Basic Services, 1997-2004 $14.00 Monthly Rate (in Dollars) $13.50 $13.00 $12.50 $12.00 $11.50 $11.00 1997 1998 1999 2000 2001 Year 2002 2003 2004 Graph 1.11 Average Total Monthly Rates, 1995-2004 $50.00 $45.00 Average Total Monthly Rates (in Dollars) $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 1995 1996 1997 1998 1999 2000 Years 2001 2002 2003 2004 Graph 1.12 Broadband Technologies' Market Share Other Wireline, 2.04% Fiber or Powerline, 1.06% Satellite or Wireless, 0.72% ADSL, 37.20% Coaxial Cable, 58.99% Generation Transmission Distribution Flows of electricity across the network of interconnected power lines cannot be directed. Electricity must be produced on demand so blackouts don’t occur - can’t be stored; must always be in balance. Developments of markets requires reforms by both state and federal agencies. David G. Loomis 309-438-7979 7/12/2016 28 Generation - competitive? Transmission - natural monopoly - regulated by FERC, Federal Energy Regulatory Commission Distribution - natural monopoly - regulated by state commissions - ICC, Illinois Commerce Commission David G. Loomis 309-438-7979 7/12/2016 29 David G. Loomis 309-438-7979 7/12/2016 30 IL Electric Generation by Source 2006 0% 1% 1% 0% Petroleum Natural Gas Coal 47% Nuclear 51% Hydro Other David G. Loomis 309-438-7979 7/12/2016 31 David G. Loomis 309-438-7979 7/12/2016 32 High efficiency gas turbines ◦ lower construction costs ◦ lower operating costs Compared to new coal-fired generators New smaller units generate electricity at the same low cost as very large units that were built only a few decades ago David G. Loomis 309-438-7979 7/12/2016 33 Because of smaller and lower cost plants, generation has moved from a natural monopoly to potentially competitive industry. But if you generate, how do you get it to consumers? David G. Loomis 309-438-7979 7/12/2016 34 PURPA 1978 required utilities to buy from NUGS, non-utility generators Energy Policy Act of 1992 - ◦ transmission-owning utilities had to deliver power from generators to other utilities or wholesalers at reasonable, non-disc. Cost-based rates ◦ FERC 888 procedures for this, how to compensate for losses David G. Loomis 309-438-7979 7/12/2016 35 Regulated, natural monopoly service potential bottleneck Midwest ISO, Independent System Operator David G. Loomis 309-438-7979 7/12/2016 36 Distribution has high fixed cost - natural monopoly Retail sale does not have high fixed cost potentially competitive David G. Loomis 309-438-7979 7/12/2016 37 In 2006, 239 investor-owned electric utilities in US. 2,009 publicly owned 912 cooperatives 10 Federally-owned David G. Loomis 309-438-7979 7/12/2016 38 243 IOU’s, investor-owned utilities ◦ only 7.6 percent of total ◦ 75.6 percent of MWH (megawatthour) sales to ultimate consumers ◦ 45.0 MWH for resale ◦ Most electricity comes from IOUs that are integrated - generation, transmission, distribution, retail sale David G. Loomis 309-438-7979 7/12/2016 39 David G. Loomis 309-438-7979 7/12/2016 40 Avg rev. per KWH for ultimate consumers ◦ Overall US is 8.90 cents ◦ Illinois is 7.07 cents David G. Loomis 309-438-7979 7/12/2016 41 David G. Loomis 309-438-7979 7/12/2016 42 Company 1998 1999 2002 CILCO 7.49 7.52 7.70 Ameren-CIPS 8.10 7.56 7.39 ComEd 10.66 9.30 9.13 IL Power 9.58 8.41 8.29 MidAmerican 8.49 8.32 8.10 Ameren-UE 7.09 6.71 6.57 David G. Loomis 309-438-7979 7/12/2016 43 $203 Billion (3.2% of GDP) residential $85 B commercial $63B industrial $48 B David G. Loomis 309-438-7979 7/12/2016 44 One of the most capital intensive industries 179 largest IOUs ◦ $575B in assets ◦ Almost 5% of gross capital stock of all industries David G. Loomis 309-438-7979 7/12/2016 45 David G. Loomis 309-438-7979 7/12/2016 46 How do you promote competition and not just deregulate? How do you separate generation from T&D when you need instant load balancing? If IOUs keep generation, how do you assure non-discrimination? David G. Loomis 309-438-7979 7/12/2016 47 Wellhead pipeline City gate LDC customer direct access Few economies of scope - little vertical integration ECO 436 David Loomis 309-4387979 49 In 1981, 12,000 field producers, all markets unconcentrated 1954 Supreme Court, Phillips Petroleum v. Wisconsin - ruled that producers were able to exact “excessive” prices and that Natural Gas Act of 1938 authorized FPC to regulate wellhead prices. Wellhead prices that were sold interstate were regulated since 1954 ECO 436 David Loomis 309-4387979 51 2 tiered gas prices - interstate gas subject to Federal regulation ◦ intrastate gas priced much higher ◦ caused allocative distortion ECO 436 David Loomis 309-4387979 52 1978 - Natural Gas Policy Act ◦ old gas - dedicated to interstate commerce before NGPA continue price ceilings (amt. Of old gas declines as wells are depleted) ◦ new gas - no price ceiling on Jan. 1, 1985 price ceilings from 1978-1985 gradually raised ECO 436 David Loomis 309-4387979 53 1989 Natural Gas Wellhead Decontrol Act lifted all remaining wellhead ceiling by 1993. ECO 436 David Loomis 309-4387979 54 Year $/Mcf (NovApr) Percentage Increase 1998-1999 4.78 - 1999-2000 5.67 18.7% ECO 436 David Loomis 309-438-7979 55 Company 1999 (in cents/therm) CILCO 61.54 Ameren-CIPS 67.62 ILPower 60.15 MidAmerican 54.40 NICORGas 43.06 PeoplesGas 65.54 Ameren –UE 72.05 ECO 436 David Loomis 309-438-7979 56 BRITISH THERMAL UNIT (Btu) -- The standard measure of heat energy. It takes one Btu to raise the temperature of one pound of water by one degree Fahrenheit at sea level. For example, it takes about 2,000 Btus to make a pot of coffee. One Btu is equivalent to 252 calories, 778 foot-pounds, 1055 joules, and 0.293 watt-hours. Note: In the abbreviation, only the B is capitalized. ECO 436 David Loomis 309-4387979 57 MMBtu = Million BTU (British Thermal Unit) THERM - One hundred thousand (100,000) British thermal units (1 therm = 100,000 Btu). ECO 436 David Loomis 309-4387979 58