Electric Restructuring
4/12/2020 David G. Loomis 309-438-7979

Overview

Implementing Competition

Transmission Issues

Vertical Integration

Stranded Costs
4/12/2020 David G. Loomis 309-438-7979

Implementing Competition
4/12/2020 David G. Loomis 309-438-7979

Reason for change
 technology changes - gas cheaper?
 dissatisfaction/current prices

Dissatisfaction across customer class
4/12/2020 David G. Loomis 309-438-7979

Expanded Wholesale
Competition
 deregulate only generation - any one can sell in wholesale market for competition
4/12/2020 David G. Loomis 309-438-7979

Retail competition
 separate local distribution from retail sales
 purchase electricity from marketer
 generation also deregulated as in expanded wholesale
4/12/2020 David G. Loomis 309-438-7979

Two market structures for implementing either retail or expanded wholesale

Bilateral contracting - specific supply contracts between 2 parties

Poolco - centralized spot market where electricity is bought as needed and sold as available
4/12/2020 David G. Loomis 309-438-7979

Bilateral contracting with retail competition

Line companies - only provide unbundled distribution

Marketing companies - buy from generators and sell to customers under a bilateral contract between the marketer and customer.
4/12/2020 David G. Loomis 309-438-7979

 can still have some bilateral contracts called self-nominated contracts.

Long term contracts, called contracts for differences (CFD) can also exist to reduce risk of spot price fluctuations.
4/12/2020 David G. Loomis 309-438-7979

Poolco Entity
 regulated monopolist
 solicits bids from generators regarding prices and amounts of power they are willing to sell each 1/2 hr.
 finds where demand and supply and all generators receive same price.
4/12/2020 David G. Loomis 309-438-7979

Transmission
4/12/2020 David G. Loomis 309-438-7979

Transmission

FERC order 888 - requires open access to the transmission grid for all companies
 functional unbundling - must separate different functions and charge itself the same rate for transmission that it charges others
4/12/2020 David G. Loomis 309-438-7979

Transmission
 regarded as an essential facility in the electricity industry.

Generally assumed to be a natural monopoly.

Regulation of transmission - ROR or PC
4/12/2020 David G. Loomis 309-438-7979

Transmission pricing and cost
 peak vs. off peak
• peak = cost of adding lines + MC
• Off peak = MC
 distance - costs of rights of way, lines and power losses.
4/12/2020 David G. Loomis 309-438-7979

Transmission pricing & cost
(cont.)

Interruptible vs. non-interruptible
 variableness of demand
 possibly use 2 pt. tariffs
4/12/2020 David G. Loomis 309-438-7979

Transmission Characteristics

Load balancing - no storage

Powerline losses - 10% loss in transmission and distribution

Loop flow effects - electric flows overall connected lines
4/12/2020 David G. Loomis 309-438-7979

Pros & Cons of Vertical
Integration
4/12/2020 David G. Loomis 309-438-7979

Vertical Integration

Pro:
• Transaction costs
• Economies of scope
• Improving Coordination
• Hedging Risk
4/12/2020 David G. Loomis 309-438-7979

Vertical Integration

Con:
• Self-dealing
• Undersizing
• Discrimination
• Cross-subsidization
4/12/2020 David G. Loomis 309-438-7979

Stranded Costs

Stranded costs are $10B - $200B

Pros & cons of stranded cost recovery
4/12/2020 David G. Loomis 309-438-7979

How to recover Stranded Costs
• Contract renegotiation - get it from customers
• Transmission surcharges
• Compensatory “Exit Fees”
• Accelerated Depreciation
• Auction off transmission facilities
4/12/2020 David G. Loomis 309-438-7979