Electric Re-Regulation and Effects
on Industrial Customers
Robert A. Durham
Central & Southwest Services
Marcus O. Durham THEWAY Corp / U of Tulsa
Introduction
 Regulation
began in 1935
 Consumers
 States
see utilities as last monopoly
are making rapid changes
Yipee!
Introduction
 Process
 Many
ties closely to dereg of oil
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
 Some
diversified to provide power to others
were created by cities
History
Utility Life Cycle
 Companies
 Large
conglomerates formed by Industrialists
 Federal
government created authority to regulate
 Consumers
 Those
started by technologists
see limited risk and demand change
that adapt do well, those that don’t fail
$
Regulation
Deregulation
Technological
Growth
Growth
Development
Concept
Figure 1 - Regulated Industry Life Cycle
Time
History
Federal Regulation
 Federal
Power Act
– To restrict “undue discrimination”
– “Natural Monopolies” due to geography
 Public
1935
Utility Holding Company Act
1935
– To regulate holding companies of local utilities
– Unprecedented control & restrictions
History
Federal Regulation
 SEC:
“purpose of PUHCA achieved.“
 Public
1955
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
History
Ancillary 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 Oil
Correlations
 Both
industries had large, vertical integrated companies
Generation
Production
Transmission
Pipeline
Distribution
Refining & Marketing
 Many Independent Producers, few distributors
Parallels to Oil
How Oil looks today
 Fewer
 Price
producers
dramatically reduced
 Separate
“common carrier” pipelines purchase & resell
 Standards
set by voluntary ad-hoc organizations
Parallels to Oil
Differences
OIL
Multiple Outlets
Distributed Investment
ELECTRICITY
Direct to Customers
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
 Each
risks are limited
entity can draw support from others
G
T
D
GENERATION
MARKETER
TRANSMISSION
DISTRIBUTION
PRODUCT - MARKETER - CLIENT
Darkness and Light
 Historically,
 Now,
 As
one entity responsible for all of system
each entity has its own competing concerns
system is pushed, reliability will suffer
Observations from Western Outages
 Transmission
 Not
enough dynamic reactive support
 Events
 No
being stressed more than ever
not been studied
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
 More
repeal of PUHCA
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
 Many
& New England have implemented
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
 No
for efficient trading of power
need for government charter or run
 NYSE,
AMEX, Chicago Mercantile do this kind
 Competitive
markets form own arenas of exchange
Generation Models
 Generators
 Several
must be allowed free access to markets
approaches have been proposed
Direct Access
Pool
Hybrid
Generation
Company
Generation
Company
Generation
Company
Generation
Company
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Figure 3 - Direct Access Model
Generation
Company
Customer
Customer
Generation
Company
Generation
Company
Customer
ISO
Controlled
Power Pool
Customer
Customer
Customer
Generation
Company
Customer
Figure 4 - Pool Model
Price Per
KWh
Marginal Payout
to Utilized Units
System Load
Figure 5 - Pool Model Pricing
Customer
Generation
Company
Customer
Generation
Company
Generation
Company
Customer
ISO
Controlled
Power Pool
Customer
Customer
Generation
Company
Customer
Customer
Figure 6 - Hybrid Model
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 Electricity
Royalty Comes to Utility
 Landowner
 Producer
 Key
gets royalty from production
gets profit from remainder after expense
clause: producer uses oil / gas w/o pay royalty
 Producer
has “free fuel” even to make electricity
Oil for Electricity
Creative Idea
 Proposal
 By-pass
 Permit
 Oil
to OCC: direct exchange of oil for use
on-site investment, operating cost, taxes
oil & utility to agree on “barter” rate w/o regs
foothold into utility before others get access
Oil for Electricity
An Interesting Twist in Last Year
 Large
gas pipelines
 Formerly
 Fell
owned by holding co. & sole supply
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
 Must
recovery must be allowed
change accounting
from single-year to long-term
How Will This Affect Me (Us) ?
 Much
 No
 If
of push to deregulation comes from industrials
company can stay in business w/o profit
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
Conclusions
Re-regulation is here

Regulation stymies
creativity, technology & economics

Competitive utilities
eventually lower costs

Must compensate old system decisions

Benefit utilities & customers
Conclusions
Entities




Supply:
Generation
Transportation:
Transmission
Marketing:
Distribution
Manage:
– ISO
– Transporter
w/ industry standards & contracts
Conclusions
Standards

Technological & economic

Industry professionals - vs - govt

Regulation: state - vs - Federales
Conclusions
Cost-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