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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 Marcus O. Durham THEWAY Corp / U of Tulsa. Yipee!. Introduction. Regulation began in 1935 Consumers see utilities as last monopoly States are making rapid changes.

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Electric Re-Regulation and Effects on Industrial Customers

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  1. Electric Re-Regulation and Effects on Industrial Customers Robert A. Durham Central & Southwest Services Marcus O. Durham THEWAY Corp / U of Tulsa

  2. Yipee! Introduction • Regulation began in 1935 • Consumers see utilities as last monopoly • States are making rapid changes

  3. ? Introduction • Process ties closely to dereg of oil • Many models, all have effects on consumers • Needs of small consumers must balance w/ industrials

  4. 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

  5. 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

  6. $ Regulation Technological Growth Deregulation Growth Development • Time Concept Figure 1 - Regulated Industry Life Cycle

  7. 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

  8. 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)

  9. 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

  10. 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

  11. Parallels to OilCorrelations • Both industries had large, vertical integrated companies Generation Production Transmission Pipeline Distribution Refining & Marketing • Many Independent Producers, few distributors

  12. Parallels to OilHow Oil looks today • Fewer producers • Price dramatically reduced • Separate “common carrier” pipelines purchase & resell • Standards set by voluntary ad-hoc organizations

  13. 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.

  14. G T D Industry Reorganization • Utilities will organize themselves along three lines Generation - Transmission - Distribution • Individual risks are limited • Each entity can draw support from others

  15. GENERATION MARKETER TRANSMISSION DISTRIBUTION PRODUCT - MARKETER - CLIENT

  16. 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

  17. Observations from Western Outages • Transmission being stressed more than ever • Not enough dynamic reactive support • Events not been studied • No one had “big picture”

  18. ? 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

  19. Energy Policy Act of 1992 • Free Access to transmission • Wholesale generation allowed • Ownership of foreign utilities

  20. 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

  21. 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

  22. 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

  23. SEC Proposals • Limited Repeal of PUHCA - proper state oversight • Unconditional repeal of PUHCA • More authority to exempt companies • Maybe in 1998?

  24. State Changes • More appropriate than Federales • Each area has different needs • Can respond quicker • Interest in local economy, not national consensus

  25. 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

  26. Independent System Operator • California & New England have implemented • Many other states following • Charged w/ “ensuring efficient use & reliable operation of xmission”

  27. 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

  28. 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

  29. Generation Models • Generators must be allowed free access to markets • Several approaches have been proposed Direct Access Pool Hybrid

  30. Generation Generation Company Company Generation Generation Company Company Customer Customer Customer Customer Customer Customer Customer Figure 3 - Direct Access Model

  31. Generation Customer Company Customer Generation Customer Company ISO Controlled Customer Power Pool Generation Company Customer Customer Generation Company Customer Figure 4 - Pool Model

  32. Price Per KWh Marginal Payout to Utilized Units System Load Figure 5 - Pool Model Pricing

  33. Customer Generation Company Customer Generation Customer Company ISO Controlled Customer Power Pool Generation Company Customer Generation Customer Company Customer Figure 6 - Hybrid Model

  34. 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

  35. 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

  36. 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

  37. 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

  38. 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

  39. 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

  40. What About The Existing System? • Distribution: system will remain in place • Generation & Transmission: competition will balance out advantages • Aggressive companies: will enter overpriced market

  41. 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

  42. 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

  43. 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

  44. What Happens To Costs? • More options • Long term - more competitive market drive price down • New technologies from striving for competitive edge

  45. ConclusionsRe-regulation is here • Regulation stymies creativity, technology & economics • Competitive utilities eventually lower costs • Must compensate old system decisions • Benefit utilities & customers

  46. ConclusionsEntities • Supply: Generation • Transportation: Transmission • Marketing: Distribution • Manage: • ISO • Transporter w/ industry standards & contracts

  47. ConclusionsStandards • Technological & economic • Industry professionals - vs - govt • Regulation: state - vs - Federales

  48. ConclusionsCost-based Pricing • Encourage efficiency • Reduce cost • Maintain economic viability • Keeps large customers in all segments

  49. Key Competitive utility benefits all parties Be careful, ill-crafted legislation is a burden

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