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Alternative Models of Electric Industry Restructuring

Alternative Models of Electric Industry Restructuring. Bruce Edelston Director, Southern Company Presentation to Carnegie Mellon Electric Industry Center September 23, 2004. Who We Are. Southern Company is an investor owned energy company in the Southeastern U.S. and a holding company for:

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Alternative Models of Electric Industry Restructuring

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  1. Alternative Models ofElectric Industry Restructuring Bruce Edelston Director, Southern Company Presentation to Carnegie Mellon Electric Industry Center September 23, 2004

  2. Who We Are • Southern Company is an investor owned energy company in the Southeastern U.S. and a holding company for: • Alabama Power Company • Georgia Power Company • Gulf Power Company • Mississippi Power Company • Savannah Electric & Power Company • Southern Power Company • supplying electric service in the states of Alabama, Florida, Georgia, Mississippi. • Other Businesses • Southern Company Gas • Southern Nuclear • Southern LINC • Southern Telecom

  3. Southern Company Profile • Generated 183 billion KWh of electricity in 2002 with 39,000 MW • Earnings for 2002 of $1.3 billion on total revenues of $10.5 billion • More than 26,000 employees • Fortune magazine’s most admired electric and gas utility in America for the past two years • Rates 20% below national average

  4. Generating Mix • 281 generating units at 69 plants in the Southeast • 2004 Generation Fuel Mix:

  5. ALTERNATIVE MODELS OFELECTRIC INDUSTRYCOMPETITION ANDRESTRUCTURING

  6. The Original California Model Generation -- Utility, IPPs, Marketers Power Exchange/Pool Contracts Contracts Network Operator (ISO) Contracts Distribution Utilities Competitive Suppliers Contracts Customers

  7. The Original California Model (cont.) • All utility generation had to be sold into Power Exchange • Customers could buy from the distribution utility, directly from a generator, or from a competitive supplier • Distribution utility had to buy all its needs from the Power Exchange • Retail rates of distribution utilities remained regulated • Competitive suppliers could buy their needs from generators or from the Exchange, or some combination

  8. Customer Choice Model (TX) Generation -- Utility, IPPs, Marketers Competitive Suppliers Network Operator (RTO/ISO) Contracts Contracts T & D Utilities Customers

  9. Customer Choice Model (cont.) • Customers may contract directly with generators or competitive suppliers (power marketers) for their own needs • Network operator runs transmission system, does planning and scheduling, balances supply and demand through bid-in balancing market, and is responsible for reliability • Distribution company simply operates distribution system - it may put out bids for “standard offer service”

  10. Centralized Dispatch Model (PJM) Generation -- Utility, IPPs, Marketers Centralized Pool (e.g., PJM) Network Operator Distribution - “POLR” Service Competitive Suppliers - Billing - Value Added Services

  11. Centralized Dispatch Model (cont.) • Retailers (either utilities or competitive suppliers) buy all of their needs from pool, resell to end users • All generators bid into pool on an hourly basis • Pool dispatches generation from lowest cost bid to highest cost bid • Highest cost bid that gets dispatched becomes market clearing or “spot” price • All generators that are dispatched are paid the spot price

  12. Centralized Dispatch Model (cont.) • Pool is either “energy only” or energy and capacity are separate products (and markets) • May be a minimum capacity requirement for suppliers • Customer choice is really a matter of risk management for suppliers

  13. Vertically-Integrated, Incremental Wholesale Competition Model New Generation – Competitive Existing Generation -- Regulated Network Operator (RTO/ISO) (Plans and Operates) Integrated Utility Distribution Existing Needs - Use Own Units Incremental Needs -- Buy from Market

  14. Vertically-Integrated, Incremental Wholesale Competition Model (cont.) • No customer choice (limited exceptions) • Existing generation used for retail sales remains regulated • New generation and existing (excess) generation available for wholesale sales are market-based (assuming regulatory approval) • Integrated utilities with service obligations buy incremental needs via requests for proposals • Utilities may or may not bid a “self-build” (rate base) option • Utilities choose incremental option based on price and non-price factors and signs purchase power agreement (typically 5-7 years)

  15. Vertically-Integrated, Incremental Wholesale Competition Model (cont.) • Utility affiliates may also bid if permitted by state regulators • Over time, more and more generation is acquired through purchase power agreements, rate base diminishes • Transmission and distribution planning and operations continue to be performed by integrated utility • Integrated utility also distributes power and makes retail sales at rates set by state regulators

  16. CURRENTMODELS

  17. Customer Choice States Retail Choice State Non-Retail Choice State Source: EIA

  18. Centralized Dispatch Areas • New England • New York • PJM • ERCOT • California • Planned: Midwest ISO

  19. Vertically-Integrated States Unbundled Vertically-Integrated Source: EIA

  20. Comparison of Models

  21. Customer Choice - Pros • Lets customers decide • Risks shifted from customers to suppliers • Spurs product innovation • Spurs technical innovation • Maintains competitiveness of economy

  22. Customer Choice: Issues Are Prerequisites for Competition Satisfied?

  23. Customer Choice – Issues (cont.) • Do small customers want choice? • Can regulators/politicians let competition work? • Who will pay for reserves needed for reliability but not revenue producing? • Are there significant economies of scope that are lost by unbundling? • Should any one care about fuel diversity? • What about externalities? • Transaction costs vs. savings? • How is success measured?

  24. Centralized Economic Dispatch:Pros • Production efficiency clearly the greatest potential benefit • Locational price signals tell where generation and transmission should be built • Physical system is separated from financial system • Relatively easy for areas with existing traditional power pools • Provides hourly price signals to customers • Lessens market power concerns • PJM has made it work (some experience)

  25. Centralized Economic Dispatch:Issues • Costs of RTOs (vs. benefits)

  26. RTO Costs (2003) Source: Public Power Council

  27. Source: Public Power Council

  28. Centralized Economic Dispatch:Issues (cont.) • Will regulators (politicians) accept price volatility and high prices necessary to pay for peakers (that must recover fixed costs in only a few hours per year)? • If not, how will sufficient generating capacity be ensured?

  29. Centralized Economic Dispatch:Issues (cont.) • How will demand side interact with pool? • Who will build transmission? What incentives will they have? • Fuel diversity • Externalities/public benefits

  30. Centralized Economic Dispatch: Issues (cont.) • What is appropriate size? • Seams issues • Requires transfer of jurisdiction from states to FERC • Reliability responsibilities dispersed (more complicated) • Unregulated utilities (coops and government-owned) must participate, especially where they are a major presence (NW, SE)

  31. Vertically-Integrated, Incremental Wholesale Competition: Pros • Clear accountability for reliability and service obligations • Fuel choice and externalities can remain part of resource planning • Generation, transmission and distribution can be planned jointly, lowering total costs (economies of scope)

  32. Vertically-Integrated, Incremental Wholesale Competition: Pros (cont.) • Because of stranded cost recovery, most of the benefits of competition come from incremental generation, not existing • Customers get benefits of wholesale competition without transaction costs (and hassle) of choosing supplier • Integrated utility manages risks on behalf of customers • States retain jurisdiction

  33. Vertically-Integrated, Incremental Wholesale Competition: Issues • Perception of market power • Generation dominance • Transmission access • Other barriers to entry • No transparency of dispatch • Few buyers • Lack of regional planning • Retail customers retain risks of bad utility decisions

  34. Possible Additions to Vertically-Integrated Model • Independent operation of OASIS and granting of interconnections and transmission access • Regional planning and security coordination by independent entity • Short-term formal competitive procurement process • More formalized long-term RFP process with greater transparency and independent oversight

  35. Other Critical Issues • Lack of investment in both generation and transmission • Credit ratings of IPPs/marketers • Relationship between federal and state regulators • August 14 blackout and its ramifications • Lack of mandatory reliability rules • Tug of war between environmental objectives and competitive objectives • Elected vs. appointed Commissions

  36. Conclusions • All of these models (except California) can work if issues are properly addressed • Regional characteristics and concerns drive choices • Competition should be a means to an end (reliability at lowest possible cost) rather than the end itself

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