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Alternative Models of Electric Industry Restructuring

This presentation discusses alternative models of electric industry restructuring, including the Original California Model, Customer Choice Model, Centralized Dispatch Model, and Vertically-Integrated, Incremental Wholesale Competition Model.

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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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