Electric Utilities, Deregulation And . - Purdue University

1Electric Utilities, Deregulationand Restructuring of U.S.Electricity blications/Primer/primer.pdf

2In The Early DaysInitially utilities were not regulated.Early utilities would often compete for thesame customers including building duplicatedistribution systems. Naturally, competitionwas greatest in urban areas. It was cheaperto compete in densely populated areas &wealthy customers more likely to use power.

3An Historical PerspectiveHistorically, the cost of generating power declined asutilities built ever-larger power plants, whichincreased efficiency and reduced production costs.Increased electric demand required more & largerplants, which reduced costs further as well asincreasing the utility rate base. This era was a winwin for everyone. Consumers had abundant, lowcost power; regulators oversaw declining rates,increased electrification, & economic growth; &utilities & stockholders gained financially.

Utility Functions4The common vision of a utility embodies threefunctions:(1) Generation (electricity), or production (gas)(2) transmission& (3) distributionFacts are that only a small fraction of the 3,200 or soelectric utilities, in the U.S., perform all three functions& virtually no utility exists in isolation. Major investorowned utilities (IOUs) do own generation,transmission, & distribution.Very few of the publicly owned utilities (POUs) owntheir own generation or transmission.

5USA Structure Outline: FederalStateUtilityPower Pool

Status of electric utility deregulation in each state in the U.S.6White - Continuing to monitor restructuring investor-owned utilities, IOUs, not pursuing further action now.Yellow - Completed studies of IOUs (power providers), not pursuing further action at this time.Green:Light – enacted legislation to implement investor-owned utility restructuring transition not begun or suspended.Medium – Transition to restructuring begun, implementing competitive electric utility market IOUs (includes DC)Dark Green – Functioning competitive electric utility markets for investor-owned providers, allowing all customerschoice without stranded cost or other surcharges.

7PUHCA -- 1935Since state regulation was not sufficient tocontrol the action of interstate holdingcompanies headquartered out-of-state,Congress passed the Public Utility HoldingCompany Act of 1935 (PUHCA).

8The New York Blackout of 1965 andthe Creation of NERCThe New York blackout of 1965 was a wakeup call to the power industry. The industryresponded to the blackout by creating avoluntary, utility-managed reliabilityorganization, the North American ElectricReliability Council (NERC).

9NERCNERC divided the nation into ten reliability regions.The largest council is the Western SystemsCoordinating Council (WSCC). The smallest is theMid- Atlantic Coordinating Council (MAAC). Eachreliability council promulgates system planning &operating criteria that are intended to ensure thateach utility with generation or transmission assetsbuilds & operates them in a way that allows systemcontrollers to preserve bulk power reliability.

10NERCThe 10 reliability regions of the North American Electric Reliability Council

111970’s Oil EmbargoThe Oil Embargo of the 1970s changed things in ahurry. Rapid increases in the cost of fuel to operatepower plants translated into equally large jumps inretail power prices. Continued increases in oil prices& unstable fuel supplies led electric utilities toconstruct new power plants that relied on domesticcoal and uranium. These plants cost much more tobuild than simple oil or natural gas-fired generators.Consequently, the fixed costs of utility operationsincreased, further increasing retail electricity prices.The natural consequence was consumer complaints& increased regulatory oversight.

12PURPA -1978Federal Public Utility Regulatory Policies Act of 1978,Section 210, (PURPA). This legislation created a newlegal category of power plants known as qualifyingfacilities, QFs, & new market entrants calledindependent power producers, IPPs. Contracts forpower from QFs typically covered the life of theplant, because the only outlet for power from a QFwas the local utility. Subsequently, utilities askedCongress and state PUCs to reform the powerpurchase requirements of PURPA. AlthoughCongressional action is still pending, PURPA didcreate a new category of power producers.

13Transmission and DistributionThe transmission grid moves wholesale power fromgenerators to distributors. The distribution system movesretail power from distributors to customers. Transmission willcontinue to be regulated at the federal level by FERC.Distribution will continue to be regulated at the state level bystate commissions.

14IRPBy the early 1980s, the situation appeared to be outof control, with most utilities requesting routine,often significant, rate increases and several utilitieson the verge of bankruptcy. As a result, regulatorsbegan to take a much more active role in utilityplanning. One response was for regulators to requireutilities to evaluate conservation and otheralternatives rather than automatically building newplants. This process, called integrated resourceplanning (IRP), was successful in keeping retail ratesin check, although rates were still thought to be toohigh.

15Why Regulation?Regulation of utilities is based on the inherentrisk that a single monopoly supplier willovercharge consumers due to the lack ofcompetition and high demand.In the United States, state PUCs regulateretail electricity prices while FERC regulateswholesale prices.

16Cost Based RegulationThe historic standard for wholesale power exchangeshas been that the price of electricity be cost-based,not market-based & that savings associated with theexchange be shared. In other words, the extraincome the seller reaps and the reduced costs thebuyer receives are shared between the two utilities &passed on to consumers in lower rates. The costbased regulatory approach was adopted by FERC tostimulate so-called economy exchanges & to protectbuyers (small utilities) from the inherent advantagethe sellers (large neighboring utilities) had in thetransaction.

17Electric Industry Restructuring in the1990’sBy the early 1990s it was becoming apparentthat electric industry regulatory approacheswere not working. IRP was successful inholding rate increases in check & stimulatingconsumer choice, but the process was highlyadversarial, time consuming, & expensive.Rates were still high & significant differencesamong adjacent electric utilities & betweengas & electric utilities caused problems.

18Introduction to RestructuringUntil recently the local utility set a price, called a rateor tariff. Next, it metered the energy used & sent thecustomer a bill based on the rate. Finally, thecustomer pays the bill.Facility managers can participate in the regulatoryprocess through which rates are set, but individualconsumers have little influence over final prices. Now,however, this structure is undergoing a profoundchange. State legislators & utility regulators are nowletting consumers choose among a variety of newenergy suppliers on the basis of competitive prices &products.This trend is called deregulation, or restructuring.

19A Utility DefinedWhat is a utility? Typically, a utility provides acommodity or service that is considered vital to thegeneral public such as power, water, or natural gas.Utility service is a vital need.It is deemed by state & federal lawmakers to be inthe public interest to regulate its provision. Toprevent price gouging & encourage widespreadaccess, the government has granted individualutilities certain monopoly rights, accompanied by theright to regulate price as well as service terms &conditions.

IOUs & PUCs20Utilities are defined differently by each state & infederal legislation. Generally, there are two types ofutilities, private and public.Private investor owned utilities, IOUs, issue stocks,sell bonds, & are regulated at the state level byregulatory commissions. Regulatory commissionshave a variety of names although the names PublicUtilities Commission (PUC) & Public ServiceCommission (PSC) are the most common. Thesecommissions, or PUCs, set the retail rates charged byIOUs for their services. Commissions also ensure thatIOUs respond to customer service requests & areproperly maintaining utility infrastructure.

POU’s21Publicly owned utilities, POUs, are member-ownedcooperatives or government or municipally ownedutilities.Publicly owned utilities are generally exempt fromregulation by state regulatory commissions becausethey are assumed to have the customers’ (who arealso the owners or voters) best interests in mindwhen setting rates & service standards. A few statesdo subject publicly owned utilities to regulatoryoversight.There are approximately 3,200 utilities operating inthe United States, roughly 200 of them are IOUs.The IOUs provide power to almost 70 percent of allconsumers.

PMAs22The federal power marketing agencies, PMAs, includethe semi-autonomous Tennessee Valley Authority, TVA,& the four DOE power marketing administrations:Western Area Power Administration,Bonneville Power AdministrationSoutheastern AdministrationSouthwestern Power Administrations.Federal PMAs generally restrict their sales to wholesalecustomers, typically publicly owned utilities. They havethe authority to sell to federal & state agencies & a fewvery large industrial customers. Some states also havepower marketing agencies.Examples: New York Power Authority, the LowerColorado River Authority, TX, the Platte River PowerAuthority, CO, & the Salt River Project, AZ.

23Regulated Utility Features Ownmost of generation needed to meet the needsof customers in a dedicated service territory. The local utility may import power to meetdemand some months and export surplus powerto adjacent utilities during others. Neighboring utilities may use the local utility’stransmission lines to wheel power to other utilities.Obligation to serve customers all the power theyrequire. Inter-utility sales of surplus power may result inan active and competitive wholesale powermarket.

24Transmission & DistributionThe distinction between transmission & distributionfor a utility is not so obvious.The industry has tried to draw a so-called bright linebetween the two. Such a line is needed to clarifyFERC and State jurisdiction over power lineregulations & rates. In general, transmission linesare high-voltage lines, those with kilovolt-ampere(kVa) ratings of 750, 500, 230, & 115. Distributionlines have lower voltage ratings, such as 69, 34, &13 kVa. Many in the industry refer to ratings of 115kVa & above as transmission.

25Major Generator DesignsThere are four major power plant designsbased on the primary source of energy. Theseare water turbines, reciprocating engines,steam turbines, and gas turbines.1.Hydropower plants2.Gen-sets3.Steam Turbine4.Combustion Turbine & Combined-Cycle CT

26Plant EfficiencyOlder plants are less fuel efficient than newerones. The efficiency of a plant is reflected in a metriccalled the heat rate, which is expressed in terms ofBTUs per kilowatt hour (kWh) of power (e.g., 9,500BTUs/kWh). One kWh of power produces 3,412 BTUs ofenergy, so a plant with a heat rate of 3,412 wouldbe perfectly efficient. Improved heat rates are the focus of intenseresearch sponsored by U.S. Department of Energy,DOE, & industry.