Transcript Alternative Models of Electric Deregulation

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:
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

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
Generating Mix
 281 generating units at 69 plants in the Southeast
 2004 Generation Fuel Mix:
Gas
9.6%
Coal
71.5%
Oil
0.1%
Nuclear
15.1%
Hydro
3.7%
ALTERNATIVE MODELS OF
ELECTRIC INDUSTRY
COMPETITION AND
RESTRUCTURING
The Original California Model
Generation -Power Exchange/Pool
Utility, IPPs, Marketers
Contracts
Contracts
Network Operator (ISO)
Contracts
Distribution Utilities
Competitive Suppliers
Contracts
Customers
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
Customer Choice Model (TX)
Generation -Utility, IPPs, Marketers
Competitive Suppliers
Network Operator (RTO/ISO)
Contracts
Contracts
T & D Utilities
Customers
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 bidin balancing market, and is responsible
for reliability
 Distribution company simply operates
distribution system - it may put out bids
for “standard offer service”
Centralized Dispatch Model (PJM)
Generation -Utility, IPPs, Marketers
Centralized Pool (e.g., PJM)
Network Operator
Distribution
- “POLR” Service
Competitive Suppliers
- Billing
- Value Added Services
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
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
Vertically-Integrated, Incremental
Wholesale Competition Model
Existing Generation -Regulated
Integrated Utility
New Generation –
Competitive
Network Operator (RTO/ISO)
(Plans and Operates)
Distribution
Existing Needs - Use Own Units
Incremental Needs -- Buy from Market
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)
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
CURRENT
MODELS
Customer Choice States
Retail Choice State
Non-Retail Choice State
Source: EIA
Centralized Dispatch Areas






New England
New York
PJM
ERCOT
California
Planned: Midwest ISO
Vertically-Integrated States
Unbundled
Vertically-Integrated
Source: EIA
Comparison of Models
Customer Choice - Pros
 Lets customers decide
 Risks shifted from customers to
suppliers
 Spurs product innovation
 Spurs technical innovation
 Maintains competitiveness of
economy
Customer Choice: Issues
Are Prerequisites for Competition Satisfied?
Competitive Markets: Electric Markets:
Consumers should face true
costs of supply
Consumers have regulated
option available, regulators likely
to cap very high prices
Customers should be
responsive to prices
Demand is very inelastic
Large number of sellers and
buyers
Few sellers, few buyers
Customers can choose level of
reliability
Reliability is a public good
No inter- and intra-class
subsidies
Subsidies abound
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?
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)
Centralized Economic Dispatch:
Issues
 Costs of RTOs (vs. benefits)
RTO Costs (2003)
Revenue
Requirement
PJM
Cost per Unit
($/MWh)
$252,164,806
0.723
NYISO
117,578,796
0.718
ISO–NE
102,924,000
0.787
CA ISO
235,240,000
1.020
ERCOT
184,159,748
0.545
Ontario
107,204,400
0.705
Source: Public Power Council
RTO Cost Trends (2000-2004)
1.2
All-In Cost ($/MWh)
1
0.8
0.6
0.4
0.2
0
2000
PJM
NYISO
2001
NE-ISO
Source: Public Power Council
2002
CA ISO
2003
ERCOT
2004
Ontario
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?
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
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)
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)
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
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
Possible Additions to VerticallyIntegrated 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
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
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