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Alternative Models ofElectric Industry Restructuring
Bruce EdelstonDirector, Southern CompanyPresentation to Carnegie Mellon Electric Industry CenterSeptember 23, 2004
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Who We Are Southern Company is an investor owned energy company in the Southeastern
U.S. and a holding company for:Alabama Power CompanyGeorgia Power CompanyGulf Power CompanyMississippi Power CompanySavannah Electric & Power CompanySouthern Power Company
supplying electric service in the states of Alabama, Florida, Georgia, Mississippi. Other Businesses
Southern Company GasSouthern NuclearSouthern LINCSouthern Telecom
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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
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Generating Mix
281 generating units at 69 plants in the Southeast 2004 Generation Fuel Mix:
Nuclear15.1% Hydro
3.7%
Coal71.5%
Gas9.6%
Oil0.1%
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ALTERNATIVE MODELS OFELECTRIC INDUSTRYCOMPETITION ANDRESTRUCTURING
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The Original California ModelGeneration --
Utility, IPPs, Marketers
Network Operator (ISO)
Customers
Distribution Utilities
Contracts
Competitive Suppliers
Contracts
Power Exchange/Pool
ContractsContracts
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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
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Customer Choice Model (TX)Generation --
Utility, IPPs, Marketers
Network Operator (RTO/ISO)
Customers
T & D Utilities
Contracts
Competitive Suppliers
Contracts
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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”
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Centralized Dispatch Model (PJM)
Distribution- “POLR” Service
Generation --Utility, IPPs, Marketers
Centralized Pool (e.g., PJM)Network Operator
Competitive Suppliers- Billing
- Value Added Services
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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
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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
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Vertically-Integrated, Incremental Wholesale Competition Model
DistributionExisting Needs - Use Own Units
Incremental Needs -- Buy from Market
Network Operator (RTO/ISO)(Plans and Operates)
Existing Generation --Regulated
Integrated Utility
New Generation – Competitive
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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)
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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
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CURRENTMODELS
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Customer Choice States
Source: EIA
Retail Choice State
Non-Retail Choice State
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Centralized Dispatch Areas
New England New York PJM ERCOT California Planned: Midwest ISO
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Vertically-Integrated States
Source: EIA
Unbundled
Vertically-Integrated
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Comparison of Models
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Customer Choice - Pros
Lets customers decide Risks shifted from customers to
suppliers Spurs product innovation Spurs technical innovation Maintains competitiveness of
economy
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Customer Choice: Issues
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
Are Prerequisites for Competition Satisfied?
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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?
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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)
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Centralized Economic Dispatch:Issues
Costs of RTOs (vs. benefits)
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RTO Costs (2003)
Revenue Requirement
Cost per Unit
($/MWh)PJM $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
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RTO Cost Trends (2000-2004)
0
0.2
0.4
0.6
0.8
1
1.2
2000 2001 2002 2003 2004
All
-In
Co
st (
$/M
Wh
)
PJM NYISO NE-ISO CA ISO ERCOT Ontario
Source: Public Power Council
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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?
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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
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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)
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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)
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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
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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
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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
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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
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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