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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

Alternative Models ofElectric Industry Restructuring

Bruce Edelston

Director, Southern Company

Presentation to

Carnegie Mellon Electric Industry Center

September 23, 2004

who we are
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
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
Generating Mix
  • 281 generating units at 69 plants in the Southeast
  • 2004 Generation Fuel Mix:
the original california model
The Original California Model

Generation --

Utility, IPPs, Marketers

Power Exchange/Pool

Contracts

Contracts

Network Operator (ISO)

Contracts

Distribution Utilities

Competitive Suppliers

Contracts

Customers

the original california model cont
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
Customer Choice Model (TX)

Generation --

Utility, IPPs, Marketers

Competitive Suppliers

Network Operator (RTO/ISO)

Contracts

Contracts

T & D Utilities

Customers

customer choice model cont
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”
centralized dispatch model pjm
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
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 cont1
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
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

vertically integrated incremental wholesale competition model cont
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 cont1
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
customer choice states
Customer Choice States

Retail Choice State

Non-Retail Choice State

Source: EIA

centralized dispatch areas
Centralized Dispatch Areas
  • New England
  • New York
  • PJM
  • ERCOT
  • California
  • Planned: Midwest ISO
vertically integrated states
Vertically-Integrated States

Unbundled

Vertically-Integrated

Source: EIA

customer choice pros
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
Customer Choice: Issues

Are Prerequisites for Competition Satisfied?

customer choice issues cont
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
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
Centralized Economic Dispatch:Issues
  • Costs of RTOs (vs. benefits)
rto costs 2003
RTO Costs (2003)

Source: Public Power Council

centralized economic dispatch issues cont
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 cont1
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 cont2
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
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
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
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 vertically integrated model
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
other critical issues
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
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