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Electric Utilities, Deregulation

and Restructuring of U.S.
Electricity Markets
[Link]
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In The Early Days

Initially utilities were not regulated.

Early utilities would often compete for the

same customers including building duplicate
distribution systems. Naturally, competition
was greatest in urban areas. It was cheaper
to compete in densely populated areas &
wealthy customers more likely to use power.
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An Historical Perspective
Historically, the cost of generating power declined as
utilities built ever-larger power plants, which
increased efficiency and reduced production costs.
Increased electric demand required more & larger
plants, which reduced costs further as well as
increasing the utility rate base. This era was a win-
win for everyone. Consumers had abundant, low-
cost power; regulators oversaw declining rates,
increased electrification, & economic growth; &
utilities & stockholders gained financially.
 Utility Functions
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The common vision of a utility embodies three

functions:
(1) Generation (electricity), or production (gas)
(2) transmission
& (3) distribution

Facts are that only a small fraction of the 3,200 or so

electric utilities, in the U.S., perform all three functions
& virtually no utility exists in isolation. Major investor
owned utilities (IOUs) do own generation,
transmission, & distribution.
Very few of the publicly owned utilities (POUs) own
their own generation or transmission.
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USA Structure Outline:

► Federal
► State
► Utility
► Power Pool
 Status of electric utility deregulation in each state in the U.S. 6

White - 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 customers
choice without stranded cost or other surcharges.
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PUHCA -- 1935

Since state regulation was not sufficient to

control the action of interstate holding
companies headquartered out-of-state,
Congress passed the Public Utility Holding
Company Act of 1935 (PUHCA).
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The New York Blackout of 1965 and

the Creation of NERC

The New York blackout of 1965 was a wake-

up call to the power industry. The industry
responded to the blackout by creating a
voluntary, utility-managed reliability
organization, the North American Electric
Reliability Council (NERC).
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NERC
NERC divided the nation into ten reliability regions.
The largest council is the Western Systems
Coordinating Council (WSCC). The smallest is the
Mid- Atlantic Coordinating Council (MAAC). Each
reliability council promulgates system planning &
operating criteria that are intended to ensure that
each utility with generation or transmission assets
builds & operates them in a way that allows system
controllers to preserve bulk power reliability.
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NERC

The 10 reliability regions of the North American Electric Reliability Council

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1970’s Oil Embargo

The Oil Embargo of the 1970s changed things in a
hurry. Rapid increases in the cost of fuel to operate
power plants translated into equally large jumps in
retail power prices. Continued increases in oil prices
& unstable fuel supplies led electric utilities to
construct new power plants that relied on domestic
coal and uranium. These plants cost much more to
build than simple oil or natural gas-fired generators.
Consequently, the fixed costs of utility operations
increased, further increasing retail electricity prices.
The natural consequence was consumer complaints
& increased regulatory oversight.
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PURPA -1978
Federal Public Utility Regulatory Policies Act of 1978,
Section 210, (PURPA). This legislation created a new
legal category of power plants known as qualifying
facilities, QFs, & new market entrants called
independent power producers, IPPs. Contracts for
power from QFs typically covered the life of the
plant, because the only outlet for power from a QF
was the local utility. Subsequently, utilities asked
Congress and state PUCs to reform the power
purchase requirements of PURPA. Although
Congressional action is still pending, PURPA did
create a new category of power producers.
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Transmission and Distribution

The transmission grid moves wholesale power from

generators to distributors. The distribution system moves
retail power from distributors to customers. Transmission will
continue to be regulated at the federal level by FERC.
Distribution will continue to be regulated at the state level by
state commissions.
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IRP
By the early 1980s, the situation appeared to be out
of control, with most utilities requesting routine,
often significant, rate increases and several utilities
on the verge of bankruptcy. As a result, regulators
began to take a much more active role in utility
planning. One response was for regulators to require
utilities to evaluate conservation and other
alternatives rather than automatically building new
plants. This process, called integrated resource
planning (IRP), was successful in keeping retail rates
in check, although rates were still thought to be too
high.
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Why Regulation?
Regulation of utilities is based on the inherent
risk that a single monopoly supplier will
overcharge consumers due to the lack of
competition and high demand.

In the United States, state PUCs regulate

retail electricity prices while FERC regulates
wholesale prices.
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Cost Based Regulation

The historic standard for wholesale power exchanges
has been that the price of electricity be cost-based,
not market-based & that savings associated with the
exchange be shared. In other words, the extra
income the seller reaps and the reduced costs the
buyer receives are shared between the two utilities &
passed on to consumers in lower rates. The cost-
based regulatory approach was adopted by FERC to
stimulate so-called economy exchanges & to protect
buyers (small utilities) from the inherent advantage
the sellers (large neighboring utilities) had in the
transaction.
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Electric Industry Restructuring in the

1990’s
By the early 1990s it was becoming apparent
that electric industry regulatory approaches
were not working. IRP was successful in
holding rate increases in check & stimulating
consumer choice, but the process was highly
adversarial, time consuming, & expensive.
Rates were still high & significant differences
among adjacent electric utilities & between
gas & electric utilities caused problems.
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Introduction to Restructuring
Until recently the local utility set a price, called a rate
or tariff. Next, it metered the energy used & sent the
customer a bill based on the rate. Finally, the
customer pays the bill.
Facility managers can participate in the regulatory
process through which rates are set, but individual
consumers have little influence over final prices. Now,
however, this structure is undergoing a profound
change. State legislators & utility regulators are now
letting consumers choose among a variety of new
energy suppliers on the basis of competitive prices &
products.

This trend is called deregulation, or restructuring.

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A Utility Defined
What is a utility? Typically, a utility provides a
commodity or service that is considered vital to the
general public such as power, water, or natural gas.
Utility service is a vital need.

It is deemed by state & federal lawmakers to be in

the public interest to regulate its provision. To
prevent price gouging & encourage widespread
access, the government has granted individual
utilities certain monopoly rights, accompanied by the
right to regulate price as well as service terms &
conditions.
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IOUs & PUCs

Utilities are defined differently by each state & in
federal legislation. Generally, there are two types of
utilities, private and public.

Private investor owned utilities, IOUs, issue stocks,

sell bonds, & are regulated at the state level by
regulatory commissions. Regulatory commissions
have a variety of names although the names Public
Utilities Commission (PUC) & Public Service
Commission (PSC) are the most common. These
commissions, or PUCs, set the retail rates charged by
IOUs for their services. Commissions also ensure that
IOUs respond to customer service requests & are
properly maintaining utility infrastructure.
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POU’s
Publicly owned utilities, POUs, are member-owned
cooperatives or government or municipally owned
utilities.
Publicly owned utilities are generally exempt from
regulation by state regulatory commissions because
they are assumed to have the customers’ (who are
also the owners or voters) best interests in mind
when setting rates & service standards. A few states
do subject publicly owned utilities to regulatory
oversight.
There are approximately 3,200 utilities operating in
the United States, roughly 200 of them are IOUs.
The IOUs provide power to almost 70 percent of all
consumers.
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PMAs
The federal power marketing agencies, PMAs, include
the semi-autonomous Tennessee Valley Authority, TVA,
& the four DOE power marketing administrations:
Western Area Power Administration,
Bonneville Power Administration
Southeastern Administration
Southwestern Power Administrations.
Federal PMAs generally restrict their sales to wholesale
customers, typically publicly owned utilities. They have
the authority to sell to federal & state agencies & a few
very large industrial customers. Some states also have
power marketing agencies.
Examples: New York Power Authority, the Lower
Colorado River Authority, TX, the Platte River Power
Authority, CO, & the Salt River Project, AZ.
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Regulated Utility Features

►Own most of generation needed to meet the needs
of customers in a dedicated service territory.
► The local utility may import power to meet
demand some months and export surplus power
to adjacent utilities during others.
► Neighboring utilities may use the local utility’s
transmission lines to wheel power to other utilities.
Obligation to serve customers all the power they
require.
► Inter-utility sales of surplus power may result in
an active and competitive wholesale power
market.
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Transmission & Distribution

The distinction between transmission & distribution
for a utility is not so obvious.
The industry has tried to draw a so-called bright line
between the two. Such a line is needed to clarify
FERC and State jurisdiction over power line
regulations & rates. In general, transmission lines
are high-voltage lines, those with kilovolt-ampere
(kVa) ratings of 750, 500, 230, & 115. Distribution
lines have lower voltage ratings, such as 69, 34, &
13 kVa. Many in the industry refer to ratings of 115
kVa & above as transmission.
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Major Generator Designs

There are four major power plant designs
based on the primary source of energy. These
are water turbines, reciprocating engines,
steam turbines, and gas turbines.
[Link] plants
[Link]-sets
[Link] Turbine
[Link] Turbine & Combined-Cycle CT
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Plant Efficiency
► Older plants are less fuel efficient than newer
ones. The efficiency of a plant is reflected in a metric
called the heat rate, which is expressed in terms of
BTUs per kilowatt hour (kWh) of power (e.g., 9,500
BTUs/kWh).
► One kWh of power produces 3,412 BTUs of
energy, so a plant with a heat rate of 3,412 would
be perfectly efficient.
► Improved heat rates are the focus of intense
research sponsored by U.S. Department of Energy,
DOE, & industry.
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Plant Selection & Dispatch

Some power plants operate around the clock. These plants are called base load
plants. Utilities typically choose coal-fired, hydro, or nuclear plants for this
continuous base-load operation because their fuel costs are low, and their
relatively high capital costs are spread over a large number of hours and years.
To meet demand during peak daylight hours, utilities are likely to run oil and gas-
fired plants, referred to as peaking plants, which are more expensive to operate,
can be started and stopped quickly, and their capital costs are relatively low. In
between are intermediate or mid-merit plants, which are typically combined-cycle
combustion turbine plants.
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Combined-Cycle Combustion Turbine Plant

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Plant Construction & Operating Costs

Generating plants vary in construction cost &
complexity. The fuel for generators also varies in
price.
Generally, fuels with low heat content, like coal or
wood waste, are inexpensive & those with high heat
content, like gas, oil, & uranium, are expensive. As a
result, the selection of generating plant designs
requires trade-offs between construction costs &
operating costs, primarily fuel. An approximate rule
of thumb is that coal, which fuels 55% of U.S.
electricity, is about a third as expensive as gas, per
Btu.
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Construction Costs of Various

Generating Plants in the U.S.A.
Typical New
Plant Efficiency
Plant Type: Typical Plant Size: Cost/kW Range
Reciprocating engine 2.5 kW up to 10 MW+ $350 30-40%
Combustion Turbines 90 – 500 MW $300-400 30-35%
Combined-Cycle
Combustion Turbines 250-1,500 MW $600-650 50-65%
Coal plant 1,000 MW $1,200 30%
Nuclear plant* 300-1,500 MW $2,000 na
*These figures are based on estimates as no new nuclear plants have been
ordered in the United States since 1978.
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Utility Planning and Generating

Reserve Margins
Customer demand growth is uneven and somewhat
unpredictable but utilities are required to provide for
all customer demands. The amount of reserves is set
through industry standards, & are reviewed &
approved by regulators.
Typical reserve margins are in the 15% to 20%
range, usually based upon the need to have power
available if two of the utilities’ largest plants are out
of service at the same time during peak demand.
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Reliability
Reliability is actually composed of two elements:
► Generation & transmission capacity adequacy
► Reliability of transmission & distribution

In other words, is there enough power &

transmission capacity & can it be used to get
power to all customers when they need it?
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Reserves
Two different types of reserves are required for
system reliability.
► Non-spinning reserve, or installed capacity reserve
(ICAP). This is usually supplied by power plants that
are available for operation, but sitting idle.
► Spinning reserve or operating capacity reserve
(OCAP). Spinning reserves are provided by power
plants that are actually operating.
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Control Centers
Wheeling power requires the use of transmission
lines that are owned by multiple utilities. This use
needs to be managed so that power can be tracked
as it flows from utility to utility. Utilities manage the
operation of generation, transmission, & transmission
maintenance from facilities called control centers.
Power that is wheeled through a system is
coordinated between adjacent control centers.
Although there are over 3,000 retail utilities, there
are only 140 control centers in North America.
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Structure of the Traditional Utility

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Examples of U.S. Power Pools

Operation of pooled generation requires
cooperative operation of transmission in the pool.
Tight power pools have some form of centralized
transmission dispatch. Usually, there is a control
center for the pool as a whole that issues dispatch
instructions to the control centers of the larger
utilities in the pool.

Examples of tight pools include the New England

Power Pool (NE Pool), the New York Power
Pool (NY Pool), & the Pennsylvania, New
Jersey, & Maryland Pool (PJM). PJM is the oldest
U.S. power pool having been founded in the 1920s.
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Unbundling & ISOs

In the traditional system, although the utility may
purchase power from neighboring utilities, it is
primarily responsible for its own generation,
transmission, & distribution of power to all of the
retail customers in its service territory.
In the deregulated supply system, generation &
distribution are unbundled & customers are no
longer captive but are free to purchase from any
suppliers on the grid. Purchasing of power is done
via market mechanisms like the power exchange and
transmission scheduling is conducted by the
Independent System Operator (ISO).
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Structure of the Deregulated Electric

Supply System
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Functions after Industry

Restructuring
Conventional utility operations, prior to restructuring,
consisted of generation, transmission, distribution, &
service to captive customers. Deregulation can be
rather narrowly defined as the substitution of
market forces for regulated generation rates.
In order to create an appropriate environment for
consumers to participate in the generation
marketplace, new rules & standards of conduct are
needed to ensure truly competitive markets result.
This process has launched a series of changes in
utility management & institutions - revolutionary.
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Power Pools, Exchanges,

& Wholesale Markets
In a deregulated environment, the power pools that
had existed are replaced by power exchanges
(sometimes still called pools) for the wholesale
marketing of power only. Tight power pools
integrated the operation of wholesale markets &
transmission operations.
New power markets require new rules & new
methods for conducting transactions. Power trading
has to be isolated from transmission operations to
prevent collusion between the two or insider trading
based on non-public information about plant or
transmission line outages.
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Power Pool Pricing

A utility has generating resources that cost 3
cents/kWh & its neighbor has resources that produce
power for 1 cent/kWh. It would be advantageous
for the first utility to buy power from its neighbor
rather than operate its own plants. Implementing
this scheme creates two challenges.
(1) How to price the power in the exchange?
(2) How to create and manage an exchange, or
market, that ensures cost minimization while
maintaining overall system reliability.
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Pool Procedures
In order to facilitate economy exchanges &
collaborative generation development, utilities
formed power pools. Pools have standard
procedures for conducting power exchanges
among members including arranging for
wheeling. As a result, each transaction does
not have to be submitted for FERC review.
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Power Pools and Regional Power

Markets
In addition to providing reliability reserves,
adjacent utilities can also provide alternative
sources of generation to meet routine loads &
partners to jointly build new generation.
Through these arrangements, utilities can
collaborate to operate their collective portfolio
of generation so that operating costs are
minimized.
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Transparent Pricing
Price deregulation requires open markets &
transparent pricing. Transparent prices are
prices that can be readily determined by
market participants in an open environment.

Exchange markets typically take the form of

bid-offer auctions where sellers can bid against
each other and market clearing prices are
known by all parties, including consumers,
buyers, and sellers.
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Pool Types
Two types of power pools - tight and loose:
A loose power pool is a voluntary association of
utilities that negotiates generation sales primarily on
a bi-lateral (two-party) basis. Bi-lateral
transactions are private, thus other participants
are unaware of the terms of the exchange, including
price & transmission access.

Tight power pools require true pooling of generating

& transmission assets. The cost of each resource
in the pool is known & each is operated on the
basis of those costs, with the lowest cost resources
being used most.
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Pool Concerns ~ Market Power

In order to make all sellers comfortable
that an incumbent utility does not have
market power, or undue market
influence, deregulation rules require local
utilities to mitigate potential market
power.
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Pool Concerns ~ Market Manipulation

Prices in electricity markets can be manipulated
through a variety of mechanisms, including
restricting power generation, restricting
transmission access, & manipulating power
exchanges. Restricting power supplies has the
effect of increasing prices in the short run,
because prices are a function of supply &
demand – difficult to detect manipulation.
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Independent System Operators

Competitive generation & transmission
markets merge in the ISO, despite the fact
that the markets themselves operate
independently. A central point of control is
necessary to ensure system reliability. ISOs
became the heart of the new competitive
electricity industry & are required by FERC to
be broadly representative of all market
participants, not just transmission owners.
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South Asia Energy Links

► What is there to learn from the
experiences of the U.S. & others?
► What structures might be considered?
► What should be South Asia’s priorities?
► What umbrella agencies can assist to
promote regional co-operation & rules?