Electric Restructuring

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Electric Restructuring
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Overview

• Implementing Competition
• Transmission Issues
• Vertical Integration
• Stranded Costs

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Implementing Competition
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Reason for change

• technology changes - gas cheaper?
• dissatisfaction/current prices
• Dissatisfaction across customer class

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Expanded Wholesale Competition

• deregulate only generation - any one can sell in
  wholesale market for competition

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Retail competition

• separate local distribution from retail sales
• purchase electricity from marketer
• generation also deregulated as in expanded
  wholesale

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Two market structures for implementing either
retail or expanded wholesale

• Bilateral contracting - specific supply contracts
  between 2 parties
• Poolco - centralized spot market where
  electricity is bought as needed and sold as
  available

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Bilateral contracting with retail competition

• Line companies - only provide unbundled
  distribution
• Marketing companies - buy from generators and
  sell to customers under a bilateral contract
  between the marketer and customer.

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Poolco Arrangement

• can still have some bilateral contracts called
  self-nominated contracts.
• Long term contracts, called contracts for
  differences (CFD) can also exist to reduce risk
  of spot price fluctuations.

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Poolco Entity

• regulated monopolist
• solicits bids from generators regarding prices
  and amounts of power they are willing to sell
  each 1/2 hr.
• finds where demand and supply and all generators
  receive same price.

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Transmission
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Transmission

• FERC order 888 - requires open access to the
  transmission grid for all companies
• functional unbundling - must separate different
  functions and charge itself the same rate for
  transmission that it charges others

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Transmission

• regarded as an essential facility in the
  electricity industry.
• Generally assumed to be a natural monopoly.
• Regulation of transmission - ROR or PC

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Transmission pricing and cost

• peak vs. off peak
• peak cost of adding lines MC
• Off peak MC
• distance - costs of rights of way, lines and
  power losses.

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Transmission pricing cost (cont.)

• Interruptible vs. non-interruptible
• variableness of demand
• possibly use 2 pt. tariffs

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Transmission Characteristics

• Load balancing - no storage
• Powerline losses - 10 loss in transmission and
  distribution
• Loop flow effects - electric flows overall
  connected lines

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Pros Cons of Vertical Integration
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Vertical Integration

• Pro
• Transaction costs
• Economies of scope
• Improving Coordination
• Hedging Risk

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Vertical Integration

• Con
• Self-dealing
• Undersizing
• Discrimination
• Cross-subsidization

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Stranded Costs

• Stranded costs are 10B - 200B
• Pros cons of stranded cost recovery

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How to recover Stranded Costs

• Contract renegotiation - get it from customers
• Transmission surcharges
• Compensatory Exit Fees
• Accelerated Depreciation
• Auction off transmission facilities