electricity towers

Electricity Restructuring Deja Vu

Nov. 16, 2016
Judging from some of the issues the industry is facing today, it is possible another generation of power professionals will experience significant restructuring of one form or another.

“It’s Déjà vu all over again.”  Those of us that have been around for a while fondly remember this and other quotes by Yogi Berra.  There is actually a museum for those now days (see http://yogiberramuseum.org/just-for-fun/yogisms/).  Those of us who can recall the “Yogism’s” probably also recall electricity deregulation or restructuring the first time around.  It was about 20 years ago, but I can remember the trepidation we all felt just like it was yesterday.  Judging from some of the issues the industry is facing today, it is possible another generation of power professionals will experience significant restructuring of one form or another.

We increasingly are seeing utilities and states pursuing “around market solutions” to garner subsidies for deregulated power plants that are unable to compete in today’s open markets.  The “around market” term derives from the use of mechanisms outside the competitive market process and beyond the reach of FERC regulation. 

The solution might be some form of maintenance fee, emergency capacity payment or carbon –free emission subsidy to help pay the carrying cost of the plants and keep them running.   The rationale for saving the plants ranges from fuel diversity and grid reliability to arguments as fundamental as protecting the economic health of utility companies with proportionally large coal and nuclear fleets.  A number of states and utilities dissatisfied with the results of current market policies also are considering a more draconian solution:  re-integration.  Some are considering a return to the full vertically integrated utility model and others the termination of energy choice programs.    

Hold on a minute.  Maybe competition and the benefits it has brought to the power industry are like emancipation:  once realized no one will accept going back to the old way.  I should note a number of states contracted “deregulation remorse” in the past after the California energy crisis, but this did not prevent various degrees of deregulation from proceeding elsewhere.  In addition to the several states considering re-regulation today, others are considering deregulation.

So let’s take a deeper dive and look at the parts of the business that may be at risk of change.  The deregulation we have seen in the last two decades has most impacted the generation, transmission and retail marketing segments of the business.  Deregulation of transmission has a long history of FERC involvement and court decisions, so this area is unlikely to be reversed.  The impact of generation and retail marketing deregulation have been less consistent and frequently state level,  so these areas are more likely targets for re-integration, particularly if deregulation is not “currently” producing  the desired results for utilities and customers.

Today, we also are seeing considerable interest in distributed energy resources, micro-grids and energy storage. All of these technologies have the potential to impact retail markets which the states largely control, but also wholesale markets regulated by FERC.  Throw in the recent election of a political party that has been sidelined during many of the recent FERC decisions and you have the potential for a significant change in regulatory direction going forward.

So, how should we advocate?  Some market changes have produced real savings and advancements in the power industry.  Competition can increase efficiencies and innovation.  If customer driven, competitive free markets, like the Internet of Things (IoT), are inevitable,   we have to advocate for rules that ensure our utilities can recover the cost of past mandated investments and make it possible for them to compete on the same level playing field with independents.   Once we do that, we can continue with the great power market deregulation experiment.

On the flip side, many segments of the country are not deregulated and several more want to return to an integrated, regulated environment.   With the broad application of smart meters and other digital technologies available today, we should be able to administer monopoly service better than ever before with true marginal cost based, real time pricing for everyone.  After all, it was a perception of unfair pricing that started the deregulation push in the first place.

What’s your opinion?  Is the competition genie out of the bottle or can service be better and cheaper when it is provided by a dedicated monopoly provider?  Either way, another famous “Yogism” probably applies:” The future ain’t what it used to be.”

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