RESTRUCTURING OF CA ELECTRIC POWER INDUSTRY.   Term Paper ID:25222 Click to get this paper

Essay Subject: Goals, economics, regulation & reform, legislation, competition, residential & business customers, green power products, Proposition 9.... More...

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Paper Abstract: Goals, economics, regulation & reform, legislation, competition, residential & business customers, green power products, Proposition 9. Paper Introduction: The issue of deregulation of the electric power industry is gaining considerable attention through the federal and state governments. California is leading the way with restructuring public utilities, followed by a handful of other states. This research examines the growing movement of restructuring the electric power industry and the economics of electricity restructuring, especially as it relates to the California experience. National Movement Federal and state governments are actively considering regulatory reforms to restructure the electricity industry-an industry with total assets worth about $500 billion and net revenues of over $200 billion annually. In 1992, the Congress enacted the Energy Policy Act, which, among other things, Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Within the service territory of the six IOUs, the local electricutility is responsible for the distribution of electricity to consumers'homes and businesses. These sourcesinclude: lower cost generation, early competition transition chargeexpiration, favorable load profile, efficiency load management, and lossleader pricing. Significant investment opportunities remain for energy efficiencythroughout the large-volume market. Strandedcosts are investments or assets owned by regulated electric utilities thatare not likely to be competitive in a restructured marketplace. and San Diego Gas & Electric Co. Because of their size,and because customer acquisition costs per kWh run far lower for largeelectricity users than for smaller ones, the largest customers have beenexpected to reap the most significant rewards from competition. Seen in this light, the results to date ofresidential switching in California's electric market hardly appearsurprising. Severalstudies estimate short-term cost savings at anywhere from 6 to 15 percent. Competition in the residentialgreen power market is apparently robust. As with residential consumers, because of the generally low PX prices,supply choice offers only modest savings for the large-volume customers.The 1-5 percent savings seen to date are therefore derived, in part atleast, from more creative sources, including those listed here. In some cases, ESPs seeking a market presence have priced servicesbelow cost. (Non-bypassable means thatthe charge will be imposed in such a way that consumers cannot avoid payingit, whether they stay with their current utility or choose a new supplier.) However, not all states' plans call for the full recovery of strandedcosts. Washington D.C.: Federal Communications Commission, 1998. At issue is the restructuring compromise reached two years ago by thestate's three big utilities, environmental groups and others that enabledthe Legislature to unanimously pass a law making California the first stateto deregulate its utility industry. In the first year after the 1984 breakup of the Bell system, forexample, AT&T's share of the interstate telephone market declined by lessthan 4 percent, despite aggressive marketing on the part of its challengers(Zolniereck and Rangos 2-4). If a residential customer switches suppliers, only the commodity pricefor electricity generation (the clearing price at the power exchange, orPX) will be subtracted from the overall rate charged by the utilitydistribution company (UDC) for electric service. Relying on thisearly experience, it is therefore useful to examine products, serviceoptions and customer behavior in California's restructured market. In 1992, the Congress enacted the Energy Policy Act, which, amongother things, promotes market competition in the wholesale industry. The 13 states are Arizona, California, Maine, Massachusetts,Montana, Nevada, New Hampshire, New Jersey, New York, Oklahoma,Pennsylvania, Rhode Island, and Vermont (Department of Energy 19). (Presumably, AT&T's share of the residentialmarket declined at an even slower rate.) Though AT&T still commands 5 percent of the long-distance market, over time consumers have become morefamiliar with the process of switching long-distance carriers, causingAT&T's market share to decline. Washington D.C.: Energy Information Administration, 1998.Griffin, James and Henry Steele. Currently, a number of bills to restructure the retail electricityindustry to promote a more efficient and market- driven industry are beforethe Congress. With many retail energy service providers (ESPs) already vying for apiece of the state's $2 -billion power market, other states are watchingCalifornia's market closely to assess the short-term benefits thatrestructuring can bring to different customer classes. After all, the "diffusion" of new products is rarely immediate, buttypically starts slowly before accelerating. These"savings" are largely illusory, however, because they would be obtainedwhether or not the customer switches providers. But whatkinds of price savings and service options have these customers been ableto obtain in the California market? Though a high proportion of the largest customers are already activein the new market, through May just 66, 8 residential customers, or .8percent, had requested a new service provider. Unexpectedly, however, the bills now alsoinclude a variety of additional charges - including one for those nuclearplants and high-cost contracts - and consumer groups are arguing thatsmaller customers are actually saving very little, perhaps only 1 to 3percent. Such pricing tactics may also be used in anticipation ofselling other, more profitable services to these customers once arelationship is set. With razor-thinprofit margins, such acquisition costs can easily swamp any savings thatmight be available on the commodity cost of power (California EnergyCommission 3-5). Next it wasEnron Energy Services (EES), the state's largest and most vocal energyservice providers (ESP), who in late April, just three weeks after themarket had opened to competition, pulled out of the residentialmarketplace. Finally, although activity on the governmentaggregation front is slow in coming, to create buying power some localgovernments are exploring the option of aggregating their residential loadon a voluntary basis. Sacramento: State of California, 1998.Department of Energy. Pointing to the benefitsprovided by the deregulation of other industries, they expect electricrestructuring to drive down costs, better allocate and manage risks,promote innovation and bring an increasing and diverse array of productsand services to all customers.(Winston 1263-1264). Smaller players include deen 'ngreen, Keystone, Friendly Power, PowerUSA, PowerSource, ITT PowerCom, andPowerCom Energy & Communications Access. Themarkets for the transmission and distribution of electricity are likely toremain regulated for the foreseeable future. Because the PX is a large,liquid, wholesale exchange without a retail markup, the ESPs are thereforeforced to compete, at retail, with a low default generation price, leavinglittle or no margin for entry. Nevertheless, despite the promise of customer benefits, some expect tosee transitional problems in the early years of electric restructuring.They warn that it may take years before competition yields significantcustomer benefits, and that most of the cost "savings" in the short-run arelikely to arise not from efficiency gains, but from an inequitablereallocation of costs among market players. California'selectric power industry, though freed from many of the constraints ofregulation, have exercised some business practices that have resulted inlittle cost savings for consumers. One useful way of thinking about the degree to which rapid change canbe expected in the new electricity market is to look at the experience intelephony. A Shock to the System. In theresidential sector, the new market is dominated by green power products andso it is useful to look especially closely at the green offerings indiscussing what is available to the customer. "Study on Electric Initiative Shelved Before Election." Los Angeles Times (November 19, 1998): 1, 25.D. This movement is causing the electricity industryto be restructured. While utilities have up to four full years to recover their strandedcosts via the competition transition charge, it is now thought likely thatPG&E and Southern California Edison will terminate their CTCs early. What Electricity Restructuring Means for Rural California Counties. This fact is perhaps not surprising given thatboth Pacific Gas & Electric Co. Of the 16 ESPs that intend to sell to residential customers, most planto have green power products and most of the larger, well-capitalizedcompanies are avoiding the price-based market altogether, and are focusingtheir efforts on green power alternatives. For example, in California, where a plan is furthest along,competitive electricity markets and consumer choice have begun this year.California's plan calls for a rate cut of no less than 1 percent for allsmall customers at the beginning of this year. In addition, such power plants often have high debtlevels. The California plan calls for the recovery of stranded costs through anon-bypassable competitive transition charge. Works CitedBrennan, Timothy et al. As more customersexperience real-time pricing, incentives increase for load shifting. Those results should not be looked upon as an indication of astagnant or failing market. So far,the expected competition among electricity suppliers is taking place mostlyfor these big customers; as a result, it is utilities and industry thatprovided most of the money for the campaign to defeat Proposition 9. More than 95 percent ofthe load that has requested a switch is comprised of commercial, industrialand institutional customers. As noted above,the movement for restructuring is being debated in Congress as well as 49states. Proposition 9 While the public utility industry has been singing the praises ofderegulation, opposition to the deregulation movement has sprung up inCalifornia, Massachusetts and New Hampshire. Yet it is important not to overestimatethe amount of residential customer switching that can be expected in a newmarket. These events, along with others, seem to have bolstered thefears of some that small customers are not well positioned to takeadvantage of competition. Nevertheless, the utility companies outspent proponents of Proposition9 by nearly 4 -to-1, and the ballot measure in California (as well as inMassachusetts) went down in defeat. The various products offered by green power retailers differ on manycounts, including resource content, pricing level and structure, pricestability, term of agreement, billing method, and the provision of varioussign-up bonuses. havereported that as many as one-fourth of their industrial accounts asked tobe switched (California Energy Commission 17). (Thewholesale electricity industry is comprised of intermediaries such aselectric utilities that resell electricity to their retail customers.) Inaddition, under the act, the states may pursue their own reforms in theretail electricity market (Department of Energy 1-5). In California, the ballot measure was known asProposition 9. State Programs The electric industry is being fundamentally reformed. Fears of fraud, misrepresentation of product offers, redlining,slamming, and other abuses have also prompted calls for strict rules toprotect small, unsophisticated consumers. and J. The Restructuring of the Electric Power Industry. This research examines the growing movementof restructuring the electric power industry and the economics ofelectricity restructuring, especially as it relates to the Californiaexperience. and K. Most of the green power products include substantial quantities ofrenewable energy (the two products that do not include renewables consistprimarily of large hydropower). By contrast, big industrial customers may end up cutting their powercosts by a third within four years, according to energy marketers. This could be attributed to lack ofprice competition from two primary factors as well as to several secondaryfactors related to how the "market rules" have been established (e.g.,restricted competition in billing and metering services and high switchingfees). Schuler. San Diego: Aztec Shops, 1986.Rodgers, L. Though some commercial, industrial, and institutional customers haveand will continue to make targeted purchases of green power, thesecustomers are primarily interested in products and services that providemore tangible benefits. Estimates of these stranded cost vary widely, from a low of roughly$1 billion to a high of about $5 billion. The brokered restructuring agreementwill remain in effect. With the Californiamarket now open - albeit only for a few months - we finally have some realevidence of what to expect, however tenuous. Because of competitiveconcerns, little public information is available on the terms of most ofthe private sector deals. Despite fears to the contrary, however, theresidential market is far from "dead." In fact, according to the PUC, therewere at least 16 ESPs, or marketers, that planned to offer products toresidents by year's end. Restructuring the electric power industry is still likely to prove avery positive step forward for the industry, but the industry will have tolearn how better to operate in the new competitive environment. Some ESPs are offering such services toprovide customers savings on total electric bills. United Energy on the other hand offers bundled natural gas andelectric service to customers in the San Francisco area. In fact, by most accounts, electricityrestructuring in California has been driven largely by the desire of theselarge consumers to receive lower electricity prices. While theseresidential ESPs will presumably lose money by offering such savings, theyhope to realize a profit by establishing brand identity and attracting newcustomers over time, and by selling related products and services. Restructuring of California's $22 billion electric utility industry byAssembly Bill 189 (Brulte, Chaptered 854, Statutes of 1996) hastransformed Pacific Gas and Electric, Southern California Edison, San DiegoGas and Electric, Sierra Pacific Power, PacifiCorp , Bear Valley Electric,and Mountain Utilities, the investor-owned utilities (IOU) in the state.For them, restructuring has divided the process of providing electricityservice-generation, transmission, distribution, metering, billing, andother services-among many, and some new, market participants. Energy Economics and Policy 2nd. The major players in the retailgreen power market include Edison Source, Green Mountain Energy Resources(GMER), and PG&E Energy Services (PG&EES). As discussed above, the utilitiesagreed to open themselves to competition from power suppliers outsideCalifornia; electricity customers, meanwhile, would foot most of the billfor stranded costs. Sinceresidential power service was opened to competition earlier this year, theelectric bills received by California households have shown a state-mandated 1 percent discount. After all, based on data provided to the California Public UtilitiesCommission, by the end of May only 11 , customers, or 1.1 percent of the1 million eligible customers, had asked to switch suppliers. It is also useful to look atthe early experience of larger customers, where a range of product offersand cost savings are available. In California, for example, many of the costsavings for retailers especially have yet to materialize. 1, 1998): 26-43.Shuit, Douglas. Conclusion Traditional thinking in the energy industry that electric powergeneration, transmission and distribution is a natural monopoly has givenway to a new way of thinking. With those numbers so low,some have suggested that small consumers have been effectively left out ofCalifornia's restructuring effort. An independent analysis by the California Energy Commission indicatedthat Proposition 9 would have indeed reduced electric rates for nearly 1 million Californians. We can gain some insight into the reaction of customers to retailelectricity competition by looking at the early numbers for customerswitching. For municipaland other publicly owned utilities, no comparable changes have yet beenrequired (California Energy Commission 2). The issue of deregulation of the electric power industry is gainingconsiderable attention through the federal and state governments.California is leading the way with restructuring public utilities, followedby a handful of other states. For example, the New Hampshire plan calls for all customers to haveretail choice by July 1, 1998. However, three states - California, Massachusetts, and Rhode Island- have already opened to retail competition and many more expected tofollow suit over the next few years. The plan also calls for thefull recovery of utilities' stranded costs over a 1 -year period. Rangos. The study, completed on October 16 but not releaseduntil after the November election, concluded that under Proposition 9,ratepayers of Southern California Edison, Pacific Gas & Electric, and SanDiego Gas and Electric would have received reductions of 11 percent toeighteen percent. Proposition 9, had it been passed, proposed to cutresidential electric bills by 2 percent, basically by shifting $6 billionin stranded costs to the utilities and their shareholders. These potential benefits include, amongother things, (1) increased competition, (2) lower prices, (3) loweroperating costs for business, (4) smaller regional differences in costs,(5) more jobs, (6) more reliable service, and (7) a cleaner environment. It is in the midst of being transformed from a verticalmonopoly into an competitive market where wholesalers and retailers maychoose the suppliers of their electric power. "Ready, Fire, Aim: California and the Nation on the Eve of Competition." Public Utilities Fortnightly (Jan. Customer switching will not take off as rapidlyas some had dreamed, and some unscrupulous marketers will enter the market(Brennan et al. It would alsohave prevented the utilities from imposing fees on rate payers to pay off aseparate $6 billion bond issue that enabled the power companies to give therate payers a 1 percent rate cut this year. "Economic Deregulation: Days of Reckoning for Microeconomists." Journal of Economic Literature 31 (September 1993): 1263-1289.Zolnierek J. Compared with the initially "bullish" expectations, customerswitching in California appears, at first glance, to be off to a slowstart. With the departure of Enron, no large ESP currently is usingsignificant mass-media advertising to peddle price-based electricityproducts to residential customers. Soyka, "Pyramid Schemes: A Black Eye for Power Retailing?" Public Utilities Fortnightly (May 1, 1998): 26.Winston, C. Other ESPs, usingmultilevel and other nontraditional marketing techniques, also expect tooffer price-based products, though some of these companies may be promisingmore than they can deliver. Forexample, some utilities own nuclear power plants that have very highoperating costs, and these plants are not likely to be competitive in thenew retail market. Washington D.C.: Resources for the Future, 1996.California Energy Commission. Opposition to restructuringhas sprouted in California and other states forging ahead with deregulatingthe electric power industry. But there are still many unanswered questions about the transitionfrom a regulated monopoly to a market industry. Long Distance Market Shares: Fourth Quarter 1997. Nonetheless, there are several major ESPs thatappear to be targeting large customers and, in fact, price competition isfar more robust for these customers than for smaller electricity users.Contract lengths of one to five years are common and, while cost savingsare often expressed in different terms, total electric service pricereductions in the range of 1 to 5 percent appear typical (relative tobundled UDC tariffs). And will California customers switch suppliers whengiven the chance? Customers with flat load shapes or with the bulk of theirelectricity consumption in off-peak periods will likely find larger savingsthan those with high, peak-coincident consumption patterns. 13-14). Unlike residential customers, many of the larger customers negotiatedirectly with ESPs or issue RFPs for power supply. Reform proponents see blue skies ahead. National Movement Federal and state governments are actively considering regulatoryreforms to restructure the electricity industry-an industry with totalassets worth about $5 billion and net revenues of over $2 billionannually. Any available benefits mayaccrue primarily to the large customers, who enjoy the greater buyingpower. In so doing, researchers areable to analyze and discuss the sole effect of lower prices resulting fromretail competition on the government's spending for electricity. Consumer groups in bothCalifornia and Massachusetts measures on their November 1998 ballots torepeal elements of the utility deregulations that have been enacted bytheir legislators; consumer groups in New Hampshire have challenged thatstate's law in court. The study also concluded that closing the Diablo CanyonNuclear Power Plant would not have posed a significant loss to the state'selectricity supply because other sources are already being developed (ShuitA1). California, which has moved further than other states to deregulateits utilities, has become the flashpoint for consumer discontent. California's Early Experience We need no longer rely solely on industry prognosticators to evaluatethe impacts of electric restructuring for customers. In this era of privatization anddecentralization, a national movement is taking hold - with California inthe lead - to introduce the basic principles of the competitive market tothe electricity industry. During their deliberations, the Congress and the states are discussingthe numerous potential benefits of electricity restructuring in order tobring about retail competition. Green Products Because of the difficulties that ESPs face in attempting to offerlegitimate cost savings to residential customers, one of the only entreesinto this market is to offer premium-priced, value-added products andservices, the most prominent of which are turning out to be green powerproducts - that is, products that are differentiated based on environmentalcharacteristics (Brennan et al. Though it appears virtually impossible to offer price-basedelectricity products to households at a profit, several smaller, start-upESPs are offering total electric price savings in the range of .5 to 2.5percent (relative to UDC tariffs), including Commonwealth Energy Corp.,Friendly Power Co., Keystone Energy Services and United Energy. Specifically, it is nowpossible to obtain a preliminary picture of the types of electricityproducts being offered to different customer classes and the resultinglevel of customer switching. 41-42). But what types of products, serviceoptions and cost savings can customers, both large and small, really expectin the short-term? Indeed, if one is tobelieve the governor of California, the state's bold experiment torestructure its electric industry will offer something for everyone:vibrant competition, lower rates for all customers, job creation, reliableand efficient operations, support for "public purpose" programs, and theprotection of the financial integrity of the state's utilities. A significant determinant of cost savings is the customer's loadprofile. Though most ESPs guarantee a particular level ofsavings, some instead offer a predetermined split of any savings realized.In either case, there are several key sources of the savings. These two factors are high acquisition costs and low default prices. Forty-nine states have considered reforming their retail electricitymarkets, and 13 states have developed plans to restructure the industry,either by enacting legislation or by issuing comprehensive regulatoryorders. In stating that falling electricity prices would likely causethe government to buy more electricity, researchers are implicitly holdingconstant all other factors that could affect the government's electricitypurchases, such as the size of the government. Even if new competitors offersignificant savings and other benefits, the switching process itselfentails large transaction costs for smaller consumers, especially in thetime and effort required to gather information and evaluate offers. Residential Market Beyond early customer switching results, two critical events havehelped shape the negative perception about California's residential market.First it was Boston-Finney's pyramid scheme, which was not looked uponfavorably by state regulators and legal authorities (Soyka 26). In effect, the initiative'sbackers said, it would have stopped the utilities from taking back with onehand the discount they extended with the other. By July, half of these companies already had somevariety of products on the market. For example, Commonwealth Energy plans to market an energy-efficiencydevice in the desert southwest that is claimed to lower air-conditioningbills. Utilities will be allowed to recover onlysome of their stranded costs. Clearly, price competition for residential customers will be quitelimited in the near-term. An additional attribute of some of theproducts is the inclusion of "new" renewables (i.e., newly constructedrenewable generation facilities), and many of the products includecommitments to supply some new renewable generation (from 6 to 13 percent).Price premiums range from .7 to 3.5 cents per kilowatt-hour. Thus,where ESP prices are linked to historical utility tariffs, early CTCexpiration offers the potential lot "savings" toward the end of the four-year period that can be amortized across the entire term of the deal. Due to high start-up and customer acquisition costs, signing up anaverage residential customer in the early years of restructuring may costwell more than $1 million (Enron reportedly spent $ 1 million to attract3 , residential customers, a $ 3 -per-customer cost). The distribution utilities are now called utilitydistribution companies (UDCs) and are regulated by the California PublicUtilities Commission (CPUC). The full recovery of stranded costs isunlikely because, as the plan points out, the primary goal of restructuringis to lower electricity rates. But accordingto this same data, it is estimated that these switchers account for roughly7-1 percent of all load eligible to switch, demonstrating significantearly interest by customers in switching suppliers. One scholar predicted that "Californiabusinesses and homeowners will feast from a table set with products andservices" (Rodgers and Schuler 28). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.