Around the beginning of this year I read a particularly good article about deregulation and restructuring in the electric utility industry. Besides putting the current state of deregulation into acontemporary perspective, that article also reminded me that the utility deregulation process has been ongoing since the debut of FERC 436, 500 & 636 in the gas industry, now more than two decades ago. My own experience with deregulation began in the mid-1980s, when the very notion ofderegulation was in its infancy. And, because the proposed unbundling of transportation (pipelines) and merchant services was central to our business, I watched with keen interest as this rather radical plan unfolded.
At that time I was working for an automation company focused primarily on oil and gas pipeline automation systems. In the early 1980s – and for decades before – gas pipelines had been integral parts of vertically integrated gas companies in much the same way that transmission and distribution are an integral part of vertically integrated electric utilities. But, for the most part, that’s where the similarities between gas and electricity end, at least as related to deregulation. Let me explain…
For starters, one would think that someone at the regulatory level would have jotted a few things down on the “What NOT To Do” list as a result of their experience with gas pipeline deregulation. For instance, not directly engaging the major gas pipeline companies in the process early enough to jointly tackle the most complex issues – take-or-pay contracts, storage, etc. – before attempting to issue the rule, rather than after FERC 436 proved to be unworkable. But instead of moving up the learning curve, they repeated many of the same mistakes by initially ignoring stranded assets, transmission limitations, reliability, security and other key consequences of opening the electric market to competition. Moreover, the electricity deregulation plan was based almost exclusively on econometric models, which essentially ignored technical and operational efficiencies of vertically integrated utilities as well as other power engineering limitations that are unique to the electric power industry – and that involve physics, not merely spreadsheets.
We all know that electricity cannot be effectively stored like gas and that unlike gas in a pipeline, it doesn’t always move in the same direction and changes direction in milliseconds. Even more importantly, electricity moves at the speed of light, rather than in hours or days, the latter being the normal dynamic for gas transport. And, despite having spent millions on consultants and research to design the initial deregulation and restructuring model, virtually nothing was spent on engineering analysis to determine whether the plan was operationally sound or even feasible, given the (then current) condition of the grid.
Admittedly, a lot of utilities didn’t take FERC’s initiatives all that seriously at the beginning of the process, apparently hoping that if they ignored them long enough FERC would just give up on what was viewed as a pretty radical plan at that time. Regardless, foisting deregulation upon utilities without any substantial technical analysis being an integral part of the preparatory process was, in my opinion, flawed at best. Indeed, after nearly a century of operating in a regulated environment where reliability was clearly the top priority, expecting an entire industry
totally unfamiliar with competitive business models and behaviors to simply conform, one really has to wonder what they were thinking.
On the consumer side, the entire premise of competition has been extensively promoted as a rate reduction plan. Naturally, when ratepayers hear the word "competition" they tend to assume that it will eventually translate into a reduction in their electric bills. What they don't think about, however, is that while rates might be lowered by competition in historically high-cost areas, it will likely have quite the opposite effect on lower cost regions. (Just ask someone in Washington or Oregon what effect competition has had on their bills!) What competition actually does – when it works correctly – is balance prices, rather than lowering them across the boards.
Finally, the (apparently) prevalent notion that electricity is “just like any other commodity” is something I’ve never been able to get my head around either. For many obvious reasons, as well as others pertaining to the laws of physics and economics, reliable electricity has become a basic necessity of life. You can choose whether to use gas or not and even whether or not to have a phone; but try to survive without electricity. Sure, it can be done for a few hours or a few days – maybe even a few weeks as during ice storms or other temporary interruptions – but prolonged unavailability is simply no longer a choice in any industrialized region.
Let's face it, despite its cumbersome bureaucracy, myriad rules and stodgy resistance to change, regulation achieved its principal objective of reliability quite handily for the most part. Conversely, deregulation created new and abundant business opportunities for the utility market in general. Yet many of those seemingly lucrative opportunities - and the resultant distractions from core utility business - have arguably had a profoundly negative impact on reliability. Speaking as both a former supplier as well as a consumer who has seen the good, the bad and the ugly sides of it all, it still worries me that one day I'll turn on my bathroom light and get a message that says: Select the lowest cost provider: Press 1 for Nuclear; 2 for Fossil; 3 for Wind; 4 for Ethanol; or, simply wait while an energy source is selected based on the preferences in your profile… yikes!
So what are utilities doing to deal with this new way of conducting the business of providing safe, reliable electricity? Well, among other things, several IOUs are selling off transmission assets that are high risk, low return parts of their business while others are squeezing out inventories of spare transformers, switches and other apparatus in an effort to reduce costs, perhaps at the risk of not having replacement equipment immediately on hand in times of crisis. I can’t speak for others, but this new austerity posture certainly doesn’t give me a warm, fuzzy feeling about electricity reliability in a deregulated market.
But perhaps there is some good news in this otherwise bleak scenario. The problems and shortcomings have certainly gotten people fired up about re-inventing the grid in a far more modern and resilient form. In fact, just a couple of months ago I attended an industry seminar that was focused on the widely acclaimed Smart Grid (sometimes called Intelligent Grid) and the emerging technologies that surround and help to drive so called Smart Grid Initiatives.
There were several excellent presenters with stirring presentations extolling the virtues of the “Intelligent Grid” and all that it will mean for the future well being of the electric utility industry. Yet despite the genuinely stimulating discourse, I couldn’t help but wonder how an industry just emerging from a self-imposed T&D investment moratorium that has persisted for more than two decades is going to suddenly embrace all of this new, bleeding edge technology – especially when there is so much proven technology already available that has been so widely underutilized.
Call me cynical, but I just don’t see how an industry that has been deferring all but the most critical T&D investments for twenty-something years is going to suddenly start drinking these Smart Grid technologies from a fire hose – it just doesn’t make nearly as much sense as I would hope it would. I know that sounds terribly pessimistic, and I assure you that I’m not in any way suggesting that we shouldn’t try. On the contrary, the electric utility industry still has great potential and the ability to move mountains when motivated to do the things that are necessary and prudent.
However, it seems to me that we’ve somehow managed to unplug utilities from their core mission and objective; that is, providing electric service safely, reliably and at an affordable price – at precisely the time when we need them to be focused on that the most. Coupled with a declining infrastructure and the oncoming exodus of our soon-to-be-retiring brain trust, failure to recognize – and accommodate – the grid’s physical limitations in the regulatory process can only exacerbate the problems and the resultant challenges. Let’s hope that we can get the plug back where it belongs and re-energize the system before it’s too late.
- Mike
Behind the Byline
Mike Marullo has been active in the automation, controls and instrumentation field for more than 35 years and is a widely published author of numerous technical articles, industry directories and market research reports. An independent consultant since 1984, he is co-founder and Director of Research & Consulting for InfoNetrix LLC, a New Orleans-based market intelligence firm focused on Utility Automation and IT markets. Inquiries or comments about this column may be directed to Mike at MAM@InfoNetrix.com.
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