The California Public Utilities Commission (CPUC) has directed the state's electric and gas utilities to implement a two-year pilot allowing applicants such as residential real estate developers...
The Monolith is Cracking: Electric Restructuring and its Implications for Gas
The profound changes now occurring in the electric industry will most directly affect those who are engaged in the enterprises of generation, transmission, and distribution of power. But challenges and opportunities confront gas companies as well. Certainly, the electric industry will continue to influence markets for gas: both in bulk fuel supply and in retail energy. Beyond that broad observation, though, much else depends on the speed and form of the transition to a competitive electricity market.
Will the transition be swift and complete? If so, one could expect gas to compete on a level playing field for retail customers, with gas-fired plants emerging as the investment of choice for new capacity.
Or will it prove slow and compromised? In that case, one can envision electric utilities shifting costs to save threatened retail load, with "special deals" proliferating to keep nuclear plants running even though not economical.
Where is the power business going? How is it responding to change? What does it all mean for natural gas?
Forces of Change
in the Power Business
The electric power industry stands as one of the last remaining regulated, monopoly industries in the United States. With regulated rates far above current market prices, pressure is mounting for increased reliance on market forces. Opening this market to competition gives policymakers a broad opportunity to make U.S. business more competitive (em to foster economic development, bolster local industry, and cut consumer prices generally. It is little wonder, then, that the forces of change have been irrevocably unleashed in the power business. These forces stem from several factors:
s Global Competition. Industrial managers worldwide leave no stone unturned in their efforts to cut costs and boost productivity.
s Market Fancy. U.S. business chooses to rely more and more on market forces in lieu of government regulation (as evidenced by the successful deregulation of other industries).
s New Players. A competitive independent power industry that relies on increasingly efficient, gas-fired generation.
Fundamental changes are also emerging in the formation and deployment of capital, the legal and regulatory arena, the participants in the electricity marketplace, and the pricing and terms of transactions.
Capital Reconfiguration. The utility merger trend is well known. But it is only part of a broader emerging trend of "capital reconfiguration." Straightforward, utility-to-utility mergers will prove only one of many transaction forms. The industry will probably also undergo disaggregations and spinoffs of assets and functions and reaggregations of assets and functions in new combinations. Indeed, some companies are already refunctionalizing within the existing corporate umbrella in possible preparation for more dramatic action.
This capital reconfiguration will take place in the context of an increasingly open transmission grid and power market. In this environment, geographical proximity of a company's activities will be less important than the development of skill sets and core
competencies. One can imagine the reconfiguration of organizations along the functional lines of generation, transmission, distribution, and merchant services;
the merger of these functions
into consolidated "GenCos," "TransCos," and "DisCos"; as well as the formation of companies specializing in the operation of coal or gas facilities