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The Monolith is Cracking: Electric Restructuring and its Implications for Gas

Fortnightly Magazine - September 15 1995

(as distinct from facilities consuming other fossil fuels).

Legal Frameworks. The Energy Policy Act enabled a new class of exempt generators (EWGs) to compete for wholesale power markets. It also laid the foundation for wider competitive access to the transmission grid. More recently, the Notice of Proposed Rulemaking issued by the Federal Energy Regulatory Commission (FERC) would unbundle transmission and ancillary services, expand transmission access, provide equal access, reduce preferences for the utility's sales function, and provide equal access to essential transmission information. States likewise are beginning to question the historical assumptions underlying the regulation of the electric industry (see Figure 1). Competition for retail load, the historical service obligation, and the prudence of the traditional, vertically integrated, franchised monopoly are all on the table in this debate.

Most important, perhaps, is how the nature of the debate has changed in just the last 12 months. The policy debate ended almost before it started. Few now question the wisdom of introducing competitive forces into the industry. The question is no longer whether, but when and how.

New Participants. The independent power-producing segment of the industry is now augmented by nearly 100 power marketers that either have, or have applied for, authority to buy and sell power in the bulk-power market. Power marketers include utility affiliates, successful players in the gas industry restructuring, and financial and trading houses. As the grid opens, these firms can expect to see their transaction volumes climb and their collective market share rise. Competitive pressure will mount on traditional power merchants, just as it did in the gas industry a few years ago.

New Transactions. The unbundling of access to transmission assets and information already allows competitors to offer a wide variety of products and services in the physical power market. As liquidity increases, financial transactions will become more prominent as well. The New York Mercantile Exchange plans to open an electricity futures exchange early in 1996. As the grid opens, electricity will move readily from region to region, crossing traditional boundary lines and integrating regional markets. This integration will reveal capacity surpluses and rationalize the market. Consequently, new investment in generating capacity is already being deferred. Prices for existing output are falling.

Other forces are at work as well. The monolith is cracking. Utilities that once found it easy to cooperate with other similar entities now encounter deepening rifts as the market becomes competitive. Some utilities welcome change. Others live in various stages of denial. The progressive utilities are rapidly giving the lie to traditional arguments about reliability, cost-shifting, and even stranded costs. The push for change from within the utility fraternity, and the overall resignation to competition, is perhaps the most profound catalyst of all. Without the excuse that the "lights will go off," utilities are left with very thin arguments to resist free-market forces as a substitute for government regulation and the monopoly franchise.

Technology is also changing. In the days of large capital accumulations, central planning, and guaranteed recovery, a monolithic approach to technology development and deployment was the order of the day. "Bigger