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Fortnightly Magazine - September 1 1995

elaborate compromise designed to correct the "anticompetitive distortion" seen in NU's further consolidation of the grid and its increased generating capacity.

The NU merger controversy would have been largely irrelevant in a privatized United Kingdom. There, vertical disintegration freed the newly created generators and distributors to focus on real issues (em customer requirements and satisfaction, cost reduction, and market performance. The tightly integrated grid helped ensure a more or less evenhanded market.

Beyond New England, many other U.S. regions emerge as candidates for consolidation and disintegration. California, the Tennessee Valley, Chicago and the Midwest, and the Ohio River area all feature tightly integrated grids that could well come to resemble the British model.

Gaining Experience

In the meantime, companies like Southern will be gaining valuable experience on how to deal with new realities that loom on the American horizon:

s A new transmission network authority

s Regulation of price, not profit

s Generation without a service obligation

s Competition from outside the territory

s Demand growth forcing capacity additions

s Customer reaction by segment, class, and contract.

Operating in a competitive environment required the British RECs to adopt commercial behavior. All the industry players cut overhead and staff. Competition reduced the tendency to cooperate. The pool introduced higher unit dispatch planning and more complexity for the generating companies. Exploitation of joint resources to take advantage of different patterns of demand shifted to the pool operation. Less efficient plants have shut down, replaced by high-efficiency, gas-fired generation.

Financial performance has also become paramount. The need to satisfy shareholders appears to have driven the generating companies and the RECs to focus on short-term profits. Under increasing pressure to demonstrate commercial success, industry players are less willing to subsidize local services such as indigenous coal industries. In fact, the two years following privatization saw a significant shift from coal to gas as the favored energy source: 33 new gas-fired power stations were ordered, and coal-mining capacity was significantly (em and controversially (em reduced. In addition, both National Power and PowerGen have been forced to begin backfit installation of flue-gas desulphurization on a portion of their coal-fired units, to comply with the stricter environmental standards of the European Community.

The character of investment decisionmaking has also changed. Long-term government planning has been replaced with shorter time horizons. Generators and RECs now bear a greater share of risk. Capital markets have responded with a shift to higher debt-to-equity ratios.

As the dust begins to settle from this massive transformation, some key lessons have begun to emerge. Energy is increasingly a commodity, not a service. Distinctive competencies are creating new products and services, such as energy audits, end-use consulting, demand-side management, and power-quality services. Greater defensive positioning has led to segmentation, pricing, customer differentiation, and lock-in. Offensive strategies emphasize market share, capacity efficiency, and new businesses.

At Day's End

So, "at the end of the day," as the British are fond of saying, what can be learned? The U.K.'s ESI has a new strategic vision of the difference between generation, transmission, and distribution (em enabled by a fully