Electric Restructuring: An Urgent Proposal

Fortnightly Magazine - November 1 1995
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Technological advances in electric generation and telecommunications make utility competition both possible and inevitable. These economic forces will eventually break down the regulatory structure of the electric industry. However, public policy should play a crucial role in molding and nurturing competition.In recent months, regulators in a majority of the states have opened proceedings to study electric competition. But little agreement exists on how to restructure the industry. I suggest that we now know enough about the issues to take some positive steps. I offer a plan that should introduce the essential elements of competition, while providing recovery of potential stranded investment and flexibility in choosing the final industry structure in the future.

Technology: Cause and Effect

Electric industry restructuring must take advantage of technological improvements in electric generation and telecommunications.

Generation. Technological advances, particularly combined-cycle gas turbines (CCGTs), have sharply reduced the cost of generating electric power and dramatically shrunk the scale required for efficient plant operation. While they cut the cost of producing power by increasing efficiencies in fuel use and operating practices, CCGTs also decrease capital intensity and shorten the period needed to bring a new plant on line. For instance, CCGTs with 200 megawatts (Mw) of capacity cost about $550 per kilowatt (Kw), are capable of 90-percent capacity factors, and have heat rates in the area of 7,500 British thermal units (Btu) per kilowatt-hour (Kwh). With gas priced at $2 per million Btu and a pretax capital cost of 12 percent, the full cost of producing power with these plants is about 2.9 to 3 cents per kilowatt-hour (›/Kwh).

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