You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.
Giving up today's customer to retail wheeling could help cut losses tomorrow.
Estimates of stranded investment for U.S. investor-owned electric utilities (IOUs) range from as little as $20 billion to as much as $500 billion (em more than double the shareholder equity in U.S. utilities. These potential losses can be traced to above-market book values for some utility-owned power plants and long-term power-purchase contracts, as well as deferred income taxes, regulatory assets, and public policy programs.
A utility can react to the potential loss of retail customers in two ways.1 It can let the customer go, and then resell some or all of the lost load on the wholesale market. Or it can offer its at-risk customers the lower, competitive wholesale price and thereby retain the sale. These two options, keep the sale (KEEP) or relinquish it (FORFEIT), often yield very different estimates of stranded investment. (In principle, regulators could cap utility recovery at the smaller of these two amounts.)
Estimates of stranded investment for the two options depend strongly on interactions between the utility's generating assets (both utility-owned units and long-term power-purchase contracts) and the wholesale power market, but in different ways. Several key factors in the wholesale market will affect the level of stranded investment: wholesale prices, utility marginal production costs, transmission capacity, the percentage of retail load at risk, and the difference between wholesale purchase and sale prices.
Under the KEEP option, a utility loses revenue in two ways:
s Lost Margin. For those customers that wheel, the utility loses the margin between its embedded cost of generation and the market price of power.
s Lost Allocations. The utility may incur losses associated with rate-design differences in cost allocation and subsidies, if any, among retail customer classes.
Under the FORFEIT option, a utility's revenue loss will reflect three factors:
s Avoided Costs. The probable revenue savings represented by the product of the retail load at risk and the difference between the utility's embedded cost of generation for those customers that wheel and its marginal cost of production.
s Potential Profit. The possible revenue gain from the sale of some or all of the lost load on the wholesale market, based on the difference between the utility's marginal cost and the price it can get on the wholesale market. (The fraction of lost sales that the utility can resell, and the profitability of doing so, depend on the utility's marginal cost and available capacity for each generating unit, wholesale prices, and transmission constraints and prices.)
s Lost Allocations. The same effects (tariff differences in cost allocation and subsidies) as with the second factor in the KEEP option, which create losses associated with rate design.
At first glance, one might consider the FORFEIT option unrealistic. If the utility can sell at wholesale and make money doing so, why not keep the wheeling customers? Several reasons make both options viable. First, the departing customer may have reasons for purchasing from another firm that go beyond the simple matter of price differential. Second, once a utility relinquishes a sale, and gains relief from