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Perspective

Fortnightly Magazine - August 1997

option for serving geographically dispersed loads. These same improvements will provide economical supply options to meet new peak demands of current customers.

In addition, the preeminence of information technology will increase power quality requirements and the costs customers must bear because of service interruptions. Innovations in control and monitoring systems integrated with information technology, however, will allow customers to respond instantaneously to changes in pricing and system conditions.

Steadily increasing demand for portable and grid-remote power (em in applications such as telecommunications and electric vehicles, for example (em is driving vigorous research and development in electric supply and storage technology. This effort surely will increase the potential for a "breakthrough" development. As we approach the 21st century, we still cannot be sure what the "black box" that promises safe and efficient distributed generation will be. But we can be increasingly confident that it will exist before too long.

It was technology, of course, that drove electric utility expansion and regulation in the first place, including:

• The arrival of alternating current;

• Advances in transmission, transformation and control;

• Steadily rising economies of scale in central station generation; and

• Development of devices and applications of electricity in industry, business and at home.

All of this created electric utilities that were thought to be "natural" geographic monopolies. Competing infrastructures were simply not economic. The regulatory compact we have in place today arose as a substitute for market forces.

But technology does not stand still. Two fundamental changes have undermined the regulatory compact.

First, the preeminence of technologies that exploit economies of scale, symbolized by large, central generating units and the transmission network, is fading. The day of technologies that exploits economies of manufacture has arrived. We see it in personal computers, cellular phones and personal communication devices. In the electric industry its vanguard has arrived with the emergence of technologies such as photovoltaics, fuel cells, small gas turbines and micro-hydro and in steady advances of electric storage technology.

Second, in the breathtaking advance of information technology, we are reinventing the way we organize businesses to produce value. This shift has dramatically restructured the "value chain" that the regulatory compact so effectively managed for decades.

The value chain defines the fundamental process by which an industry creates and delivers value. It represents the interaction between input suppliers, producers, distribution channels and consumers. In high-performing markets with high-performing industries, both producers and consumers are organized to exploit the value chain effectively.

The electric industry's value chain historically has remained linear: Fuel to large, central plants; long-distance transmission of AC power at high voltage; distribution at low voltage; customer meter; customer use of bundled services. It is this linearity that led to today's regulatory framework. Consumers were confronted with a monopoly supplier that controlled all aspects of production and delivery of an essential product.

Today, technology has disrupted this linearity. It has already blurred the roles of suppliers, producers and customers. As a result, the points at which the industry can extract value have proliferated.

An array of energy service companies, generating companies, brokers and agents are already hawking