(March 2011) First Energy subsidiaries get new executives; Constellation names new treasurer, finance v.p., and CIO; Puget Energy gets new general counsel; plus senior staff changes at...
Scarce Resources, Real Business or Threat to Profitability?
All three may apply, especially if regulators go wrong and let ISOs make the business decisions.
Electricity transmission is a real business. With more than $50 billion of net plant, another $3 billion annually in capital expenditures and yearly operating income that could reach $5 billion per year under normal circumstances, the power grid is roughly twice the size of the natural gas pipeline industry. One would never know that from current events, however. Utility management treats transmission as an inconvenient stepchild. Regulators view it as a wayward delinquent in need of institutionalization. Investors ignore it altogether.
In truth, transmission affects more than reliability and quality of service. It affects profits. When grid operators set a price and decide which transactions will take place, they influence the value and location of power stations. We're not talking about arcane, opaque, academic, engineering exercises. We're talking about real money.
Nevertheless, the current transmission system was not built to meet the needs of a competitive market nor has it matched pace with shifts in population or the growth in demand for electricity (see Table 1). Environmental restrictions and the limited rewards offered by the regulatory process have contributed to minimal investment in this sector. Current policy seems to assume that transmission investment shows no sensitivity to price incentives. %n1%n New technologies could reduce some transmission bottlenecks, but we have to convince transmission owners to make the investments. %n2%n Without new investment, the scarcity of transmission (em and its pricing at time of scarcity (em could create unpleasant problems.
To solve this impasse many suggest an independent system operator to manage the transmission grid. However, a power market made dependent on an ISO invites a host of questions:
• How to price transmission?
• How to create an incentive for new grid construction?
• How to ration grid access to address congestion?
• How to curtail grid use in an efficient and fair manner?
• How to remove the ISO from making commercially sensitive decisions?
• How to ensure efficiency without discriminating unfairly against buyers or sellers?
Investors might wonder why no one is paying attention to these and other technical questions. In fact, someone is paying attention. It is the people who truly understand these issues who are hard at work, figuring out how to tailor the rules for their own benefit. Meanwhile, restructuring arrives. The structure is set. The ISO forms and takes control over corporate assets. Curtailment procedures and other rules of the game are set that will affect the profits of individual transactions.
Hello, stockholders. Is anybody out there?
Issues: ISOs, Pricing, Congestion
In the brave new world of electric competition, customers will pay for power delivered, which includes the bulk price of power plus payment for delivery and services needed to keep the system running. Most people focus on the bulk power price, which the new market sets by one of the three methods:
1. Mandatory ISO. Power producers submit bids. The ISO chooses the winners by price.
2. Bilateral Market. Buyers and sellers make deals with each other. The ISO provides the requested transmission.