Distribution Utilities: Forgotten Orphans of Electric Restructuring
The "duty to connect" demands definition - such as the optimal investment in local wires, and who should pay for it.
As the electric utility industry continues its slow but inexorable transformation into a more "competitive" industry, there has been a notable absence of discussion concerning continued regulation of local distribution utilities, or discos.
This glaring omission is problematic, as the overall success of restructuring efforts will depend to a critical degree on maintaining a safe and reliable "obligation to connect." If that obligation is not met, or if the costs of meeting it increase, the benefits of competition will not be realized.
And the matter is even more complicated. A fundamental regulatory conflict may exist between regulated discos and unregulated retail energy suppliers. This conflict may well require action from utility regulators.
The Conflict That Arises
Suppose a large, electricity-intensive industrial customer wishes to expand its manufacturing operations in a particular disco's service territory.fn1 If the expansion takes place, it will mean additional secondary growth in electricity demand as new suppliers, businesses and households locate in the area. If not, local area demand will increase very slowly.
The manufacturer wants the best possible deal for energy and will examine competing offers of suppliers. Those suppliers will have to meet all applicable regional transmission system requirements (e.g., installed capacity, spinning reserve, etc.) to ensure that the energy can be reliably delivered to the manufacturer's local disco without adversely affecting the regional transmission system. The disco will remain responsible for delivering the electricity to the customer, ensuring sufficient distribution capacity to meet the increased demand from secondary sources.
But what happens if there isn't enough distribution capacity at the local level to deliver the power to the manufacturer? The manufacturer won't be able to construct its own set of "wires and poles" in order to increase available distribution capacity to its facilities, or otherwise bypass the disco, because the disco will have an exclusive distribution franchise. This problem illustrates a part of the fundamental tradeoff: A disco must satisfy an "obligation to connect" in exchange for gaining an exclusive local distribution monopoly.
Utility regulators will want the disco to meet this new duty to connect in an efficient and cost-effective manner. Regulators may impose incentive programs that reward the disco for greater efficiency, or require specific planning methodologies be used to evaluate distributed resource options that can meet the increased demand for distribution capacity, whether through new investments in "wires and poles," distributed generation or demand-side management (DSM).
The potential for conflict among regulators (utility and environmental), the disco, the customer and the retail energy provider is very real. The retail provider wants to maximize the profits of its electric sales to the manufacturer. The manufacturer wants to pay as little as possible to the disco for delivering the electricity it buys, and not absorb the entire cost of new distribution system upgrades that may provide benefits to other customers in the area. The disco cannot refuse to provide service to the manufacturer, even if it means making new capacity investments. Utility regulators