Canadian markets beckon U.S. utilities, and vice versa, demanding greater access to transmission lines to bridge the gap.
When I took the job of president of Niagara Mohawk Power Corp., way up North, near the Canadian border, I shared the news with a close friend. I told him how excited I was to be joining an innovative team that was out in front, breaking new ground in the competitive arenas rapidly evolving in the electric power industry.
He looked me in the eye and asked, "Do you know what people who are comfortable in the dark do when they see light at the end of the tunnel?"
"No," I replied.
"Build more tunnel," he said.
We can see the light at the end of the tunnel, of course, from both the U.S. and from Canada. That tunnel, a metaphor for the transmission bottlenecks that block access to energy markets, is a natural result of regulation in the electric industry. However, powerful market forces are rapidly changing that regulatory framework. Soon history may forget why it ever existed.
Some suggest that these market changes stem from public policy and regulatory initiatives. Indeed, it is true that sweeping regulatory changes are upon us. Arguably, these changes appear to affect the production, pricing and transmission of electricity.
Nevertheless, in my view, these changes occur simply as manifestations of the force of new technologies. In fact, as we restructure the electric industry, we must take care to craft policies that respond to emerging technology (em and not to tunnel-building instincts.
The view from Syracuse is based on prudent economics. The Canadian and U.S. economies need a well-conceived, straightforward, bilateral transmission policy, rooted in the principle of open access, that will match the shifts in technology already transforming the electric industry.
Shifting Technology, Changing Regulations
The current regulatory system, which was developed to respond to the issues of the industry 15 to 20 years ago, continues to make headlines today. The severe effects of the Public Utility Regulatory Policies Act and the New York "6-cent law" for independent power producers have changed completely the corporation I encountered just two years ago when I came to Niagara Mohawk. Outmoded regulatory policies have kept Ontario Hydro from competing for electricity sales in the U.S. because of the difficult problems of access and pricing associated with the transmission network in Ontario.
However, in spite of these barriers, I believe that relief will come from industry restructuring, which marks the bow wave of technological changes now occurring both in North America and around the world.
For decades, the economies of scale associated with central-station generation and long-distance transmission have dominated the market and discouraged innovation in the fundamental structure of supply, delivery and control of electricity. This dominance will fade, however, as market forces already in place drive changes at an accelerating pace. Environmental and aesthetic concerns will continue steadily to increase the cost of "traditional" grid systems and large central-station supply. Improvements in end-use efficiency will reduce the crossover point at which grid systems are no longer the most economic 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 their wares in the market. They are rapidly developing the capacity to link seamlessly to produce a unique response to each customer's unique requirements, coalescing into whatever array best responds to market needs.
In fact, Niagara Mohawk today has come before its regulators on bended knee, asking to give up its status as a regulated monopoly. Fundamentally, we understand we must open our franchise to competition to achieve the flexibility we need to grow the business.
If my view is correct, the grid as we know it today will face steadily stronger competition from distributed generation in the years to come. Many customers that we view today as "captive" will have economically viable options much sooner than many of us expect. In short, the transmission network today might remain the last bastion of electric utility monopoly. But we cannot expect that to last forever. Today's policies must be directed toward sustaining its viability for the longest possible time. Forward-looking policy must deliver to customers the greatest possible value from existing transmission assets and provide economic incentive for building additional capacity where it is economically justified.
Developing a Policy
If the changes taking place in our industry are driven not by regulation but by fundamental technological change, we can postulate several principles that should guide the development of transmission policy over the long term.
First, we must recognize that in the long term regulation of the transmission system must be directed toward ensuring nondiscriminatory system access and reliability, not electricity price control.
The disaggregation of vertically integrated electric utilities in Canada and the U.S., combined with the growth of distributed generation, will rapidly make the historic role of regulation in protecting consumers from monopolistic pricing irrelevant. I believe this transition will occur in the next decade.
In the short term, prudent measures are required to address "bottleneck" situations and the potential they create for price-gouging. If policy adequately protects market access, however, then economic forces will support the development of alternatives that will ultimately eliminate the most serious bottlenecks.
Second, we should strive for a system driven first and foremost by economic value-added, without regard to the origin of generation. Those of us who straddle the St. Lawrence and the Great Lakes know well that our competition for load is global. If Niagara Mohawk's distribution company of the future can best meet its customers' needs in cooperation with kilowatts from Canada, it must be free to do so. If a Canadian customer's least-cost option is power from the other side of the Niagara, it must have that option.
Third, the system must be simple, transparent and straightforward. We have at our disposal information technology that allows us to complete the most complex commercial and physical transactions in nanoseconds. Our policy should bring all of this capability to bear with the goal of delivering the greatest possible value that can be derived from transmission assets.
We cannot afford to allow tunnel-building instincts to control the valuable transmission assets that are truly the lifeblood of North America's economy. t
Albert J. Budney Jr. became president and COO of Niagara Mohawk Power Corp. in 1995. He also is president of two of the company's subsidiaries, Opinac in Canada, and Plum Street Enterprises. Budney serves on various boards, including the New York State Regional Economic Development Committee. Prior to joining the company, Budney was corporate managing vice president of UtiliCorp Power Services Group, a unit of UtiliCorp United Inc. He joined UtiliCorp in 1993 as president of Missouri Public Service.
Niagara Mohawk is an investor-owned utility headquartered in Syracuse, which provides electricity service to more than 1.5 million customers and natural gas service to more than 500,000 customers in upstate New York. With assets of more than $9 billion and operating revenues of almost $4 billion a year, Niagara Mohawk is among the 30 largest IOUs in the U.S.
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