Fortnightly Magazine - February 15 1995

Our industry stands at the threshold of significant change. Competitive forces and significant technological advances beckon the nation's electric utilities to step forward. The electric industry has the opportunity to create a future that provides the benefits of competition to all customer groups. If we don't restructure, someone else will do it for us. And that could put us at a distinct disadvantage.

At Wisconsin Electric, we've spent considerable time evaluating and discussing various industry restructuring models. In the future we envision, the benefits of competition become available to all customers simultaneously, not just certain sectors at certain times. The primary benefits include:

s A competitive market

s Customer choice in supply and value-added service

s Increased customer satisfaction

s Economic efficiency

s Enhanced environmental achievements

s Technological development

s Protection of utility and customer interests.

We envision splitting today's vertically integrated utilities into natural monopolies and competitive entities. Monopolies will remain where a single entity can provide the lowest cost to customers. Competitive entities will appear where competition can provide the lowest cost. Natural monopolies will be re-regulated so that appropriate incentives exist to provide electricity at reasonable prices. Competitive entities would operate outside of traditional regulation.

Re-regulated Entities

In our view, the re-regulated monopolies will be the generation pool, transmission, and distribution functions. The generation pool, or Poolco, coordinates transmission system operation. The Poolco creates a spot market for selling and buying electricity, provides access to the transmission system, and dispatches member power plants on a least-cost basis. The pool operates in the short-term to facilitate system interactions and allows long-term bilateral contracts between sellers and buyers of electricity. Today, each utility dispatches its own power plants, and in recent years, we've seen more brokering among utilities for economic and reliability reasons. In the future, this function will expand across an entire region, resulting in additional long-term contracts and additional day-to-day exchanges based on economics. This is the Poolco concept that will benefit the ultimate consumer by keeping prices as low as possible.

The Poolco will serve a multistate region under operational guidelines provided by a voluntary group interested in transmission grid operation. This regional transmission group (RTG) would include marketers, generating companies, transmission line companies, state regulatory commissions, and others. The RTG would govern all transmission companies within the region, set operating rules, and establish system reliability requirements. The RTG would also resolve disputes and set transmission service terms and conditions. Wisconsin Electric (em along with the 15 utilities, five state utility commissions (PUCs), several independent power producers, and power marketers that belong to the Mid-America Interconnected Network reliability council (em is developing a proposal for an RTG.

Ownership of the grid would belong to the transmission companies (Gridcos) or, alternatively, a regional transmission company (RTC). We believe transmission ownership should be removed from generation ownership in order to ensure a truly competitive, open-access market for generation.

An RTC that owns all transmission assets within a region would help optimize transmission operations. Grids owned by RTCs might coincide with grids governed by the RTG, or they might cover parts of two or more RTGs. In any case, an RTC with regional transmission ownership can combine transmission systems to obtain greater economies of scale and better coordinate operations. Open access to transmission and regional power dispatch through the Poolco and RTG are the keys to true wholesale competition in the electric generation market.

The distribution company would also be re-regulated. Such companies construct, operate, and maintain the distribution wires. Re-regulation would involve some form of price cap and performance standards to ensure reliability. Distribution line companies (Linecos) would be required to deliver power from whomever the customer chooses.

Competitive Entities

The competitive entities in our model future serve the generation, customer service, and energy merchant functions. Companies that generate electricity (Gencos) will operate and maintain new or existing power plants. They will bid into the short-term power pool for least-cost dispatch, and contract directly with buyers. The Poolco will need to encompass enough different generation owners that no one owner has excessive market power. Utilities with uneconomic assets are not very comfortable with deregulation of generation, but the overall benefits for consumers and the majority of producers outweigh the disadvantages it poses for the few. State PUCs will struggle with this issue. Wisconsin Electric believes uneconomic assets should, as much as possible, be addressed as they are by other businesses (em through writedowns and amortization of excess costs, or through an access charge on the distribution lines. State PUCs can best resolve the stranded investment issue. Wisconsin Electric does not support federal mandates to spread the burden across the industry through transmission wire access fees that do not recognize state-to-state differences.

Customer service companies (Retailcos) will buy electricity from brokers, the spot market, or Gencos, and sell it to customers along with value-added services. While we expect many residential and small commercial customers will continue to want the full-service style of today's electric utility, those who want choices (em such as real-time pricing of electricity (em will find a Retailco that anticipates and meets their needs. The obligation to serve will continue.

Energy merchants will market and broker services for the generation and customer-service companies, as well as for municipal utilities and large customers. They also may broker other forms of energy and arrange transport services by matching buyers and sellers of longer-term power supply.

State/Federal Roles

In our vision of the future, the Federal Energy Regulatory Commission (FERC) would regulate the generation pool and transmission functions through an RTG to ensure open access, comparable pricing, comparable service, and adequate cost recovery. Although the FERC would function as a "court of final appeal" to address disputes not resolved by the RTGs, it will have to defer to the RTGs in order to maintain a truly competitive environment.

The state PUCs would regulate the distribution function for reasonable price, reliability, public safety, and customer satisfaction. We may need to change the Federal Power Act to clarify the jurisdictional boundaries, but the industry still will need strong state regulation after restructuring. Regulation will concentrate on quality, reliability, and other benchmarks of customer service as PUCs shift to a consumer protection role. Price caps will replace today's cost-of-service methodology; future regulation will focus on customer needs.

The industry will remain subject to all federal and state environmental laws and standards, as it is today. Competition can imply cost reductions, including those related to environmental concerns, but Wisconsin Electric believes proactive environmental stewardship will provide competitive advantages. Market-based solutions to environmental problems are proving more effective than traditional command-and-control approaches. Overall, placing direct or indirect controls on electric utilities is probably not the most cost-effective way to achieve emission reductions. Policies that cap or limit growth in all those who produce emissions will offer better incentive for finding the lowest-cost solutions.

There is some concern that competition in generation will neglect renewable energy, particularly given the increase in renewable "setasides" in PUC-controlled bidding schemes. We feel that a state can more easily promote renewables under the re-regulated model we envision. The distribution-line access charge could include a renewable subsidy; the Poolco could include a renewable subsidy as an "uplift" or service charge. In addition, opening the retail market to competition will enable "green" Retailcos to go after those consumers willing to pay more for "clean" power.

Wisconsin Electric also believes that energy efficiency will remain an important focus for business, society, and the environment. Utility-sponsored energy-efficiency programs will likely change. In a restructured industry, energy efficiency will become a competitive customer service rather than a substitute for generation. One of the original rationales for utility-sponsored energy-efficiency programs was the belief that market failures and imperfections caused individuals and businesses to invest in less energy efficiency than they would otherwise. But the price signals were inadequate because prices were based on embedded, average costs. With a spot market for electricity, customers will have access to real-time, market-based prices that will encourage them to invest in energy-efficiency improvements. In addition, Retailcos will package the sale of electricity with value-added products, including energy efficiency. The introduction of many market players and market-induced energy efficiency in the future will replace the need for utility-sponsored market intervention.

In the transition to the end-state we envision, there will be a continuing need for regulatory energy-efficiency programs. Because efforts to improve energy efficiency create upward pressure on rates, at a time when utilities are doing all they can to improve their competitive position, we propose a competitively neutral access fee on the distribution lines. Part of this fee could be set aside in a state-administered fund that would be available under a bidding mechanism to supply energy-efficiency services. An access fee on the cost structure of the distribution system would prevent bypass of social programs or other initiatives by any customer. Over time, the need for the fund would diminish as market imperfections fade. This fund also could support low-income programs typically done by the utility.

The transition to a more competitive environment will not be easy, and the outcome will affect everyone in the nation. That's why Wisconsin Electric is actively involved in the process of utility restructuring. The input of all electric utilities is needed to bring change that provides benefits to all customers, and Wisconsin Electric's plan is a good place to begin the discussion. t

Richard Abdoo is president and CEO of Wisconsin Electric Co. in Milwaukee, WI.


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