Business & Money
Can economies of scale make the industry more stable?
The recent Northeast Blackout framed for regulators and public policy-makers one of the central issues confronting the utility industry: infrastructure reliability and the significant capital investment requirements necessary for improvement. While estimates vary widely, some industry experts currently project that the investment necessary to revitalize and secure the transmission infrastructure in the United States may run in excess of $100 billion.
Fortnightly Magazine - March 2004
A digital grid to the home, secured via a local fiber-optic network, could position utilities to fix power and telecom together.
Before billions are spent building new transmission lines to ensure reliable electric service, North American electric utilities should evaluate whether the alternatives-controlling demand and fostering distributed generation-might be more cost-effective and broadly beneficial.
As a former independent power producer, George Lagassa is sympathetic to the woes of the merchant power industry. Until just a few years ago, he held the license to a micro-hydro qualifying facility (QF) in New Hampshire, so he understands what it takes to compete in a regulated-franchise industry. Yet, as the principal of Mainstream Appraisals in North Hampton, N.H., Lagassa is also a dedicated pragmatist. He sees the industry's consolidation trend as a sort of correction in the U.S. power market.
A pseudonymous executive tells why the CCRO's recommendations don't pass muster.
The latest splash from the Committee of Chief Risk Officers1 (CCRO)-a new white paper regarding capital adequacy for energy companies2-makes barely a ripple. While an improvement over the CCRO's previous efforts,3 the capital adequacy recommendations do not provide adequate standards that can be implemented consistently by energy companies.
A Risky Business Utilities wrestle with how much to charge for their product.
The trading model has many good points, including the imposition of market discipline upon both transfer prices and prices to external third parties. Trading also encourages the use of resources and capital at their market value and the cultivation of specialized skills within different business units. But applying the model, particularly to the risks of power pricing, continues to be a challenge.
A new approach to rate design.
As energy markets have evolved in the late 1990s away from cost-based transactions to competitive market-based transactions, the exposure to market risks for the variable cost of supply has substantially increased.1 Reflected in these market risks are the diminishing reserves for North American gas supply, which has created conditions of extreme volatility in gas supply. The added market risk is compounded by the sensitivity of some retail load customers to weather conditions.
Revisiting performance-based rates with endogenous market designs.
More than 20 years ago in the pages of this publication, economist William Baumol outlined a method by which the regulation of public utility monopolies could be streamlined while simultaneously providing incentives for efficiency and productivity growth.1 Baumol proposed a productivity incentive clause that adjusts rates automatically according to the formula,
What is the right and prudent level of spending on service?
Times have changed for electric utilities. The combination of deregulation, mergers, major storms, and widespread outages has shifted the industry's emphasis to reliability. That wasn't always true. Even 20 years ago, the growth of load was adding so much to ratebases and driving such large rate increases that regulators spent a lot of time reviewing plans for capacity additions-and challenging utilities for over-spending.
How much confidence do NERC demand forecasts warrant?
Independent consultants must properly estimate peak demand growth if they are to provide clients with reasonable market analysis. Some consultants defer to the North American Electric Reliability Council (NERC) on this matter because NERC bases its projections on utility-specific estimates developed with more information than consultants typically can access. NERC recently rolled out new demand growth forecasts, so the time seems right to explore whether this confidence is justified or misplaced.
Do-nothing regulators scare off investment, raising prospects for yet another large-scale power failure.
Last summer's blackout is slowly fading from the radar screen. The silver lining that might have moved some to action has now tarnished.