Rezachek & Associates'
Energy & Environmental Resources

Utility Integration of Renewables

Utility Restructuring/Stranded Costs

A Federal Agenda for Electric-Industry Restructuring In its combined economic, equity, and environmental significance, the electric industry has few rivals. Congress is considering proposals that would fundamentally restructure the entire industry. Such proposals could compound existing problems and create new ones. Therefore, any such legislation must lead to a cleaner environment as well as lower electricity bills for all consumers. To ensure that electric industry restructuring yields real benefits to both consumers and the environment, we unite behind a common agenda.

Air Quality and Electricity: What Competition May Mean Although the likely breakup of the U.S. electricity industry is heralded as an economic boon to business and consumers alike, the downside to more competition is debatable, especially since the uncertainties involved are many. Whether the air we breathe improves or worsens will depend on choices consumers, producers, and policymakers have yet to make. Economic analysis of alternative regulatory options offers insights into what could happen.

Benchmarking Air Emissions of Electric Utility Generators in the U.S. - Section 3: Implications of Restructuring The electric utility industry in the United States is currently in the process of "restructuring" - moving from the traditional monopoly-based system to a competitive market system. This restructuring process largely began with the Energy Policy Act of 1992 and FERC Order 888, which together require utilities to provide nondiscriminatory transmission service for all wholesale electricity transactions. The effect of these laws has been to open competition for supplying electricity on the wholesale level, which provides utility and non-utility power suppliers greater flexibility in seeking the lowest cost electricity. Since the lowest cost generators are often high-emitting coal-fired plants, wholesale competition has increased utilization of high emission facilities (and in some cases led to the restarting of mothballed plants) and threatened to exacerbate existing environmental problems.

Cost Savings Sans Allowance Trades? Evaluating the SO2 Emission Trading Program to Date (97 KB in PDF format) Title IV of the 1990 amendments to the Clean Air Act initiated a historic experiment in incentive-based environmental regulation through the use of tradable allowances for emission of sulfur dioxide by electric generating facilities. To date, relatively little allowance trading has taken place; however, the costs of compliance have been much less than anticipated. The purpose of this paper is to address the apparent paradoxÑthat the allowance trading program may not require (very much) trading to be successful. Title IV represented two great steps forward in environmental regulation: first a move toward performance standards and second formal allowance trading. The first step has been sufficient to date for improving dynamic efficiency and achieving relative cost-effectiveness.

Electricity Deregulation and the Consumer Competition is coming to the electricity industry, but can individual consumers really expect lower prices and an attractive array of new products and services?

Electricity Deregulation: Separating Fact From Fiction in the Debate Over Stranded Cost Recovery As the debate over the restructuring of America's massive electricity industry heats up, much time and attention is being devoted to the perplexing issue of stranded cost recovery. Parties on all sides of the debate hold passionate views on the subject, and they frequently make claims that the wrong decision on the issue could kill any chance for final passage of deregulation legislation. But, as with many issues in which literally billions of dollars are at stake, the debate over stranded cost recovery is laced with passionate rhetoric and deceptive assertions that the "sky is falling." The result is confusion and frustration on the part of policymakers who want to bring competition to this industry as quickly and fairly as possible.

Electricity Restructuring and Regional Air Pollution (170 KB in PDF format) This paper investigates the regional air pollution effects that could result from new opportunities for inter-regional power transmission in the wake of more competitive electricity markets. The regional focus is important because of great regional variation in the vintage, efficiency and plant utilization rates of existing generating capacity, as well as differences in emission rates, cost of generation and electricity price. Increased competition in generation could open the door to changes in the regional profile of generation and emissions.

Electricity Restructuring and the Costs of CO2 Control The electricity industry is responsible for one-third of all greenhouse gas emissions in the United States. The ongoing restructuring of the electricity industry (driven by the recent Federal Energy Regulatory Commission Order 888 that requires open transmission access) and a growing number of state-level initiatives to extend competition in electricity sales to the retail level could result in increased carbon dioxide (CO2) emissions from the industry.

Energizing America: A Blueprint for Deregulating the Electricity Market America's electricity market is massive. Its total assets are worth approximately $500 billion and it has net revenues of over $200 billion annually. The size of this market is not surprising, considering that almost every American is a consumer of electricity. Unfortunately, despite the fact that millions purchase and use electricity, few have a true choice in deciding from whom they will receive their service. And a confusing set of outdated, inefficient, and overlapping laws and regulations continue to govern the electricity industry at the federal, state, and local levels.

Energy Trading - The Market's Response to Deregulation Remarkable changes have resulted from the decision to deregulate oil markets sixteen years ago. What lessons can be applied to increased competition in the markets for electricity and natural gas? Will expectations be realized?

Getting on the Map: The Political Economy of State-Level Electricity Restructuring (437 KB in PDF format) Retail competition in electricity markets is expected to lead to more efficient electricity supply, lower electricity prices, more innovation by suppliers and a greater variety of electric power service packages. However, only a handful of states have currently gone so far as to pass legislation and/or make regulatory decisions to establish retail wheeling. This paper analyzes a variety of factors that may influence the rate at which legislators and regulators move towards establishing retail competition. In general, we find that where one interest group dominates others in the struggle for influence over the decision makers, the net effect seems to push a state forward more quickly when retail wheeling is expected to yield large efficiency gains.

Information Links... Restructuring Documents On-Line Here are some links to restructuring-related documents on-line.

Regulatory Assistance Project (RAP) The Regulatory Assistance Project (RAP) is a non-profit organization, formed in 1992, that provides workshops and education assistance to state public utility regulators on electric utility regulation. Workshops, addressed from the perspective of utility regulators cover a wide range of topics including electric utility restructuring, renewable resource development, the development of competitive markets, performance based regulation, demand-side management and Green Pricing. RAP has worked with public utility regulators in 45 states, Washington D.C. and in several other countries.

Renewables Restructuring Work Group The renewables working group involved in discussions of utility restructuring in California.

Restructuring and Public Policy - Ten Hurdles to Clear The electric power industry is on a slow and erratic path toward competition of a much more pervasive sort than was seriously discussed even two years ago. Because the path is slower and more erratic than it needs to be, it is wasteful from a consumer and a societal standpoint. Many individuals and institutions, however, may appear to gain from the delay. This Issuesletter looks at the governmental not regulatory issues associated with increased competition. Restructuring involves major public policy changes that transcend the jurisdiction of any regulatory body and thus pose something of a conflict for regulators. Optimal outcomes will make regulators -- at least traditional regulators -- somewhat less relevant.

Restructuring Glossary One of the difficulties with discussing restructuring the electric industry is that terms mean different things to different people. This results in poor communication and misunderstandings about the proposals being discussed. To avoid some of this confusion, the following glossary is provided to clarify what the Council means when it uses certain terms. The glossary from the NARUC publication "Affected with the Public Interest" was used as the base of this list. Supplemental material was taken from many sources, including the Public Utilities Commission of Ohio, and a report by the Texas Ratepayers' Organization to Save Energy, Inc. titled "Electric Utility Restructuring, Can the Small Consumer Afford It?"

Retail Competition in Electricity Supply The Electricity Reform Taskforce is preparing a Report to the Minister for Energy on a recommended option for introducing competition into the retail sector of the NSW electricity industry. The Report is in response to the commitment made in the May 1995, Electricity Reform Statement to give retail customers in NSW a real choice between competing suppliers.

'Second-Best' Adjustments to Externality Estimates in Electricity Planning with Competition (93 KB in PDF format) A number of state public utility commissions are using "social costing" methods to consider externalities in electricity resource planning. The most comprehensive and formal method is the use of monetary place-holders in the financial evaluation of new investments and potentially in system dispatch to reflect quantitative estimates of externality values. This approach necessarily must take existing environmental and social regulation as given.

SO2 Allowance Trading: How Experience and Expectations Measure Up (65 KB in PDF format) The SO2 trading program has achieved reductions in emissions ahead of schedule, with allowance prices below the marginal costs that were anticipated for the program. This paper explores the experience with the program and proposes a taxonomy of reasons why allowance prices are low. The overarching reason is that the most costly investments to accommodate full emission reductions have been successfully delayed. Application of a discount rate to these long run marginal costs yields an estimate of allowance price close to that observed today. Several factors have contributed to the delay in bearing these costs, and helped to reduce their magnitude. One group of factors stems from market fundamentals, especially the cost of rail transport of low sulfur coal. A second group includes the influences of state and federal regulators. A third group includes distinctions from the "imagined" program compared to that which was actually been enacted.

Staff Investigation of the Restructuring of the Electric Industry A proper evaluation of the potential impact of a restructuring of the electric industry upon Virginia requires a review of the status of the Commonwealth's electric utilities and related activity in our State. That is the purpose of this chapter. Neither a utility nor a state can expect to operate in isolation from neighboring companies or regions. However, with all of the complex issues involved with a transitioning electric industry, one size does not fit all. Actions and reactions in California may not be appropriate in Virginia because of our current cost of power, our economic environment and our tolerance for risk.

Stranded Cost Projections The authors reserve their most complex and detailed analysis for the estimation of stranded costs. Table 4.4 in Volume II (the documentation and methods volume) presents estimates of fair market value of assets and stranded costs for 98 publicly-traded, investor-owned utility companies.

Stranded Costs The fundamental changes in the electric industry reflected in the Department's proposal may reduce the opportunity that currently exists for electric companies to recover their full investments in generating plant and other expenditures previously approved by the Department and included in current rates. These potential losses, which may result from subjecting electric company generation to the pressures of a competitive market, are typically referred to as "stranded costs." In the Department's restructuring proceedings -- and in those of other jurisdictions -- no other issue has drawn more attention. The issue of stranded cost recovery requires the Department to balance the interests of ratepayers and shareholders in light of the goals and impacts of restructuring so as to achieve a result that is in the public interest.

Stranded Costs and Other Risks to Look Out For At the heart of nearly any competitive option is the problem of stranded costs. In general terms, stranded costs represent the difference between today's retail electricity prices and the current market price for power -- a difference that today is very large. What stranded costs are and how they should be handled lie at the center of any discussion of restructuring the electric industry.

Stranded Costs, Takings, and the Law and Economics of Implicit Contracts (63 KB in PDF format) This paper explores ways in which economic analysis can help resolve the stranded cost controversy that has arisen in debates over electricity market deregulation. "Stranded costs" are costs electric utilities will not recover as power markets move from protected monopolies to an open, competitive environment. The paper begins with a description of the stranded cost problem, its magnitude, and the prominent arguments for and against recovery. We then turn to an analysis of contracts in order to understand whether there is, or should be, a legal duty to compensate utility shareholders for unrecovered costs. The paper also argues that efficient approaches to electricity deregulation will rely on more than an analysis of contracts. In particular, the politics of deregulation should be viewed as an independent constraint that affects the desirability of alternative approaches to stranded costs.

The "Regulatory Compact" and Implicit Contracts: Should Stranded Costs Be Recoverable? (50 KB in PDF format) Progress toward electricity market deregulation has brought controversy over whether or not utilities are entitled to compensation for "stranded costs," i.e., costs utilities will not be able to recover due to the advent of competition in their markets. This paper uses a legal and economic analysis of contracts to address the desirability of utility cost recovery. First, underlying principles of law are reviewed to determine whether or not there is a legal presumption of recovery. Then, the analysis considers whether or not an implicit "regulatory compact" between utilities and regulators follows from principles in the economic analysis of law, particularly theories of efficient breach and implicit contracts. The paper concludes that recovery should occur in only a proscribed set of circumstances and that, when called for, compensation should be partial, rather than full.

The Second-Best Use of Social Cost Estimates (86 KB in PDF format) A significant literature has developed to estimate the damages to third parties from new electricity generation technologies. This paper focuses on how such estimates can be profitably used in the present regulatory environment, and in the potential new environment that may result from restructuring in the electricity industry.

The Social Cost of Electricity: Do the Numbers Add Up? (157 KB in PDF format) Several recent studies have mounted major efforts to estimate the social cost of electricity generation. This paper provides an overview of this literature and a focused qualitative and quantitative comparison of the most comprehensive and rigorous of these studies. The paper also provides a synthesis that can help reduce the cost of future applications of these methods.

Transforming Power Markets: An Analysis of the Clinton Administration's Comprehensive Electricity Competition Plan The Clinton Administration's Comprehensive Electricity Competition Plan (CECP) comprises a set of principles that the administration believes should guide federal electricity policy. There’s room for improvement.,but the CECP takes a reasonable step, especially in light of the technical complexities, the money at stake, and intense political pressures from the usual suspects.

Utility Restructuring Information on Restructuring of California's Electric Utility Industry.

Utility Restructuring and Emerging Renewables The greatest obstacle to commercial development of emerging renewable generating technologies is clearly the current shift toward electric utility restructuring and more competition. Under this new paradigm, emerging technologies are becoming increasingly difficult to fund because the prices for the power they generate and the capacity they add to the system are both being significantly reduced.