Electric Power Industry Competition

8/3/2019 Electric Power Industry Competition

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Chapter 3

Alternative Scenarios for

Increasing Competition

in the Electric Power Industry


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CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .SCENARIO 1: Reaffirming the Regulatory Compact.

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . .System Operations and Planning . . . . . . . . . . .

SCENARIO 2: Expanding Transmission Accessthe Existing Institutional Structure . . . . . . .

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Implementation .. .. .. .. .. . .. ... ... ...+....System Operations and Planning . . . . . . . . . . .

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.,....* . . . . . . . . . . . . . . . . . . . . . . . .

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and Competition Within. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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SCENARIO-

3: Competition for New Bulk Power Supplies . . . . . . . . . . . . . . . . . . . . . . . . . .Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Implementation ... ... ... ... ... ... ... +.. ... *.. ... *.$. .*** ... .*. **""$*""""'""""""Systems Operations and Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SCENARIO 4: All Source Competition for All Bulk Power Supplies WithGeneration Segregated From Transmission and Distribution Services . . . . . . . . . . . . .

Background . . . . . * . . . . . . . . . . . . " " "Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Systems Operations and Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +SCENARIO 5: Common Carrier Transmission Services in a Disaggregate,

Market-Oriented, Electric Power Industry . . . . . . . . . . . .Background . . . . . . . . . . . . . . . . . . . .Implementation . . . . . . . . . . . . . . . . .Systems Operations and Planning

ANALYSIS OF THE SCENARIOS

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TablesTable

3-1. Summary of Alternative Scenarios . . . . . . . . . . . . . . . . . . .3-2. Alternative Scenarios: Summary of Sy stem Operations,

and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Planning,

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Table 3-l-Summary of Alternative Scenarios

Scenario 2Expanding Transmission Access and scenario 3 Scenario 4

Scenario 1Scenario 5

Competition in the Existing Regulated Competition for New BulkStrengthening the Regulatory Bargain

Competition for All Bulk Common Carrier Transmission ServicesUtility Structure Power Supplies Power Supplies in a Disaggregate Industry Structure

q

q

q

q

q

q

Industry consists of a mix of verticallyintegrated utilities, 10 Us, public power,

cooperatives, Federal power authori-ties, self-generators, QFs, and IPPs.

Existing regulatory structure with Stateproapproval of new generating proj-ects and periodic prudence reviews

during planning and construction.Negotiated transmission access arrangements

Traditional system coordination andcontrol by integrated utilities or con-trol centers.

Prices set by regulatory proceedingsand cost of service. Transmission

prices and wholesale rates set byFERC (including approval of negotiatedIPP power purchases). State over-sight of retail rates and PURPAimplementation.

Federal and public powe r agencies

q

q

q

q

q

and cooperatives affected only to theextent State law provides.

Industry consists of existing mix ofentitles.

Existing regulatory structure with widerQF eligibility under PURPA including

full utility ownership/control of QFs(may require amendment of PURPA).

New Federal wheeling authority under

a public interest standard for whole-sale and retail transmission access(requires amendment of the FederalPower Act). q

Traditional system coordination andcontrol by integrated utilities or con-trol centers with contracts for un-bundled services.

Prices set by regulatory proceedings .and cost of service. Transmissionprices and wholesale rates set byFERC (including approval of negotiatedIPP power purchases). State over-sight of retail rates and PURPAImplementation. q

Federal and public power agenciesand cooperates affected only to theextent State law provides.

q

Existing mix of generating entitiesexpanded by IPPs and unregulatedutility generating subsidiaries.

Existing regulatory structure with market-based rates for new competitive gen-eration. Utilities use all source procure-ment for new bulk power needs.

Contracts awarded to lowest costsupplier with consideration for non-price factors.

Transmission access provided by utili-ties as a bidding condition, or byprivately negotiated arrangements,or under new Federal public interestwheeling authority (no retail wheel-ing).

Traditional system coordination andcontrol by integrated utilities or con-trol centers. Unbundled bulk powerdispatch, control, and transmissionservices provided through contracts.

Retail and transmission prices set byregulatory proceedings. Wholesalepower prices set through competitiveprocurement except for cost-baseplants built by utility as last resortsupplier. State and Federal regula-tors oversee terms and conditions ofwholesale sales.

Federal and public power agencies,

and cooperatives can participatecompetitive generating sector to ex-tent provided by Federal and Statelaw and policy.

Industry structure: Ownership of com-petitive generating sector segregatedfrom transmission and distributiont i e r s .

New Federal and State regulatorysystems. Price and entry regulationof generation sector replaced with

competitive market. Continued regu-lation of transmission and distributionutilities and retail sales.

Revised Federal wholesale wheelingauthority. Transmission utility to planfor and provide nondiscriminatory ac-cess for bulk power supplies.

Most of traditional utility system plan-ning and coordination taken over bytransmission and distribution entities.Competitive generators plan and buildgeneration. Transmission operator as-sumes responsibility for bulk powersystem control and operation. Distribu-tion utility retains retail obligation toserve. Unbundled bulk power dis-patch, control, and transmission serv-ices provided through contracts.

Bulk power prices set by marketthrough bidding, negotiation. Transmis-sion and retail prices are set byregulatory proceedings. Some Stateand Federal oversight of competitive-

ness of generation markets and pru-dence of bulk power contracts.

Federal and public power agencies,cooperatives can participate in competi-tive generating sector to extent pro-vided by Federal and State law andpolicy.

q

q

q

q

q

q

Ownership and control of existingintegrated utility industry is disaggre-

gate into separate generation, trans-mission, and distribution segments.

New Federal and State regulatorysystem. Price and entry regulation ofgeneration replaced with competitive

markets. Distribution utilities serv-ices and retail prices remain regu-lated. Transmission prices and activi-ties are strictly regulated.

Transmission sector operates as a

common carrier providing nondiscrimina-tory access to all wholesale and retailcustomers. Reasonable renditionson reserving transmission servicesmay be imposed.

Bulk system planning and coordina-tion is split among generation, trans-mission, and distribution entities. Gen-erators identify, plan, and build newgeneration in response to marketsignals. Transmission utility assumesresponsibility for reliability of bulksystem operations. Responsibility forestimating demand and securing ade-quate power supplies rests with distri-bution utilities. Unbundled bulk power

dispatch, control, and transmissionservices provided through contracts.

Bulk power prices set by market.Transmission and retail prices are setby regulatory proceedings. Some Stateand Federal oversight of competitive-ness of generation markets and pru-dence of bulk power contracts.

Federal and public power agencies,Cooperatives can participate in competi-tive generating sector to extent pro-vided by Federal and State law andpolicy.

SOURCE: OffICS of Tecfmology Asssssrnent, 1989.


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Chapter 3-Alternative Scenarios for Increasing Competition in the Electric Power Industry 63

SCENARIO 1Reaffirming the Regulatory Compact

Under the traditional regulatory contract, a public utility is guaranteed the opportunity torecover all prudent investment committed to public

use and to earn a competitive rate of return on itsinvestment. In exchange, the utility assumes thelegal obligation to provide adequate and reliableservice at reasonable rates to all customers located inits exclusive franchise territory. Scenario 1 reflectsthe view that only modest changes in existingarrangements and institutions governing the indus-try are needed to assure continued adequate andreliable electric power supplies. This scenario dif-fers from the status quo by the adoption of measuresto reaffirm the regulatory compact between utilitiesand regulatory authorities (on behalf of utilitycustomers) through:

1. changes to State ratemaking policies to reducethe investment risk for new construction and toallow utilities to attract needed capital;

2. the modification of rules under the PublicUtility Regulatory Policies A ct of 1978 (PURPA)to address perceived imbalances in the im-plementation of avoided cost pricing for quali-fying facility (QF) payments;

3and

3. the adoption of measures to encourage greateraccess to transmission services for bulk power

transfers and the construction of additionaltransmission capacity.

Proponents believe that a major benefit of regula-tory reform for utilities would be the enhancedexpectation that over the long term they will be ableto recover their prudent capital investment and earna competitive return for their shareholders. At thesame time, customers would be assured of adequate,reliable power supplies at reasonable rates. Someanalysts speculate that reduced regulatory risksmight eventually lead to savings for consumers froma lowering of capital costs of new utility construc-tion.

4Some proponents of this scenario argue that

more drastic reforms of utility regulation are unnec-

essary because the problems of the 1970s and 1980swere the result of an unfortunate and uniqueconvergence of events and trends that are unlikely tobe repeated, and that the regulatory system anddomestic utility industry have largely adjusted to

changed conditions. Furthermore, the flexibilitywith which electric utilities and the regulatorysystem have responded to recent financial difficul-ties and competitive pressures attests to the sound-ness of current institutions.

Transmission access and wheeling arrangementswould be negotiated between the participants on avoluntary basis. The Federal Energy RegulatoryCommission (FERC) would retain its authority overtransmission rates and interstate and wholesale

power sales. States would exercise jurisdiction overresource planning, expansion, retail rates, and distri-bution. Public power agencies and cooperatives

would continue to be regulated as now, subject tovarying degrees of oversight by Federal and Stateauthorities. These changes may give requirementscustomers greater input and oversight of powersupply decisions by wholesale utilities.

Utilities would remain the primary providers ofelectric power under scenario 1. Cogenerators,self-generators, and independent power producers(IPPs) would continue to exert competitive pres-

sures on utilities, but, except for PURPA qualifyingfacilities, alternative generating sources would notbe given any special status or preference under State

or Federal regulation.

Background

Much of the current interest in increasing competi-

tion in generation can be attributed to the problemsencountered by the electric power industry over thepast 15 years in dealing with declining growth rates,excess capacity, rising fuel costs, and steeplyescalating construction costs (especially for nuclear

3]n ~omc ~W~ ~ex ch~ges wouIdloweravoid~cat rates, but in others it is conceivable thaI unrealistically low avoided cost rates would beincreased.

4~b]ic ~tllity ~missionsmi@tIowr he au~ofiz~rate of return for utilities because ofhe~UC~ regulatoryrisk, but some analysts questionwhether preapprovals would actually lead to a reduction in the risk component of capital costs m reflected in market rates. See National RegulatoryResearch Institute,Commission Preupprovaf of Utifity Investments (Columbus, OH: National Regulatory Research Institute, 1981, reissued 1987),hereafter referred to as %eapprovals.


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Chapter 3--Alternative Scenarios for Increasing Competition in the Electric Power Industry . 65

From the perspective of some utilities, PURPAcontributed to the further impairment of the tradi-tional utility bargain because, while it left utilitieswith the obligation to assure adequate, reliableelectricity service, it diminished their control overthe sources and costs of generation.

Time, lower fuel prices, and lower inflation rateshave abated many of the financial threats to theelectric utilities.

9There remain, however, some

problems of uncertainty and delay attributed to both

the regulatory process and prudence reviews ofgenerating plant construction costs. There is someagreement among regulators and utilities that tar-geted regulatory reforms would help avoid theconflicts of recent years and restore a balance to theregulatory bargain by assuring the industry ofrecovery of future prudent investments in new

facilities, if needed, while offering similar assur-ances to consumers and regulators that new capacitycosts will be kept under control.

Implementation

Theprimary responsibility for implementing sce-nario 1 would rest with State governments. Fewchanges to Federal law and regulation would benecessary. The major Federal statutory and regula-tory structure governing the electric power industrytoday would remain essentially unaltered. In particu-lar, PURPA, the Federal Power Act, and the PublicUtility Holding Company Act (PUHCA) would beuntouched and existing statutory standards wouldnot be loosened or expanded substantially by admin-istrative or judicial interpretations. Scenario 1 wouldnot, however, preclude certain relatively selective,but possibly significant, changes in existing admin-istrative rules governing industry structure andoperations. For example, FERC might make minorchanges or clarifications in rules governing utilityavoided costs for purchases from qualifying facili-ties under PURPA. FERC might impose morestringent technology or efficiency standards on QFs

to discourage the proliferation of PURPA ma-chines. Similarly, FERC could continue its effortsto encourage greater amounts of voluntary wheelingby u tilit ies and to provide additional incent ives forexpanded intersystem bulk power transactions. Ex-amples include the Western Systems Power Pool

Experiment and approvals of more flexible transmiss-ion pricing schemes in individual cases.

Transmission access and wheeling rates for whole-

sale and retail customers under this scenario woulddepend on voluntary agreements negotiated with theutilities controlling transmission facilities. FERCwould oversee wheeling rates.

Federal authority to issue wheeling orders underthe Federal Power Act and PURPA would remainlimited. The Nuclear Regulatory Commission couldorder wheeling as part of licensing of new nuclear

plants, however, it is unlikely that any new orders

will be issued. FERC jurisdiction would largely belimited to setting wheeling rates and approvingvarious proposals and experiments among utilities.Some States would continue to assert authority torequire intrastate wheeling as a condition of Stateinitiatives.

10Antitrust considerations could provide

some source of mandatory wheeling as part of a

court order or settlement, but such wheeling ordersare expected to be rare.

The current statutory split between Federal andState jurisdiction over regulation of electric utilitieswould remain largely undisturbed. With the existing

trend toward greater use of bulk power sales,however, it is conceivable that a greater share of

power costs might shift from State to Federalregulatory jurisdiction, Modified State regulatory procedures for review and approval of new plantconstruction would offer stronger assurances toutilities of recovery of investment than the currentsystem. These changes would likely require Statelegislation and would probably include a more directand active role by utility commissions (and the

public) in the planning and oversight of new

9Mmy ~tjlltle~ have~egalned ~elrhe~~yfm~ci~ s~tus~d we projected to have favorable CSShf10w5in tiel~e 19~@l~s.Seech. 2 of~sreport.

1OThe sumessof~e~ eff~sis open todoubt. ~x~r~u]resUll]i[les[0 Whee] QFpower ~other utilities, RXM may escape challenge Ixxause ktransmission grid is physically isolated from other interconnected systems and thus arguably cannot be said to affect interstate transmission flows, OtherStates are potentially subject to FERC challenges to their authority. New York and Massachusetts require wheeling as a condition of participation in theirbidding programs. Floridas attempts to require intrastate wheeling, including self-service wheeling, have repeatedly been challenged byER C and byseveral Florida utilities, arguing that Federal law preempts State control over rates, and the terms and conditions of wheeling transactions. Florida Power& Light, Petition for Declaratory Orderfrom FERC,EL87-19-000,filed Mar. 11, 1987.


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Table 3-2-Alternative Scenarios: Summary of System Operations, Planning, and Developrnent

System operation

Reliability, dispatch System planning and development

o and coordination Generation Transmission Distribution

gthening theatory bargain.

nding transmission accessompetition in the existingated industry structure.

petition for new bulkr supplies.

petition for all bulkr supplies.

mon carrier transmissionces in a disaggregatetry structure.

Utility controloanter.Control of nonutility generationset by contract.

Similar to 1 with greaterreliance on contractualprovisions for nonutilitygeneration control andwheeling.

same as 2.

Transmission utility assumesbulk system control.Operational responsibilities ofgenerators and distributionutilities set by contracts withcustomers and transmissionutilities.

same as 4.

Utility obligation toplan, build, and purchase.QFs market under PURPA.IPPs negotiate contracts.

Similar to 1 with expandedOF and IPP participation.

Utility obligation to planand secure adequate newsupplies through competitivemeans.G e n e r a t o r s , Q F s ,IPPs, and host utility affiliates.

Generators pfan and buildin response to perceivedmarket needs and solicitationsby transmissiondistnbutionutilities.

Generators plan and buildin response to perceivedmarket needs and solicitations

by local distribution utilitiesand transmission companiesas brokers.

Utility responsibility.

Same as 1, but States mayrequire utilities to plan andbuild adequate transmissioncapacity for regional needsincluding retail wheeling.

Same as 2, but no retailwheeling obligation.

Transmission utility obligationto plan and build adequatecapacity for instate/regionalwholesale needs.

Transmission utility obligationto plan and build adequatecapacity for foreseeable needs

as common carrier for regionalwholesale and retail customers.

local utility responsibility.

same as1.

same as 1.

local retail utilityobligation to plan and contractfor adequate supplies.Utility may participate in loadmanagement and conservation.Transmission utility mayprovide brokering services.

Same as 4.

Offica of Techrto)qy Assa ssman~ _ from Powar Tachnologias, inc., TbchmcaISac@ouml& Cansidwations inRopwadlncraassd Whaaling, Transrnissionkcass, and Nonutikfy Gsmtmtion, OTAcontractotreport, Mar. 30, 1988.

I


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Chapter 3--Alternative Scenarios for Increasing Competition in the Electric Power Industry q71

allowed in certain segments of the industry.26Among

the benefits of competition they cite are: better useof generation and transmission resources, a more flexible and secure power supply, increased efficien-cies in utility operations, and lower prices toconsumers over the long-term. In addition, utilityratepayers would have less exposure to the risks of

construction cost overruns and poor plant perform-ance as these risks would be shifted more explicitlyto the shareholders of nonutility generators. Afurther benefit of allowing limited competition andmore wheeling would be a growth in the informationand experience available to assist policy makers inevaluating the technical and institutional feasibilityof proposals for broader competition and economicderegulation of electric power.

Proponents note that changes in generation andtransmission technologies have diminished some ofthe so-called natural monopoly characteristics of the

electric power industry allowing workable competi-tion to exist as a supplement to regulation. Smallergenerating units are now in many cases cost-competitive with large baseload plants and haveshorter lead-times. Increased interconnections andhigher voltage transmission lines have made re-gional coordination of utility operations more feasi-ble. With these developments, some analysts see thesubregional, insulated, vertically integrated utility as fast becoming an outmoded and economically ineffi-cient entity. In their view, an industry structuredominated by such entities: inhibits cost-savingsthat could be achieved with greater coordination andbulk power trades between interconnected systems;makes cooperative agreements and power pooling

arrangements difficult to establish; provides unequalaccess to the benefits of coordination and power

pools among buyers and sellers; and allows theowners of transmission lines to exercise monopoly

power over their sections of the interconnectedsystems .27

The entrance of small power producers and

cogenerators into the generation market under the

aegis of PURPA has yielded some benefits, but it

also has imposed additional operatin g uncertaint ies

and costs on electric utilities.28 Expanding the

PURPA model is one mechanism for introducing

limited competition into the regulated generatingsector. A major advantage of this approach is that

smaller increments of increased competition can yield efficiency gains and resolve uncertaintieswithout radically altering present institutional ar-

rangements and risking a costly mistake. 29At the

same time, changes in the criteria for QFs would

reduce what some view as inherent market distor-

tions created by PURPAs limitation to small power

producers and nonutility firms.

Federal authority to issue wheeling orders rests

primarily on three sources:

1.

2.

3.

antitrust law (as a remedy for anti-competitive

or monopolistic behavior),

the licensing power under the A tomic EnergyAct, and

sections 211 and 212 of the Federal Power Act,

as amended by PURPA.30

Wheeling orders under antitrust law are rare, and

even if a plaint iff is successful, it may t ake years towork out acceptable arrangements. W heeling condi-

tions imposed on licensees of nuclear power plants

by the Nuclear Regulatory Commission (N RC) andits predecessor, the Atomic Energy Commission

have been a major source for guaranteeing transmis-

sion access for requirements customers. With nonew nuclear power plants on order, additional NRCwheeling orders as part of licensing conditions will

be rare. It is possible that N RC might modify some

MS= EL(X)N, Electricitys Future, supra note 23; WiUiam A. BrownelL Electric Utility Deregulation: Analyzing the Prospects for CompetitiveGeneration,Annual Reviewof Energy f984, pp. 229-262; and F. Paul Bland, Problems of Price and Transportation: TWO Proposals To EncourageCompetition From Alternative Energy Sources, 10 Harvard Environmentuf Luw Review 345 (1986).Z7Wi]11m A.B~~el], cc~a~cutili~~@~on: Analyzing the Prospects for Competitive Generation, Annuul Review of Energy f 984, pp.229-262.

zSId., pp. 254-255,291d., p. 253.SO16u.S.C. g24jand 824k. See discussion in ch. 2 ofthiSmw.


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74 qElectric Power Wheeling and Dealing: Technological Considerations for Increasing Competition

1.

2.

wholesale wheelingproviding transmissionservices to utilities and nonutility generatorsfor the sale of power for resale (mostlyinvolving sales to utilities); andretail wheeling-transmitting power from othergenerators (utilities, QFs, IPPs) to ultimateconsumers, which would also allow self-service wheeling among facilities owned bya QF or a self-generator.

Expanded transmission access under scenario 2would increase the market access of both potentialbuyers and sellers of electric power and lessen thedominance of the utilities controlling the transmis-sion grids.

Scenario 2 would amend the Federal Power Act tochange the definition of those eligible to seekwheeling orders and modify the process throughwhich FERC can order wheeling.

42

The restrictivefindings required by existing law, which effectivelypreclude issuance of wheeling orders in most cases,would be replaced by a more flexible public intereststandard. If efforts to negotiate voluntary wheelingarrangements failed, any utility (including QFs andIPPs) or large retail customer would have legalstanding to seek a wheeling order from FERC. Therewould be a rebuttable assumption that the capacityto wheel exists and any utility denying wheelingservices would bear the burden of proof of showingthat there is either a lack of capacity or a degradationof service that would result from the proposedwheeling transaction. The wheeling utility would be

entitled to a reasonable compensation for its trans-mission services.

In deciding whether to grant a requested wheelingorder, FERC could consider all relevant issuesincluding potential impacts on utilities, captivecustomers, and system reliability. Thus, it is possiblethat, if a wheeling order allowing an industrialcustomer to purchase off-system

43would impose a

substantial economic hardship on the utilitys re-maining customers, FERC could deny the requestfor transmission access under a public interest

standard. (The customer, of course, would alwaysretain the option of self-generation, which wouldstill leave the utility with the same problem ofrecovering its investment from a smaller pool ofratepayers.) Providing retail customers with accessto transmission would provide them with a bargain-ing tool in seeking to negotiate rate concessions

from their retail supplier.

The principal constraints on a customer purchas-ing off-system under scenario 2 would be theavailability of transmission capacity, and any spe-cific contractual provisions with the existing utilitysupplier on minimum take and termination noticeconditions. Arrangements for backup or standbypower supplies would have to be negotiated with thehost utility, perhaps with review by appropriateregulatory authorities.44 In some cases the customerwould have to negotiate contracts for provision ofunbundled control area services provided by the

local utility.Industrial customers going off-system for their

power needs would have to negotiate some stand-byor maintenance service arrangement with theirnative utilities if they were to expect any sort ofservice obligation. They may also have to negotiatesome provisions for later reconnection to localutility service if State regulations do not alreadyprovide for this. The contracts between large retailcustomers and alternative suppliers would likely bemore detailed and complex than their previousagreements with a host utility. Many of the servicesthat had been supplied as part of traditional electricpower service would now have to be contracted forspecifically. Contracts that involve wheeling agree-ments with third parties will also require morestringent delineations of technical and operatingspecifications and responsibilities.

Scenario 2 also would encourage the developmentof new initiatives to provide greater economicincentives to utilities to wheel voluntarily. FERCcould, for example, establish affirmative guidelinesfor the approval of transmission agreements that

4ZS= ~eELCON p-~ andK~ayerbill,supra note 23. The Federal Power Act defines an electric utility as any entity that generates electricpower for resale-some have questioned whether that kfinition brings QFs and IPPs within the class of parties with standing to seek mandatorytransmission orders under existing law. The proposals would also extend standing toFERC, State agencies, Federat power agencies, and large powerconsumers/purchasers.

@Offsys~$$ ~fa t. p~h~ b a pOWW supplier other than the native or host utility cumently serving the industrial customer.dqsome sta~s~dy require utilities to provide backup services at nondiscriminatory rates.


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Chapter 3-Alternative Scenarios for Increasing Competition in the Electric Power Industry q 75

might encourage wheeling, such as allowing moreflexible pricing of transmission services, requiringcompensation of other affected parties (such as otherutilities experiencing unintended flows or parallelpath problems), permitting auctioning of transmis-sion services, establishing strict timetables for

negotiating transmission agreements, and expedit-ing their own review of transmission rates andagreements. 45 FERC might also cooperate in provid-ing guidance and technical assistance to Stateregulators in pricing and contracting procedures forunbundled transmission and control services.

State Initiatives. Because States have the pri-mary responsibility for implementing PURPA underguidelines established by FERC, the States wouldhave to revise their rules and procedures to accom-modate the expanded eligibility for QF status. States

would have the lead role in implementing changesthat permit large retail customers to purchase offsystem in intrastate transactions. Federal law wouldnot preempt any State laws that characterize an IPP,self-generator, or QF engaged in retail sales as apublic utility subject to regulation. States mightrequire instate utilities to wheel power from otherinstate utilities and nonutility generators to largeretail customers.

It is possible that the existing balance betweenState and Federal regulation could be maintained

somewhat if Federal legislation expressly alloweddelegation to the States of the authority to implementintrastate retail wheeling under FERC guidelines.State involvement might also be the most politicallyeffective means of implementing retail wheelingbecause of the substantial equity and fairnessconsiderations involved in weighing the interests oflarge customers in wheeling power against both theeconomic impacts on the local utility and theinterests of other customers. Placing the decision-making responsibility in State hands would movethe process closer to the parties that potentiallywould be most affected by the order.

System Operations and Planning

System reliability and coordination remains theresponsibility of the local control center as inscenario 1. Operating requirements for QFs and IPPswould be specified in contracts. System operationswould likely be affected more than in scenario 1 as

there would be a need to accommodate a greaterdiversity of generating sources and delivery points.

Dispatch, maintenance, and unit loading opera-tions and procedures would be similar to scenario 1,except that loading and dispatch of transmissionaccessors not subject to direct utility control wouldbe determined by contracts among the generator, itscustomers, and the wheeling utility. The wheelingutility would have to adjust its operations to counterany increased uncertainty created by having nondis-patchable generators on the system. (Of course, thewheeling utility could impose reasonable technical

conditions and charges on the nondispatchablegenerators and their customers to provide thisservice.)

Emergency curtailments of service would beallocated according to State-regulated curtailmentpolicies and contracts (same as in scenario 1). Foroutages of nonutility wheeled power, curtailmentand backup power would be based on standbyservice contracts with the local utility.

Planning and developing generating capacitywould be very similar to scenario 1. Under revisedPURPA standards, a broader range of facilities

would be eligible for QF status, and State law mightrequire utilities to consider QFs as potential compo-nents of their capacity expansion plans. It is likelythat much more QF and IPP capacity would be builtunder scenario 2 than under scenario 1. As theamount of nonutility generation grows, States orregional utility groups may wish to provide for directparticipation by nonutility generators in the planningprocess.

Planning for transmission additions would besimilar to scenario 1 except that State regulators mayrequire utilities to include provisions for adequatetransmission capacity for wheeling services in

45 RWen(~xmp]es~ft~W j~tla(jve~jwlu~ tiewes~m State5 power poolex~rjment,~RC au~orjzation for Baltimore 3M & Ekttk to auctionoff its unneded capacity on the PJM power pool, and approval ofa flexible transmission pricing arrangement between Pacific Gas & Electric and theIbloek Irrigation District, see PG&E Offers New Approach To Pricing Transmission Services. Th e Energy Daiiy. Apr. 5, 1988, p. 1.


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76qElectricPower Wheeling and Dealing: Technological Considerations for Increasing Competition

Photo credit: Dominion Resources, Inc.

Operator at the controls of a power plant

system planning. There is a possibility that somenonutility entities might build private transmissionlines, but they would have no eminent domainauthority and an uncertain regulatory status. FERCmight order a utility to upgrade or expand itstransmission facilities to implement a public interestwheeling order. States might also require utilities toexpand transmission capacity to accommodate com-petitive sources.

Distribution additions would be the responsibil-ity of the local utility (same as in scenario 1).

Conservation and load management plans wouldbe developed by the local utility with oversight byState authorities. State regulators may require utili-ties to include consideration of savings from conser-

vation and load management strategies as part oftheir least-cost planning efforts as in scenario 1.

SCENARIO 3Competition for New Bulk Power Supplies

Scenario 3 would create an institutional andregulatory structure to support all source competi-tion for new electricity supplies. Bulk power priceswould be established through reliance on competi-tive market forces rather than cost-based regulation.The overall structure of regulated utilities would bemaintained, but limited competition for new capac-ity needs would be introduced in the generationsector. The present electric power industry structurewould be expanded by the entry of IPPs and


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Chapter 3-Alternative Scenarios for increasing Competition in the Electric Power Industry q 81

except to the extent that utilities controlling the gridvoluntarily agreed to provide wheeling services.

Systems Operations and Planning

System reliability and coordination would bemaintained as in scenarios 1 and 2 with primary

responsibility resting with the local utility and/orcontrol center. Operational requirements for nonutil-ity generators (e.g., QFs and IPPs) would be basedon contract terms with the local utility (or wheelingutilities). More formalized agreements would beneeded to replace many of the current informaloperating arrangements of integrated utilities andpower pools as electric power supply functions areincreasingly unbundled.

Dispatch, maintenance, and unit loading sched-ules for the system would largely be handled by thelocal utility or control center. Specific dispatch and

scheduling responsibilities of nonutility generatorsand transmission accessors would be negotiated bycontracts among the generators, power purchasers,and wheeling utilities as in scenario 2.

Emergency curtailments of generation and trans-mission services would be dealt with as in scenario2.

Planning and developing generating capacityadditions would primarily be the responsibility ofthe local utility as in scenario 2. Because the Stateswould require utilities to use a competitive selectionprocess (including consideration of non-price fac-

tors) for new power supplies, State regulators wouldbe more heavily involved in overseeing utilitydemand forecasts and determinations of capacityneeds. Independent generators would be free tomake their own plans for new construction based inpart upon the utilities needs and in part on their ownexpectations of profit.

Transmission additions would be planned andbuilt by the public utility transmission company ordivision with review and approval by regulatoryauthorities. State rules may require utilities to planfor adequate capacity for instate wheeling of newpower supplies and to consider regional transmis-

sion needs. As in scenario 2, FERC may order autility to expand its transmission capacity to providemandatory wheeling services.

Planning and building additions to the distribu-tion system would remain the responsibility of thelocal utility.

Conservation and load management planningand implementation would be the responsibility oflocal utilities as in scenarios 1 and 2. State authori-ties may require consideration of potential contribu-tions of conservation and load management strate-gies as part of utilities least-cost planning and inapproving retail rates. State regulators might alsoallow demand side options to compete directly in thebidding process for capacity additions.

63

SCENARIO 4All Source Competition for All Bulk Power SuppliesWith Generation Segregated From Transmission and

Distribution Services

Scenario 4 would restructure the U.S. electricpower industry and its regulatory institutions andcreate a competitive, unregulated generating sectorand a structurally separate regulated transmissionand distribution sector. Integrated utilities would berequired to segregate generation activities, bothinstitutionally and operationally, from transmissionand distribution to limit the potential for self-dealingand cross-subsidization. Owners of existing and newgeneration sources would compete to sell power toregulated transmission and distribution companies.

Some transmission companies could also act aspower brokers or wholesalers providing bulk powersupply planning, purchasing, and delivery servicesto distribution utilities. Purchasing utilities would beassured access to transmission services for their bulkpower needs (capacity permitting).

The scenario would entail substantial rewriting ofFederal and State laws governing utility regulationwith greater emphasis on authority for overseeingthe competitiveness of bulk power markets andregulating transmission services and power brokers.Modifications of the public utility ownership restric-tions in the Federal Power Act, PURPA, and

6 3 ~e g u ]a l o rs in M a i n e h a v e a ] ] ow~ d em~d . s j d e r n ~ a g e m e n t o p t i o n s t o c o m p e t e [ o p r o v i d e n e e d e d d c c r e r n c n t s of power caP~itY.In biddingconduclcd by Central Maine Power for 100 NIV/ of capacity, 13 of 37 total bids were for dcmand-side managemcn[ projects, however these projectsrcpresen[cd only 35.6 MW ou t of more than 1,145 MW offered. On a price basis, the dcmand side projccls averaged 75 pcrccnt ofthe utilitys avoidedcosts, while the supply side offers averaged 97 percent of avoided costs. Issues Review and Tracking, Aug. 4, 1988, p. 1.


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82 q Electric Power Wheeling and Dealing: Technological Considerations for Increasing Competition

PUHCA would allow broader participation in gen-eration markets. State regulatory schemes wouldalso have to be overhauled to accommodate thisscenario. The scenario could shift the primary locusof utility regulation from States to the FederalGovernment, but implementing legislation could

maintain a balance by giving greater wholesaleauthority to State regulators. States would regulatethe prices, operations, and quality of service of retaildistribution companies. Transmission capacity, serv-ices, and rates would be subject to mixed Federal andState regulation.

Background

Scenario 4 is derived from proposals that wouldstructurally disaggregate the electric power industryto allow the generating sector to become both more

dependent on the discipline of competitive marketforces and free from many of the pricing and entryrestraints of the existing regulatory system.* Underscenario 4, the organizational structure of theelectric power industry would begin to resemble thatof the natural gas industry where production, inter-state transmission, and local distribution are gener-ally under separate ownership (although there arenumerous cases of upstream and downstreamintegration).

Scenario 4 would open all power supply contractsto competition, unlike Scenario 3, which is limited

to new bulk power sources. Because Scenario 4would be applied industry wide, it would probablyinvolve a transition period of many years to allow agradual phase-out of rate-of-return regulation, or-derly restructuring and divestiture of assets, andrenegotiation of existing arrangements.

65

Radical industry restructuring has some precedentin the recent experience in breaking up AT&T andderegulating much of the telephone industry. On amuch smaller scale, several utilities have sought torevamp their internal structures to set up holdingcompanies, split power system functions into sepa-rate subsidiaries, and create unregulated competitivegenerating subsidiaries.

66

But, there is no precedentfor radical restructuring and deregulation of anindustry similar to electric power that is character-ized by long-term investment, heavy fixed costs, anobligation to serve, and which is in a period of excesscapacity. The restructuring under scenario 4 raisesmajor questions of public policy and equitabletreatment of stockholders and ratepayers in allocat-ing any increased value for existing assets.

As one benefit of removing most price and entryrestrictions from the generating sector and replacingthem with open competition, there would be strong,direct incentives for efficiency in construction, andnew units would be built by companies that couldoffer capacity at the lowest life cycle costs. *7 Theprincipal risk would be threats to the reliability andstability of the overall integrated systems arisingfrom lack of or reduced coordination among compet-ing entities. Proponents believe there would also besubstantial efficiency gains in the use of all availablegenerating units to meet regional electricity de-

mands. In their view, these efficiency gains wouldnot likely be achieved under the existing structurebecause of the disincentives to increased bulk powertransfers among utility control areas, difficulties informing power pools, and transmission capacityconstraints.

64s= faexmple,Ric~d J. pieu, Jr., A ROpOSaI to Deregulate the Market for Bulk Power, 72 Virginia Luw Rev. 1183 ( 1986); Aspen Institute,Electric Utilities: Structure and Regulation, Energy Policy Forum, 1986; and William W. Berry, llte Case for Competition in the Electric UtilityIndustry, 110 Public Utilities Fortnightly 13 (1982).

6SAIlemtone~P=nt of a simil~approach arguesthat mandatory divestiture and reorganization of the industry by courts and legislatures wouldnot be needed because competitive pmsures would fom.e fms to restructure vokntarily through spinoffs, mergers, and acquisitions eventually producingthe desired efficient industry structure. This process could, however, take as long as 20 or 30 years. Pierce, supra note 64, p. 1214.

66Forexmple, ~blicSewicec~p~y of New Mexico pre a significant corporate restructuring that would form a holding comP~Y,sP1itmostgeneration and transmission assets into a separate competitive subsidiary, and sell power under long-term contracts to a distribution subsidiary and itswholesale customers. Th e company dropped its proposal in mid- 1988 because of the criticisms raised by some State agencies and the City of Albuquerque,its largest wholesale customer.67wllljm W, Mw, c~e Implicatiomof ~~~mf~~ec~c IJtilities,Cotrtment for the Reason Foundation Conference on Deregulating PublicUtilities, 1987.


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Chapter 3-Alternative Scenarios for increasing Competition in the Electric Power Industry q 83

Implementation

Scenario 4 would require substantial changes inboth Federal and State laws governing the electricpower industry. The Federal Power Acts jurisdic-tional and procedural requirements would be sub-stantially revised to reflect the new institutionalstructures with greater emphasis on creating effec-tive mechanisms for overseeing the competitivenessof bulk power markets and regulating transmissionservices and power brokers. PURPA and PUHCAwould also require amendment to remove statutorybarriers to full participation in the competitivegenerating sector. This would allow utilities gener-ating companies to compete outside of their regionalterritories without coming under the full financialand operational restrictions imposed on regulatedutility holding companies. Continuation of PURPAspurchase and sale obligations for alternative energysources might also require reexamination to deter-mine if they still were effective and/or appropriateunder a changed industry structure.

The transmission and distribution segments of theindustry would continue to be regulated heavilywhile generation would be subject only to competi-tive market forces, regulatory oversight, and anti-trust laws. Price and entry regulation for thegeneration sector would be replaced with competi-tive markets. Generators would still be subject toenvironmental, siting, financial, and antitrust re-quirements imposed by other State and Federal lawsunder scenario 4 and all others. The States would

regulate the prices, operations, and quality of serviceof retail distribution companies. State regulatorswould review the power purchase contracts ofdistribution utilities, but the effectiveness of Stateprograms would be hindered without some mecha-nism to review the adequacy of competitive markettransactions. Transmission capacity, services, and

rates would be subject to mixed Federal and Stateregulation. Under this scenario there is the potentialfor increased Federal regulation and oversight ofbulk power supplies and what were formerly intra-system transmission arrangements. Implementinglegislation could, however, provide for a morebalanced Federal-State division of regulatory author-ity to give States greater control over intrastateactivities.

Vertical integration of the electric power industrywould be reduced by the separation of utilitygenerating segments from transmission and distribu-tion segments.

68This could be accomplished by

creating new subsidiaries or divisions, or by spin-ning off a new company and then selling therequired physical plant and other assets to the newentity.69 Segregated utility generators, QFs, and

IPPs could compete to provide power supplies totransmission-distribution and local distribution com-panies. Age, performance, and fuels of existing unitswill affect the competitive strengths of the newgenerating companies. These competitive differ-ences could eventually lead to a consolidation of theindustry .70

Under scenario 4 local distribution companieswould be primarily responsible for securing ade-quate power supplies from competing suppliersthrough contract solicitations and negotiations. Regu-lated transmission companies would own and oper-ate the transmission facilities and be responsible forplanning and building networks with adequate

capacity to serve buyers and sellers in a competitivemarket. Transmission companies would function asregional controllers and dispatchers of generationand provide wheeling services for utilities underregulated rate schedules. They could also act aspower brokers or as wholesalers linking independentgenerators and local distribution utilities.

~ u n d e r ~ e n ~ o s A ~d 5, h e pl@C~~ViSiOn ofi n t e g r a t e d u t i l i t y facilities among the newly disaggregate entities would probably not KfhXt aclearcut allocation of generation, transmission, and distribution facilities. It is likely that at least a portion of the transmission facilities associated withindividual generating stations might be retained by the generating subsidiary. Generators might have to construct their own transmission facilities to movepower to the point of delivery to the transmission or distribution companies. Similarly, trmrnission and distribution utilities would bc able to retain oracquire smatl scattered generating units that provide essential system support or backup services.

@This financial restructuring and redistribution of assets will be a complex and controversial aspect of this scenario for utilities, shareholders,regulators, and ratepayers alike. If not handled with caution, the transactions could result in a sizable transfer of wealth and assets from the regulated sectorsto the unregulated generators. There could be a tremendous incentive for owners of low cost older plains to move them as quickly as possible into theunregulated market so as to capture a greater profit thanwould be allowed under regulated historic embedded cost pricing. This could leave a utilityshigh cost plants in the regulated sector.

70SW, for exmp]c, Joskow and Schmatensee, Supra note ItPP. 212-21s.


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Generators and distribution companies could seektransmission orders from FERC based on a publicinterest standard similar to that in scenarios 2 and 3.Unlike scenario 2 there would be no mandatorywheeling for retail customers. It is expected, how-ever, that many generators and transmission compa-

nies would sell directly to large retail customersunder arrangements for bypass or standby paymentsto local distribution companies.

Distribution companies under scenario 4 wouldretain an obligation to serve, that is, to plan for andsecure adequate electricity supplies for the needs oftheir franchise customers. But with little or nogenerating resources of their own, they would behighly dependent on the willingness of independentsuppliers to construct needed capacity and theavailability of adequate transmission capacity tomove the power. Competing generating companies

would be under no legal obligation to build newcapacity, but would commit to do so if and when themarket price was sufficient to assure them anattractive return. Thus, in the generating sectormarket price signals would displace the utilitystraditional service obligation as the principal mecha-nism for assuring the availability of adequate andreliable power supplies. The experiences of thenumerous independent distribution companies thatcurrently obtain their electricity supplies and trans-mission services from larger integrated utilitiescould provide helpful precedents.

Transmission under scenario 4 would begin toassume some of the characteristics of a commoncarrier, but the transmission entity would retainsome discretion over who was eligible to obtainservice and would not be required to providewheeling to retail customers. The transmissioncompany could not impose unreasonable or dis-criminatory conditions on transmission access. Itcould, for example, specify minimum operatingstandards to preserve system reliability and requireadvance notice and financial commitments to re-serve firm transmission capacity.

Independent generating companies and local dis-

tribution entities would be linked by these newlycreated transmission entities, which would serve asregional controllers and dispatchers of generatingcapacity. In addition to this primary role, transmis-sion utilities could also serve as regional power

brokers which would make the market for, and beparty to, contracts negotiated between independentgenerating companies and distribution entities. Trans-mission companies might also assist in the creationof secondary futures markets as a means of hedgingagainst the added uncertainty associated with a

vertically segregated industry.Under scenario 4, transmission access would be

achieved primarily through voluntary negotiations;however, the separate transmission entities wouldhave an obligation to provide adequate transmissioncapacity to support the industrys new competitivestructure. FERC would also have the authority toorder wheeling for customer utilities on a publicinterest standard if satisfactory voluntary arrange-ments could not be reached through negotiation.With FERCS endorsement, States might requirenondiscriminatory access to transmission services as

a precondition for allowing existing regulated gen-eration, transmission, and distribution companies toparticipate in the new competitive system. Trans-mission access for retail customers would be kept ona voluntary basis.


System reliability and coordination would bethe responsibility of the regulated transmissioncompany or transmission-distribution company. Thetransmission company would take over many of theday-to-day functions of system coordination that arenow the responsibility of local utilities and control

centers. Operational responsibilities of power sup-pliers and local distribution companies would bespecified in contracts with State and Federal over-sight.

Dispatch, unit loading, and maintenance sched-ules would be administered by the transmissionutility under various contracts between power sup-pliers and: 1) regulated transmission companies, 2)regulated distribution companies, and/or 3) retailcustomers. Dispatchable generators would be con-trolled by the transmission company and compen-sated for their services according to contract terms.

Emergency curtailments for retail customersserved by local distribution companies would beallocated according to State-regulated curtailmentpolicies. For other customers, curtailments would bespecified in contracts with the transmission and


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Chapter 3-Alternative Scenarios for Increasing Competition in the Electric Power Industry q 85

generation suppliers. Curtailment of transmissionservices will be based on contractual terms, Stateand Federal regulation, and system reliability con-siderations.

Generating Capacity Additions: Future electric

supply requirements would be determined by thelocal distribution company through its planningprocesses with State oversight. Competition forsupply contracts would be open to all generatingsources, as in scenario 3. Independent generatorswould plan and build new plants based on utilitiesindications of need and their own strategic plans andprofit expectations. Transmission utilities could alsocontract for generating capacity to aid in preservingsystem reliability and to allow them to serve as powerbrokers subject to State and Federal regulation.

Transmission Additions: The regulated trans-mission or transmission-distribution companies wouldhave the obligation to provide transmission capacitynecessary to support wheeling needs for instateutilities. (This assumes of course that wheeling iseconomical and that wheeling customers are willingto pay for the additional capacity needs.) Statescould require transmission capacity planning toinclude consideration and coordination of regionaltransmission system needs.

Distribution additions would be the responsibilityof the locally regulated distribution utility, with over-sight by State authorities-same as in scenario 3.

Conservation and load management programswould be provided by local distribution companies,possibly in conjunction with transmission compa-nies. State regulators could require consideration ofpotential contributions from load management andconservation strategies as part of the distributionutilitys least-cost planning processes in this andother scenarios.

SCENARIO 5Common Carrier Transmission Services in a Disaggregate,

Market-Oriented, Electric Power Industry

Scenario 5 would break up the vertically inte-grated electric power industry by divesting genera-tion, transmission, and retail distribution segments

into separate entities. All customers (both wholesaleand retail) would have the option of purchasingpower from any willing supplier with the assurancethat such power could be delivered under reasonableterms and conditions. Distribution and transmissionservices would remain tightly regulated, but entryand bulk power pricing in the electric generationsegment would primarily be left to market forces.

The competitive generation segment would in-clude formerly regulated utility generation opera-tions, QFs, and IPPs (although such distinctionsamong power producers would no longer be rele-vant). Unlike scenario 4, ownership of generatingcompanies would be completely severed from own-ership of transmission and distribution companies.The regulated transmission companies would ex-plicitly be required to provide transmission servicesas a common carrier (i.e., nondiscriminatory service

based on approved wheeling tariffs to all partiesrequesting service) and to provide adequate trans-mission capacity. Wheeling to retail customerswould be available, although as a practical matter itwould likely be limited to very large industrialconsumers. Federal and State policies might encour-age greater aggregation in transmission services tocreate coordinated large regional transmissionsystems-either through mergers and acquisitionsor through operational agreements among neighbor-ing systems.

Background

Scenario 5 includes many of the key elements ofthe preceding scenarios including vertical disinte-gration of industry structure, market-based pricingof generation, and transmission access. Under sce-nario 5, any generator could sell to any buyer, anybuyer could purchase from any seller, and thetransmission company would have to wheel thepower. Proponents of this radical restructuring of theindustry cite a number of technological and publicpolicy reasons for adopting this approach.

71

Chiefamong them are: the decline of the natural monopolycharacteristics of the generating sector; the excessgenerating capacity in many regions; and the pre-sumably higher social and economic costs to society

7 I s = f o r exmp l e , p h l l l p R . OCoMor , R O & I I G, B u ~ a , a n d Wayne P. OIson, Competition, Financial Imovation, and Diversity in tie EIwtric powerIndustry, Public Ufilifies For?nighdy, Feb. 20, 1986, pp. 17-21; Philip R. OConnor, The Transition to Competition in the Electric Power Industxy,Illinois Commerce Commission (presen!ed at the American Power Conference, Chicago, IL, Apr. 22, 1985); and Matthew Cohen, Essay: Efficiencyand Competition in the Electric Power Indusq, 88 Yule Luw Journul 1511-1549, June 1979.


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of imperfect regulation compared with imperfectcompetition.

The key to having a vigorously competitive andeconomically efficient electric power industry lies inthe evolution of new institutions and arrange-ments.

72This is unlikely to be accomplished merely

by allowing distribution utilities and others to shoparound for the best bulk power deal without firstestablishing the necessary competitive market envi-ronment. Among the changes in industry regulation,operations and structure that would lead to achieve-ment of this scenario are:

q

q

q

q

q

encouraging the regionalization of utility regu-lation and operations by expanding the use ofcentralized dispatch of generating capacitywithin States or regions;creating power brokerage and auction markets;realigning Federal and State regulatory author-ity to allow States clear authority in intrastatebulk power and wheeling markets;creating federally approved interstate regula-tory compacts for governance of central dis-patch, auction, and brokerage systems; andassuring open and fair access to transmissionsystems either through mandatory wheeling orthrough creation of new regional transmissionentities.

Implementation

Scenario 5 would require rewriting of existing

State and Federal laws and regulations governingelectric power generation, transmission, and distri-bution. Although deregulated, the competitivegenerating sector would need continuing oversightto assure the existence of workably competitivemarkets. In addition, new contractual arrangementsand industry practices would have to evolve toassure effective operations under a new disinte-grated, market-based industry structure, and topreserve reliability and stability of interconnectedelectric power systems.

Regulators would approve the transmission com-panys wheeling tariffs for both utility and nonutilitygenerators. FERC (or perhaps a regional authority)would have the power to issue wheeling orders tofacilitate bulk power transfers if satisfactory ar-rangements could not be made with the transmissioncompany. Wheeling rates would be designed toinclude adequate signals to assure construction ofnew transmission facilities. The transmission utilityalso would have an obligation to plan for and buildadequate and reliable transmission capacity to serveregional needs and to accommodate interregionaltransfers. Wheeling customers could contract fordifferent levels of service (e.g., firm, interruptible).

Bulk power prices would be set through competi-tive markets and passed through to ratepayers.Power purchases by distribution companies andretail rates would be regulated by State authorities.Retail rates and the need for and prudence of bulk

power purchases by distribution companies wouldbe regulated as now by State authorities. Ratescharged by transmission companies acting as powerbrokers and reselling to distribution companieswould also be subject to regulatory oversight toassure that there was no cross-subsidization ofoperations or anticompetitive practices.

This scenario would involve the mobilization andtransfer of billions of dollars in utility assets tonewly established entities. Because of the complex-ity of the transactions, it is likely that many yearswould be required to complete an orderly transi-tion.

73The essential step in achieving this scenario

would be the establishment of a separate andfunctional common carrier transmission entity. Thiscould be accomplished simply by spinning off thetransmission assets and operations of a verticallyintegrated utility to a new private entity. It could alsobe accomplished through legislation to create feder-ally chartered and publicly held regional transmis-sion (and dispatch) corporations to acquire alltransmission lines and facilities within a designatedregion.

72s=JO*OW~d sc~~m=, suPam~eI,tipp. 104-1 (M, for their scenario4 which adopts a similar approach. See also Edison Electric kstitute,Deregulation Issues and Concepts, 1981. The industry structure of scenario 5 resembles that proposed for the utility industry in the United Kingdom

after privatization. See ch. 2 box 2-B. The U.S. industry and regulation structure are far more complex than the present government-run British system,so that direct comparisons with the U.K. proposal are of limited value.

73A det~]~ trwition plm for ~hiev~g~s ~~ ofindus~h~beenoutlined conceptu~]y by fiillipOConnor,fo~er Chairman Of the I]linOiSCommerce Commission.OComors lo-step process would gradually transform the industry into a vertically disintegrated structure with market-basedpricing of generation evolving in conjunction with regulated transmission and distribution entities. OComor,supra note71.


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Chapter 3--Alternative Scenarios for Increasing Competition in the Electric Power Industry q 87


System reliability and coordination would bemaintained by the separate, regulated transmissioncompany. The operational responsibilities of powersuppliers and local distribution companies would bespecified in contracts with the transmission com-pany.

Dispatch, unit loading, and maintenance sched-ules would be determined by the transmissioncompany in negotiation with generators and gov-erned by contracts as in scenario 4.

Emergency curtailments of electric power andtransmission services would be allocated accordingto contractual arrangements and/or State regula-tions.

Generating capacity additions would beplanned and built by independent generating compa-

nies based on their strategic plans, profit expecta-tions, and transmission and distribution utilitiesindications of need, Distribution and transmissioncompanies (jointly or separately) would projectfuture demand and determine the desired mix ofgenerating resources to meet those needs beforesoliciting contract bids from power suppliers.

Transmission additions would be planned andbuilt by the transmission utility which would havean obligation to provide adequate and reliabletransmission capacity necessary to supply the wheel-ing needs of anticipated customers. Regulatoryauthorities may require consideration and coordina-tion of regional transmission capacity needs inplanning.

Distribution additions would be planned andbuilt by the local distribution utility as in scenario 4.

Conservation and load management strategieswould be developed by local distribution companiesin cooperation with transmission companies andregulatory authorities.

ANALYSIS OF THE SCENARIOS

These scenarios were used by OTA and its

contractors in its assessment of the technical andinstitutional feasibility of expanding competitionand opening up transmission access. Chapter 5 looks

at the technical aspects of changing the electricpower infrastructure to accommodate the scenariosand some cost and performance implications. Chap-ter 6 examines the regional characteristics of theelectric power industry and how they might affectthe successful implementation of the scenarios.

Finally, chapter 8 examines policy options forresolving some of the technical and institutionalproblems identified in OTAS analysis.

There are many other possible scenarios thatcould be used. Selection of these five reflect the best

judgment of OTA staff and others about the range ofpossible future industry structures that may be mostuseful in testing the technical feasibility of adaptingexisting bulk power systems to change.

The five OTA scenarios were developed andanalyzed for the limited purposes of this assessment.These scenarios are not intended as legislative

policy options. They may not be, in some respects,the optimal or most probable policy choices inconsidering the creation of a new regulatory andinstitutional framework for the U.S. electric utilityindustry as a whole.

Many difficult and controversial aspects of mak-ing the electric power industry more competitive arenot included in OTAs review of the technologicalfeasibility of expanded competition and increasedtransmission access. We did not conduct an exten-sive analysis of all the legislative and regulatorychanges that would be needed to implement each of

the scenarios. For example, we did not analyze indetail the considerations to be addressed in decidingon whether to grant a petition for mandatorytransmission access under a revised public intereststandard. Nor did we address the very thornyproblems of how to divide the assets and liabilitiesof existing utilities among ratepayers, shareholders,and regulated and unregulated subsidiaries. Issues ofnational energy policy were also beyond the scope ofthis study. Therefore, we did not examine in anydetail the possible implications of changing PURPAspreference for certain classes of cogenerators andsmall power producers. OTAs study may, of course,

help to identify many of these issues for Congress.The scenarios may also prove a useful tool foranalyzing these policy options and responses.

Electric Power Industry Competition

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