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Dr. Belovicz's Insights on Electric Utility Deregulation: An Overview of Re-regulation, Study notes of Economics

This document, prepared by dr. Bill belovicz, provides students with an overview of deregulation (or re-regulation) in the electric utility industry. Topics such as the characteristic of regulated and deregulated industries, the role of revenue requirement models, stranded costs, market power, price effects, and opportunities for consumers. Dr. Belovicz also discusses the california deregulation experience and its implications.

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Pre 2010

Uploaded on 07/28/2009

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Notice to students enrolled in ECON 4333
This document was prepared by Dr. Bill Belovicz. Dr. Belovicz served as
Chief Economist to the Arkansas Public Service Commission for 9 years. He
served as a visiting faculty member at Arkansas State University in the
Spring semester of 200 1. Dr. Belovicz prepared this document to give
students enrolled in Government Regulation of Business an overview of
deregulation (or what Dr. Belovicz terms "re-regulation") in the electric
utility industry.
Be advised that Dr. Belovicz participated in a chat/virtual classroom with
students on April 11, 2001. You can read this chat at the Blackboard web
(go the virtual classroom archives).
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Notice to studentsenrolledin ECON 4333

This documentwaspreparedby Dr. Bill Belovicz. Dr. Belovicz servedas

Chief Economistto the ArkansasPublic ServiceCommissionfor 9 years.He

servedasa visiting faculty memberat ArkansasStateUniversity in the

Spring semesterof 2001. Dr. Belovicz preparedthis documentto give

studentsenrolledin GovernmentRegulationof Businessan overviewof

deregulation(or what Dr. Belovicz terms"re-regulation")in the electric

utility industry.

Be advisedthat Dr. Belovicz participatedin a chat/virtualclassroomwith

studentson April 11,2001.You canreadthis chat at the Blackboardweb

(go the virtual classroomarchives).

'"~,:'-- ,J I ...

,ifii

Bill Belovicz March 28, 2001

Electric - Regulation-To Deregulation(Reregulation)-To ?????

Characteristic Regulated Deregulated - Competitive Goals or Issue Service Allocatedby StateRegulatory Competefor customersfor energy Territory Body element,and other servicesdeclared competitive. Structureof Generation,transmission, Generation,transmission,and Industry distribution,billing, customer distributionseparated.Goal is to service,etc. verticallyintegrated makegeneration competitive. within jurisdiction. Investor Owned Transmissionstill regulatedby FERC, Utilities operatecontrol centers. but new forms of regionaltransmission Regionalcooperationaccomplished control developing. The California throughPowerPools. Also to some IndependentSystemOperator(ISO) is degreebetweenstatejurisdictions. one example. Distribution andother Transmissionregulatedby the servicesnot declaredcompetitivestill FederalEnergyRegulatory regulatedby state. Commission(FERC).

Rate RevenueRequirementmodelwhich RevenueRequirementmodelapplies Determination is an effort to simulatecompetitive to distribution andother pricing. The modelis Revenue noncompetitiveserviceexpenses.

Requirement= RateBase* Transmissioncomponentwould be

AllowableRate of Return+ dependenton form of transmission Expenses,developedfrom a coordination. Energybecomes weathernormalizedtest year. The competitive. !. overall revenue requirement is then. allocatedto the differentrate classes.Variancesfrom these tariffs aretreatedas special contractsor newly adjustedtariffs requiringstateregulatorybody approval. This modelappliesto the nonenergy portion of the bill. Energycostsare"passedthrough" to the enduser. Stateregulatory

body approvesinvestmentand

policieswhich affect energycosts.

I

"

:;~.. ..^. -

Opportunities Pricetaker with no options other Canexpectto receiveoffers pretty andrisks for than amountof energyconsumed. muchaswe now do for smallusers. Don't know the energycomponent telecommunications.The Ohio Public costuntil bill arrives. Stability Utility Commissionhasa web site for important. comparinggaspriceswhich they have deregulated.The site is calledApples -to-Apples. Consumerscanlock in the energyrate for one or two years, or choosea variablemarketprice. Severalcompanieshavedeveloped programswith which consumerscan receivea guaranteed total annual bill which is independentof weather fluctuation. Consumereducationis a major issuein this area.

.. ~^ ..~ ;;-; -' ~

-~- , *j~$~"-'i";~ ... 'i~~ ...,' ," , California Requiredthat their investorowned utilities auctionoff their generation. Put a price capon generation(energy)

. which guaranteeda 10percent

~ reductionin residentialbills. Average ,7#)"~ C-t:~.^ .d^.

~.;:;r;~~~~; (l.WOrnIareSI entlal bill h d b a een $

~~':~ to $60. Has refuse to approve plant

c".,,~~~'~~~~f~J additionsfor ab?ut 10.~e.ars.Put cap ~~?jf:j;~'?;i-c cc."" on wholesalepncesutIlitIescould pay ~~i;t,~Ii~ ..."",'eO for importedenergywhich wasbelow. ~,,?;:'.,i market. In the last year demed a ~;~j7 request by PG&E (I think) to increase ~~;; their future purchasesof energy at a

"; fixedprice. Recentlyusedan

-""'-, ;,i.~""., EmergencyPowersAct to confiscate lil-",~ :::::~t:~~~~e

,ff~,^ :~~^ '7,,'J!~~~~,,':!,j;.,~ ~:,", ;~~j^ stateto Purchaseenergy at lessthan :;,:!~,:g~;; the currentmarket. Market power ~,~);~t:: ':1 issueshavebeenraised(andseveral ii7'", ~ inquiriesconductedandongoing) ~"'C'",,' ~:;"'r""' regardinggeneratorowners ,-' withholdingpower to manipulate prices. ISO establishesprice with the following rule: all transactions ~Cf"~ conductedduring an hour will clearat ;'~ the price of the last transactionfor that ,;:;"i-:f:;;{'~~~^ ,'Pc,:^ hour"^ Dunn.^ g t e astwee t eh i k h ~"'~-',..,,"'"",i" '~:f;:.';i!t;:i:) CaliforniaLegislatureandthe Utility ~~~"~-j ~;i:){:,;:~~,"",.it. Commis~ion- haverecommended c,;;1~~ residentialrate increasestotaling 65 percent. They arein the processof determininghow quickly to phase themin. I .. -" ,'c.. _Cy- .'