Electricity Restructuring: Looking Back and Planning Ahead

Transcription

1 Electricity Restructuring: Looking Back and Planning Ahead Theresa Flaim, SVP, Strategic Planning & Analysis Tennessee Valley Authority Presentation to Harvard Electricity Policy Group Cambridge, MA May 19, 2005

2 2 Outline of Presentation* I. Looking Back II. What were the goals of restructuring? What did we get largely right? What did we get largely wrong? Looking Ahead What should be the goals going forward? What hard choices do we have to make regarding retail customers? How does our unique U.S. institutional structure affect how we proceed from here? What should the HEPG focus on in the future? *The views expressed herein are my own and not those of the Tennessee Valley Authority.

3 I. Looking Back: What were the goals? The problem Electricity prices were outrageously high (in high-cost states) Management and/or regulatory mistakes were perceived to be the problem The hope that competition in generation would: Result in cheap electricity Shift the cost of management mistakes and forecast uncertainty from customers to suppliers Lead to all kinds of nifty new value-added added services 3 Punish the incumbents Incompetent utility managers Misguided regulators

4 4 I. Looking Back What did we get largely right? How to address stranded cost recovery Initially thought to be the unsolvable problem It s largely resolved and rarely mentioned today Basic principles of workable competitive markets Rules need to reflect underlying reality of the grid Core features of workable wholesale markets Independent operation of transmission Voluntary energy spot markets Locational marginal pricing Congestion revenue rights

5 I. Looking Back - What did we get largely wrong? Potential for short-term term efficiency gains in electricity generation Economics of commodity retailing How regulated (default) service would interfere with the development of a competitive retail market Mass market economics in particular* Potential for value added services Measures of competitive success The need to have workable wholesale markets before opening up retail markets for most customers 5 * The Big Retail Bust: What Will It Take to Get True Competition? Electricity Journal, March 2000.

6 6 I. What we got wrong: Potential for short- term efficiency gains in generation The myth Competition would reduce electricity costs an order of magnitude The logic: Spot prices were 2 to 2.5 /kwh Cost of new CC gas units were estimated to be 3-44 /kwh Cost of utility generation in high cost states was 6-88 /kwh The reality Low spot prices driven by: Cheap gas ($2 - $2.5/Dt) Excess capacity Recessions in NE & CA Mandated IPP purchases Competition brought real but relatively modest efficiency gains Forecast risk is inherent in the utility business Markets aren t any better forecasters than utilities Markets do allow explicit assignments of risk

7 7 II. Looking Ahead: What should be the goals now? Focus on getting workable wholesale electricity markets We don t have a choice It s the law of the land There is no serious support for rolling back wholesale market reforms Go slow on retail markets, at least for a while

8 8 II. Looking Ahead: What hard choices do we have to make regarding retail customers? Recognize the ugly economics of commodity retailing for the mass market Small loads Thin margins High transactions costs No value-added added services to offset higher costs Electricity supply is inherently risky and complicated Are small retail customers really able or willing to deal with the uncertainties?

9 9 II. Looking Ahead: Hard choices regarding retail customers (Flaim s( advice) We need some,, but not all retail load participating in wholesale markets to help mitigate price spikes But given the economics, is it a good idea to put small retail customers into the market? It will be expensive to force customers to switch Regulated default service works at cross purposes Consider If set too low, it prevents competition If set too high, most customers simply stick with default service due to inertia and wind up overpaying Limiting retail competition to large customers instead, at least for a while, or Encouraging incumbents to stay in commodity retailing and go after other incumbent s customers

10 10 II. Looking ahead: What roles will our unique institutions play? U.S. electricity industry is very fragmented both in ownership and regulation A revolutionary approach isn t feasible at this point because there s no critical mass of support for it That means progress is going to have to be incremental and evolutionary

11 11 Market Regions in North America Which region will make the biggest impact on evolutionary progress? Alberta IMO Grid West MISO NYISO ISONE PJM CAISO West Connect SPP TVA ERCOT Southeastern bilateral markets GridFlorida

12 II. Looking Ahead: What should HEPG focus on in the future? The HEPG should continue its roles As a unique forum for key decision makers to: Talk off the record Really listen to each other s concerns Figure out how to move forward Provide a relentless focus on Identifying and addressing the real underlying issues Making sure that key stakeholders are heard Next generation of issues should focus on: Dealing with more nitty gritty problems of getting to workable wholesale markets 12 Periodic history lessons when we start to repeat the same mistakes that sent us down this path in the first place