Asia, Babcock & Wilcox, Edison, General Electric, North America

POWER-GEN Americas 94 focuses on change and competition

Issue 1 and Volume 3.

POWER-GEN Americas `94 focuses on change and competition

By Denise Warkentin

Electric Light & Power

“Toto, I have a feeling we`re not in Kansas anymore,” said Christopher Maloney, Mission Energy Co. director of business development. Maloney spoke during a session entitled “A Brave New World: Who will Survive?” during the POWER-GEN Americas `94 conference held Dec. 7-9, 1994, in Orlando, Fla.

Maloney said 1994 was a year of unprecedented changes and that 1995 will usher in a new era that will “challenge the thinking of the past.” The past year, he said, brought a number of trend-setting changes to the forefront. Maloney cited the emergence of independent power producers as a trend toward short-term contracts. In addition, he said, the greater than usual number of electric utility mergers and joint ventures also gives credence to the fact that the world the utility industry once knew is quickly on its way out.

Regulatory issues, stranded investments, the California retail wheeling initiative, regional transmission groups, qualified facilities, bulk power marketing and viewing electricity as a commodity to be traded on the open market are all contributing greatly to the myriad of trends that are the norm, Maloney said. These items, as few as 10 years ago, weren`t on the menu for the industry.

Competition not an end in itself

Competition should not be viewed as an end in itself but rather as a means to achieve results, said John A. Makuch, Consulting Services International president.

“There seems to be a widely held belief that all the ills of the electric power industry, including both generation and transmission issues, will be solved if only more competition can be introduced into the process,” Makuch said.

This reasoning is flawed because proponents do not know that the free market will automatically create the desired results since no one is sure what the results will be. “This philosophy is similar to taking all the officials off the field in a pro football game and hoping that nobody gets killed,” Makuch said.

Universal access to electricity has been achieved through a regulated utility system at relatively affordable rates. These rates are a combination of social policy and market power. “Most people who have had experience with both free markets and government are inclined to believe that the free market will produce a lower cost for electricity. Exactly who will benefit from that lower cost and whether or not universal access will be threatened is less clear,” Makuch said.

Free market efficiency

Proponents of retail wheeling contend that the free market will work efficiently because buyers and sellers will be able to make connections without a utility and/or its public utility commission acting as an intermediary. Although efficiency is said to be one major attribute of retail wheeling, Makuch said he doubted that it would be for those without market power.

Captive residential customers and those industrial customers without market power will not benefit from this efficiency. “Free market systems are great for entities with free market power,” said Makuch.

“As a homeowner and small business owner,” he said, “I have grave concerns that the cheapest power available will go to the likes of Wal-Mart. My business and I will still need the protective wing of a regulatory agency.”

Makuch said he is under no illusions that he would ever be presented with a choice of “X cents/kW from one supplier and Y cents/kW from another.” He mused that if retail wheeling reaches homeowners and small businesses in the future, the scenario would be more like this: “X cents/kW times the amount of power you used during the night of the full moon divided by the amount you used the following Saturday morning plus the arc tangent of your age expressed in radians.”

He said American citizens are not used to hearing “thank you for using Free Market Power & Light.” More importantly, we are not used to hearing “due to unusually high demand, your request for power cannot be accommodated right now. Please try again later.” He said it will be imperative for regulation to play a key role to manage the electric highway system without traffic jams.

Makuch said the industry ought to abide by a new motto: render onto the free market what the free market does well and to the regulated utilities what they do well. He said independents ought to generate power and contract directly with large users, and subject to some restrictions, they should be allowed to use the transmission and when necessary, distribution systems. “Carve out a role for the rate-based utilities which goes beyond operating the distribution systems.”

Makuch said if the industry wants to have a “sensible” mix of free market and rate-base power, the quest to find ways to keep independents from stealing their most attractive customers must be abandoned. “Utilities should talk to PUCs about those things which only utilities can do well. Once that is established, the issue of compensation can be tackled intelligently,” he said.

Competition represents

revolutionary change

“Today`s change is revolutionary, not evolutionary,” said keynote session speaker Robert Ruisch, Black & Veatch junior managing partner, energy group. This fact need not send the industry into a tailspin. “It`s not all doom and gloom. There is room for lots of opportunities.”

“Change will occur fast,” Ruisch said, “and people are just kidding themselves if they don`t believe that retail wheeling is on the way. The time is near when households will be able to choose their electricity supplier.” He said soon electric utilities will be calling people offering them the best electricity deal.

Ruisch said there will be a number of losers in the new, competitive market, but there will also be big winners. “What we`ve seen so far,” he said, “is just the tip of the iceberg.”

While Ruisch believes there “is no such thing as a sustaining industry leader” in a deregulated market, he said the “big winners” will be the utilities that follow the technology trail. Competition will promote new technologies to put those that follow the technology path on the winning end and those that do not follow on the losing end, he said. Due to an information-based culture, electric utilities will find that information technology is critical to obtaining and retaining a competitive advantage.

Big winners, Ruisch said, also will have thrown out the old mindset that said “people are the most expendable asset we have,” and replace it with the mindset that views “people as the most valuable asset we have.” It is no secret that the utility industry will employ far fewer people than it did in the past. Outsourcing of tasks related to the legal, construction and engineering areas will become all the norm. The people who do work at electric utilities, Ruisch said, will have many more duties than ever before.

Belief in competition vital

Electric utilities must not only reposition themselves to be competitive, but they must also reposition to maintain a sound financial and organizational condition, said William Rockford, Chase Manhattan Bank senior vice-president, global power.

Rockford said utilities that will survive a competitive electricity market will:

1. Believe that there will be deregulation and competition. Companies that do not are in “fatal denial.”

2. Understand that being low cost is not enough.

3. Place a premium on a corporate structure which operates along client lines and not on functional lines.

4. Place marketing professionals in senior positions.

5. Sell their product aggressively.

6. Act as agents of change within the industry.

7. Ignore stranded investment problems but demand an end to rate-base treatment.

8. Institute dividend payout ratios that are similar to other industries.

9. Change accounting methods so they are similar to other industries.

10. Change their corporate culture.

Utilities weigh costs and benefits

According to Ashley Brown, Harvard University`s John F. Kennedy School of Government`s Electric Policy Group, and RCG/Hagler Bailly Inc. consultant, those who believe that deregulation and competition isn`t coming apparently aren`t paying attention. “It`s only a matter of time,” he said, adding that “various forms of retail wheeling already exist primarily among equipment vendors.”

Electric utilities are questioning whether vertical integration is, in fact, a thing of the past and are looking at the costs and benefits as well. As the “whit- tling away” of the electricity monopoly advances utilities contracting with high-cost generators are strategically questioning what advantages a deregulated market would have on them and their generation choices. These questions, Brown said, are driven by technological change and their own ability to control generation and government policy.

Conceding that it does appear that, as a whole, the vertically integrated electric utility industry is on its way out, Brown said that in the transmission area a monopoly-like setup will still be in place. “Transmission in a deregulated market has all the characteristics of a traditional monopoly,” he said.

Brown predicted that in the coming competitive market, transmission will be tightly regulated due in part to the fact that demand for transmission will grow with deregulation. “Transmission will remain a monopoly service to be regulated,” he said. And while transmission service will be a regulated monopoly, generation will become somewhat relieved of its heavy burden of regulation.

As for transmission, diversification and maximizing the value of distribution franchises is on the hearts and minds of industry leaders. Utilities need to research how they can capture value with their distribution franchises and may need to re-evaluate some of their non-utility business activities. Some utilities will find it to their benefit not to offer demand side management (DSM) programs, while others will find it beneficial. DSM programs are offered for the purpose of retaining customers and they may be worth saving.

Different approaches, same end result

“The transition period is tougher than full-scale competition,” adding that electric utilities will be required to draw on their individual creativity to handle the transition period, according to Robert Manning, Commonwealth Edison Co. senior vice-president.

However, there are several common structural changes in the way utilities do business that are seminal to remaining successful as the road is bridged from a regulated era to a competitive era. While the method to achieve the results may differ, the end result–achieving competitiveness in the open market–will be the same.

The common structural changes are:

– A restructured customer interface with emphasis on achieving cost leadership. This will involve resegmenting the customer base. Segmenting industrial customers into as many as 100 different groups, with each group representing a specific interest was suggested.

– The push to take advantage of wholesale markets. It has already become vital for utilities to know very detailed market information, including the opportunities that exist through both buying and selling. However, a competitive market will command such knowledge and may directly contribute to a utility`s success or failure in wholesale markets.

– The willingness to help shape the future of wholesale and retail markets. A “jurisdictional challenge” between state and federal authorities has brought about the need for electric utilities to have their voices heard in helping to shape the new markets and the way they are regulated. Recovery of assets that are left stranded or unfunded as a result of retail wheeling should be addressed. “Losses here will be 20 times what the gas industry had,” Manning said. It will be essential in the retail wheeling scenario for utilities to be relieved of the duty to serve if a truly competitive market is to be achieved.

– The development of unregulated subsidiaries. Utilities need to approach the development of unregulated subsidiaries as they would any other business transaction. These subsidiaries need to be businesses that benefit the utility and its customer base.

Projects win recognition

Power Engineering and Power Engineering International magazines presented four North American utilities with Project of the Year awards during the keynote session. The utilities, along with their major vendors, were chosen for their economic, social and environmental merits.

The award winners and vendors follow:

-Nova Scotia Power Inc.`s Point Aconi power plant. Major vendors: Sargent & Lundy, Mitsui & Co. (Point Aconi) Ltd., a subsidiary of Mitsui &

Co., Ltd., Tokyo, Japan, and Pyro-power Corp.

Naheola Cogeneration Limited Partner-ship`s chemical recovery and co- generation facility. Major vendors: Rust Engineering, Babcock & Wilcox and General Electric.

City of Fayetteville`s (North Carolina) turbine ice peaking power project. Major vendor: Burns & McDonnell.

Florida Power & Light`s Lauderdale Units 4 and 5 repowering project. Major vendors: Raytheon Engineers and Constructors, Henry Vogt, Westinghouse Electric and Bechtel Construction Co.