Electric Utility Deregulation--Are the Financial Costs and Power Shortages Reasonable Or Is There a Better Way?
Commentary by Jonna M. Tarpoff, PE, Principal, Tarpoff Moore Engineering, Inc.   jtarpoff@tarpoffmoore.com    www.tarpoffmoore.com

Before the advent of electric utility deregulation, the occasional hot summer or other severe weather caused electric power shortages particularly in the Northeast. Traditionally, geographical areas with high population densities and low power generation capabilities have combined to cause brown-outs, blackouts or rolling blackouts. In the Northeast, years of regulations restricting air pollutants have restricted the fuel of power generation plants to oil, nuclear, and hydroelectric instead of dirtier fuels like coal or recyclables such as tires and other high heat capacity rubbish.

Studies to predict power usage trends for the future were a continual way of life for local electric utilities. Generation capacity was carefully determined to match demand sometimes calling for new plants sometimes calling for plant expansions and equipment upgrades. The utilities were constantly trying to find the right balance for demand and generation capacity as well as the right balance between generation costs which could be financed by existing rates and by rate increases. The process for justifying rates allowed through the state Public Utility Commission (PUC) was long and painful. Most utilities, when asked, wanted a better way to satisfy the demand/capacity and cost/regulation problem within the confines of pollution regulations.

Pollution regulations were probably not going to be lessened. And because most utilities were already managing peak demand periods by offering large power consumers incentives to reduce demand and flatten the peaks, the demand/capacity part of the equation was also probably not going to be improved. Therefore, the only avenue for utilities to meet demand at the lowest capacity cost was easement of the cost/regulation side of the equation. State regulation of what a utility could do and could not do to meet demand AND to make money to finance the equipment for meeting demand had to be re-evaluated and reduced.

This was the course of action pursued by the electric utility trade association. Larger electric utilities had more seats on the board and more influence; smaller electric utilities had little influence over the outcome of trade group studies and government lobbying efforts. Within a climate of federal deregulation for most industries across the nation, the stage was set to push the Federal Electric Regulatory Commission (FERC) to allow electric utilities to operate their businesses with less governmental oversight. In the end, companies like Pacific Gas & Electric (PG&E) and Enron influenced the direction of the electric utility trade group to pursue policy changes by FERC allowing utilities to engage in non-generation activities.

Activities such as buying and selling energy contracts through a newly formed electric power commodities market would now be possible. This required the electric power grid blanketing the country to be open to all sellers of power whether or not they actually generated power. The utilities thought that demand in their territories could be satisfied by purchasing energy from others feeding the grid 1000's of miles away. Developing capacity to satisfy their normal territory demands would no longer be necessary since they could buy it from the grid. As a result, very little new capacity was introduced while demand grew during the extended economic expansion of the 90's.

Some utilities like, CG&E, engaged in both activities, as a broker and as a producer. As a broker, they sold contracts or promises to furnish power at specified rates to producers needing additional capacity and hoped to buy that power at a cheaper rate later from others. As a producer of excess electricity within their territory, they sold the excess to others to satisfy some of those contracts. But during the summer of 1999, as their own territory demand out stripped capacity during a heat wave, they would be forced to buy power at exorbitant rates to meet contracts causing millions of $'s in losses and hundreds of Cincinnati customers without power during rolling blackouts as capacity was pulled from the Cincinnati portion of the grid to meet contract terms. In the end, the utility would be forced to find the funds to make up the losses. The methods used to cover the losses could include rate increases, income from additional power generation plant investments, and reduced shareholder dividends. As a last resort, the utility, like PG&E, could declare bankruptcy. CG&E, however, chose to scale back energy trading to reduce exposure and to increase power generation capacity.

In addition, some utilities like Enron sold their power generation plants and focused entirely on buying and selling energy contracts; selling power contracts to producers and purchasing power, hopefully at a lower price, from other producers including those formerly owned generating plants. When bets went the wrong way, they had no funds to make up the losses. Complicated partnerships served as a source of cash. And the bets continued, like a gambler who has no real job.

The grid, meanwhile, is open for other non-traditional power producers to supply power in an effort to meet national demand. And, grid distributors, such as the local territory utility, must purchase the power at reasonable rates. If the power is produced at costs higher than traditional costs and the fuel source is acceptable to the federal energy commission, the producer may be eligible for subsidies to make up the difference. The development of cogeneration capacity is key to our deregulated energy policy. And, probably key to the goal of reduced foreign oil dependence.

Alternate electric energy sources are gaining acceptance slowly in order to replace the capacity previously reserved for nuclear and hydroelectric power. Since nuclear power has never gained acceptance by environmentalists, even though it is considered both a safe and clean source of power by this country and by many overseas countries, and hydroelectric power is subject to environmental review and limitations, other sources such as solar and wind power are gaining technological and thus cost advantages. Large fields of solar panels exist in Arizona to supply the southwest grid. Turbines driven by wind are found on farmland in Colorado, Illinois, South Dakota and other states and are spreading rapidly. It is estimated through knowledge collected by mapping wind velocities and endurances that more than enough wind power exists in the US to feed the entire electric power grid provided changes are made to expand or open the grid node points for accepting the power.

Is all this change worth it? Couldn't we just go back to the way we were before deregulation of the electric power industry? Unfortunately, no, we must reduce dependence on coal and oil--domestic and foreign. Domestic coal reserves are estimated to last just 50 years longer, which is 15 years longer than stated in 1975. Domestic oil can not replace the large amounts of foreign oil we consume yearly. Therefore, we must explore change including allowing utilities to experiment with new power allocation strategies. The challenge for us, as engineers, is to understand the issues and to be involved in the process of change, through leadership and through technological developments.