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Not long ago, American
energy market leaders viewed deregulation as way to improve profits
and trim consumer pricing by managing electricity and natural gas
creation and distribution more efficiently. Unfortunately, Enron’s
accounting shenanigans, rolling blackouts in California, and the
2003 Northeast blackout clouded that view significantly.
Energy leaders recently began making a more concerted effort to
make sure that the industry begins living up to the expectations
that come with an open market. Experts outlined and discussed the
myriad factors involved in this new era of energy distribution at
an IEEE-USA-cosponsored seminar, held in October at Notre Dame University
on “Ethics and the Changing Energy Markets.” All agreed
that the stakes are high, since electricity is a basic part of the
American infrastructure. “This industry is second only to agriculture
in its importance to society,” Frank Incropera, Dean of Notre
Dame’s College of Engineering, told the audience.
Though early attempts to let open markets define the industry bordered
on disastrous, many decision makers believe that things can settle
down and run smoothly. Eventually, consumers will enjoy the benefits
of better pricing, and well-run utilities will realize the rewards
associated with efficient management.
“There’s nothing about electric power that makes it impervious
to regulation by the market, said George Mason University professor
Vernon L. Smith, an EE and Nobel Prize-winning economist. “But
the market design has to honor the features of the industry, acknowledging
engineering and technical constraints.”
Conference Focused on Electrical Grid
Many speakers focused on the electrical grid, noting that electric
companies can follow the model set by other deregulated energy fields.
“Natural gas is the best example of an industry working well
after deregulation,” said William Hederman, director of the
Federal Energy Regulatory Commission’s (FERC) Office of Market
Oversight and Investigations.
Hederman, sometimes referred to as the “cop on the beat,”
said electricity providers have a long way to go before the electric
industry can even be considered to be a model for anyone. He noted
that that unethical action by Enron and others caused a loss of
faith on every side. Investors became reticent, holding down the
amount of available capital, while customers and elected officials
lost confidence in information provided by utilities and doubted
that regulators were protecting the public interest.
FERC responded by improving the response infrastructure and providing
more vigilant oversight and rules enforcement, Hederman continued.
He said utilities and related companies must operate with more regulation
than many other fields, so deregulation is not a precise description
of the industry’s move to open markets. “It’s more
restructuring than deregulating,” he said.
What Went Wrong?
Before setting rules for the future, the industry has to understand
why problems occurred in the first place. According to Hederman,
last year’s rolling blackouts and bankruptcies in California
won’t help create a model for making the link between problems
and deregulation. “You can’t learn any more about deregulation
from looking at California than you can learn about plastic surgery
from looking at Michael Jackson,” Hederman said.
That’s because most analysts contend that California’s
regulations actually created the problem. Foremost among them was
the law that fixed pricing for retail with market pricing for wholesale,
which made it difficult to maintain profitability.
“One essential fact is that the problems in California were
not created by deregulation, but by strong regulatory rules,”
said James Sweeney, a Stanford University professor and author of
The California Energy Crisis.
Experts have analyzed the Enron debacle heavily, laying bare the
interconnection between auditors, Wall Street companies and others.
These interconnections prompted people to ignore suspicious activity
in order to boost profits. More recently, watchdogs have been given
more insight into corporate activities which, in turn, has created
an atmosphere that’s more conducive to efficient operations.
“Markets depend on good faith and ethical actions,” Hederman
said.
Looking Ahead
Most energy providers accept the idea that regulations will help
ensure that energy gets delivered with few problems. Many are working
closely with regulators to make sure that regulations don’t
produce unexpected results, as they did in California and elsewhere.
“Good market rules facilitate competition and limit market
power,” said Joseph Bowring, manager of the market-monitoring
unit at PJM Interconnection, an energy provider headquartered in
Valley Forge, Pa.
As on the financial side of the issue, industry watchdogs will pay
closer attention to detail and will enforce the rules strictly.
The enormous scope of the 2003 Northeast blackout, which affected
states from New York to Michigan, affected tens of millions of people.
“The 2003 blackout was a turning point,” said Michehl
Gent, president of the North American Electric Reliability Council
(NERC), a Princeton, N.J., group that sets standards and monitors
compliance by bulk electrical providers around the country. “We’ve
taken an oath that this will not happen again.”
Gent promised that NERC wouldn’t hesitate to take definitive
action when it discovers problems. In the past, the fraternal feel
throughout the industry may have prompted NERC and others to overlook
what they knew needed to be done. Those days are now gone. “We’re
beyond voluntary compliance,” he said. “We will measure
performance and disclose lapses. We have put in sanctions for failure
to comply with standards.”
NERC worked within the ANSI process to create a readiness audit
program that it then integrated with existing compliance programs.
The combined audits will be conducted every three years to determine
how well utilities are performing. “That was the single most
effective thing NERC has ever done,” Gent said.
Separate Generation and Delivery?
Another suggestion for service improvements is to lessen the market
power of large entities by spinning out some of their services.
Prof. Smith suggested separating power generation from power delivery.
“We have to separate the wires from the energy providers. That
principle should be supported at the retail level right down to
the plug,” he commented.
In New Zealand, this approach led to the emergence of five retail
energy companies and common use of controls for turning off water
heaters and other products when necessary. Using some equipment
at off-peak times should be a key part of energy plans, Smith said.
“There should be higher charges for consumers who buy at peak
times,” he added.
However, several hurdles will have to be overcome before this approach
can work. For starters, to turn off equipment to minimize peak usage,
companies will have to install technology in homes and offices.
The necessary microprocessor-controlled meters are available, but
the industry has been slow to adopt them.
“This is an age of sophisticated monitoring and metering, but
not in the electric power industry,” Smith said. “Local
franchise monopolies are not well-motivated to start using technology,”
partly because the “costs are not trivial.”
Terry Costlow can be reached at todaysengineer@ieee.org.
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