1. Alternative Models of Electric Industry Restructuring
Bruce Edelston
Director, Southern Company
Presentation to
Carnegie Mellon Electric Industry Center
September 23, 2004

2. Who We Are
Southern Company is an investor owned energy company in the Southeastern U.S. and a holding company for:
Alabama Power Company
Georgia Power Company
Gulf Power Company
Mississippi Power Company
Savannah Electric & Power Company
Southern Power Company
supplying electric service in the states of Alabama, Florida, Georgia, Mississippi.
Other Businesses
Southern Company Gas
Southern Nuclear
Southern LINC
Southern Telecom

3. Southern Company Profile
Generated 183 billion KWh of electricity in with 39,000 MW
Earnings for 2002 of $1.3 billion on total revenues of $10.5 billion
More than 26,000 employees
Fortune magazine’s most admired electric and gas utility in America for the past two years
Rates 20% below national average

4. Generating Mix 281 generating units at 69 plants in the Southeast
2004 Generation Fuel Mix:

5. ALTERNATIVE MODELS OF ELECTRIC INDUSTRY COMPETITION AND RESTRUCTURING

6. The Original California Model
Generation --
Utility, IPPs, Marketers
Power Exchange/Pool
Contracts
Contracts
Network Operator (ISO)
Contracts
Distribution Utilities
Competitive Suppliers
Contracts
Customers

7. The Original California Model (cont.)
All utility generation had to be sold into Power Exchange
Customers could buy from the distribution utility, directly from a generator, or from a competitive supplier
Distribution utility had to buy all its needs from the Power Exchange
Retail rates of distribution utilities remained regulated
Competitive suppliers could buy their needs from generators or from the Exchange, or some combination

8. Customer Choice Model (TX)
Generation --
Utility, IPPs, Marketers
Competitive Suppliers
Network Operator (RTO/ISO)
Contracts
Contracts
T & D Utilities
Customers

9. Customer Choice Model (cont.)
Customers may contract directly with generators or competitive suppliers (power marketers) for their own needs
Network operator runs transmission system, does planning and scheduling, balances supply and demand through bid-in balancing market, and is responsible for reliability
Distribution company simply operates distribution system - it may put out bids for “standard offer service”

10. Centralized Dispatch Model (PJM)
Generation --
Utility, IPPs, Marketers
Centralized Pool (e.g., PJM)
Network Operator
Distribution
- “POLR” Service
Competitive Suppliers
- Billing
- Value Added Services

11. Centralized Dispatch Model (cont.)
Retailers (either utilities or competitive suppliers) buy all of their needs from pool, resell to end users
All generators bid into pool on an hourly basis
Pool dispatches generation from lowest cost bid to highest cost bid
Highest cost bid that gets dispatched becomes market clearing or “spot” price
All generators that are dispatched are paid the spot price

12. Centralized Dispatch Model (cont.)
Pool is either “energy only” or energy and capacity are separate products (and markets)
May be a minimum capacity requirement for suppliers
Customer choice is really a matter of risk management for suppliers

13. Vertically-Integrated, Incremental Wholesale Competition Model
Existing Generation --
Regulated
New Generation –
Competitive
Network Operator (RTO/ISO)
(Plans and Operates)
Integrated Utility
Distribution
Existing Needs - Use Own Units
Incremental Needs -- Buy from Market

14. Vertically-Integrated, Incremental Wholesale Competition Model (cont.)
No customer choice (limited exceptions)
Existing generation used for retail sales remains regulated
New generation and existing (excess) generation available for wholesale sales are market-based (assuming regulatory approval)
Integrated utilities with service obligations buy incremental needs via requests for proposals
Utilities may or may not bid a “self-build” (rate base) option
Utilities choose incremental option based on price and non-price factors and signs purchase power agreement (typically 5-7 years)

15. Vertically-Integrated, Incremental Wholesale Competition Model (cont.)
Utility affiliates may also bid if permitted by state regulators
Over time, more and more generation is acquired through purchase power agreements, rate base diminishes
Transmission and distribution planning and operations continue to be performed by integrated utility
Integrated utility also distributes power and makes retail sales at rates set by state regulators

16. CURRENT MODELS

17. Customer Choice States
Retail Choice State
Non-Retail Choice State
Source: EIA

19. Centralized Dispatch Areas
New England
New York
PJM
ERCOT
California
Planned: Midwest ISO

20. Vertically-Integrated States
Unbundled
Vertically-Integrated
Source: EIA

21. Comparison of Models

22. Customer Choice - Pros Lets customers decide
Risks shifted from customers to suppliers
Spurs product innovation
Spurs technical innovation
Maintains competitiveness of economy

23. Customer Choice: Issues
Are Prerequisites for Competition Satisfied?
Competitive Markets:
Electric Markets:
Consumers should face true costs of supply
Consumers have regulated option available, regulators likely to cap very high prices
Customers should be responsive to prices
Demand is very inelastic
Large number of sellers and buyers
Few sellers, few buyers
Customers can choose level of reliability
Reliability is a public good
No inter- and intra-class subsidies
Subsidies abound

24. Customer Choice – Issues (cont.)
Do small customers want choice?
Can regulators/politicians let competition work?
Who will pay for reserves needed for reliability but not revenue producing?
Are there significant economies of scope that are lost by unbundling?
Should any one care about fuel diversity?
What about externalities?
Transaction costs vs. savings?
How is success measured?

25. Centralized Economic Dispatch: Pros
Production efficiency clearly the greatest potential benefit
Locational price signals tell where generation and transmission should be built
Physical system is separated from financial system
Relatively easy for areas with existing traditional power pools
Provides hourly price signals to customers
Lessens market power concerns
PJM has made it work (some experience)

26. Centralized Economic Dispatch: Issues
Costs of RTOs (vs. benefits)

27. RTO Costs (2003) Revenue Requirement Cost per Unit ($/MWh) PJM
$252,164,806
0.723
NYISO
117,578,796
0.718
ISO–NE
102,924,000
0.787
CA ISO
235,240,000
1.020
ERCOT
184,159,748
0.545
Ontario
107,204,400
0.705
Source: Public Power Council

28. Source: Public Power Council

29. Centralized Economic Dispatch: Issues (cont.)
Will regulators (politicians) accept price volatility and high prices necessary to pay for peakers (that must recover fixed costs in only a few hours per year)?
If not, how will sufficient generating capacity be ensured?

30. Centralized Economic Dispatch: Issues (cont.)
How will demand side interact with pool?
Who will build transmission? What incentives will they have?
Fuel diversity
Externalities/public benefits

31. Centralized Economic Dispatch: Issues (cont.)
What is appropriate size?
Seams issues
Requires transfer of jurisdiction from states to FERC
Reliability responsibilities dispersed (more complicated)
Unregulated utilities (coops and government-owned) must participate, especially where they are a major presence (NW, SE)

32. Vertically-Integrated, Incremental Wholesale Competition: Pros
Clear accountability for reliability and service obligations
Fuel choice and externalities can remain part of resource planning
Generation, transmission and distribution can be planned jointly, lowering total costs (economies of scope)

33. Vertically-Integrated, Incremental Wholesale Competition: Pros (cont.)
Because of stranded cost recovery, most of the benefits of competition come from incremental generation, not existing
Customers get benefits of wholesale competition without transaction costs (and hassle) of choosing supplier
Integrated utility manages risks on behalf of customers
States retain jurisdiction

34. Vertically-Integrated, Incremental Wholesale Competition: Issues
Perception of market power
Generation dominance
Transmission access
Other barriers to entry
No transparency of dispatch
Few buyers
Lack of regional planning
Retail customers retain risks of bad utility decisions

35. Possible Additions to Vertically-Integrated Model
Independent operation of OASIS and granting of interconnections and transmission access
Regional planning and security coordination by independent entity
Short-term formal competitive procurement process
More formalized long-term RFP process with greater transparency and independent oversight

36. Other Critical Issues
Lack of investment in both generation and transmission
Credit ratings of IPPs/marketers
Relationship between federal and state regulators
August 14 blackout and its ramifications
Lack of mandatory reliability rules
Tug of war between environmental objectives and competitive objectives
Elected vs. appointed Commissions

37. Conclusions
All of these models (except California) can work if issues are properly addressed
Regional characteristics and concerns drive choices
Competition should be a means to an end (reliability at lowest possible cost) rather than the end itself