Illinois
COMMENTRY

Is our power supply ready for deregulation

These are my personal thoughts on power supply based on past experience and what I foresee in the future.

The summer of 1999 is over. It was the second year in a row of high electric demands that have challenged the production and transmission capabilities of electric utilities. What happened to the good old days of the 1980s when we had plenty of power? The answer to that question begins with the '70s.

Tim Reeves

In the early '70s, electric loads were growing at a fantastic pace and electric utilities were building many large power plants to accommodate existing and forecasted loads. Most of these plants were coal and nuclear-powered. Construction, including obtaining necessary permits, typically takes more than five years for a coal-fired plant and 10-12 years for a nuclear plant. The long lead-time, coupled with out of control inflation and high interest rates, escalated the cost of plants already under construction. Since the cost of a new plant was generally not passed along to consumers until completion, the financing costs of construction compounded, which further increased the final cost.

Then came 1973, with the oil embargo and energy crisis. Electric loads stopped growing. Plans for new businesses with large electric loads were scrapped. People were encouraged to conserve, and they did. Despite the curtailment in demand, most of the new power plants were either already completed or too far along to halt construction. As a result, electric rates increased dramatically in order to pay for the new plants. The energy crisis spawned a new appreciation for natural resources and in the late 1970s, the first clean air rules were enacted. While these rules weren't applied to existing plants, they affected plants under construction.

The electric industry entered the '80s with a large surplus of power and high rates due largely to the significant costs of new power plants. Some companies were even accused of acting imprudently for building plants which were considered unnecessary and were precluded from recovering the costs. With energy conservation, improved efficiency in appliances and equipment and few new loads, the surplus continued throughout the decade.

The '90s have brought sustained economic growth and business expansion. Though we have new uses for electricity in our homes, few cornpanies have constructed new power plants. With stable prices for the last 10-plus years, conservation has declined. In short, we have used up our surplus of electric power.

One might wonder why electric utilities haven't built new plants. I believe there are several answers to this question. We are entering a period of deregulation in the electric utility industry. Up until now utilities were guaranteed a captive customer base and a guaranteed return on their investment. Deregulation will open the service territories of utilities that were once monopolies to competition from other sellers. Incumbent utilities are wary of investing in new power plants when the customers the plant is intended to serve may choose another power supplier. Some states have already deregulated, others are in the process and still others are studying deregulation.

Utilities that do choose to install generation may find it necessary to raise rates to recover the cost of the plant. Given that utilities will compete with others on the cost of power in a deregulated market, increasing rates is not an attractive proposition to utility executives.

More than 75 percent of the electricity in the United States is generated by nuclear or coal-fired plants. However, the nuclear share is shrinking due to plant closures. At this time, I believe it is safe to say no new nuclear plants will be built in the foreseeable future. Nuclear power does not create air pollution,

Tim Reeves is the general manager of Southern Illinois Power Cooperative. The generation and transmission, co-op owns four coal fired generating units and is forging new agreements with other co-op power suppliers to coordinate the supply of electricity in the region.

4 ILLINOIS COUNTRY LIVING OCTOBER 1999

The mainstay of the generation industry is coal-fired power plants. These plants represented 43 percent of installed capacity and 57 percent of electricity generated in 1997. Coal is plentiful and until the current decade, these plants were relatively free from burdensome regulations. However, the aforementioned 1970's era clean air rules were made substantially more stringent in the 1990s. Coal-fired plants are now heavily regulated by the Environmental Protection Agency. Further regulations are on the horizon, promising even higher costs and tougher standards for coal plants. Current and future rules call for the removal of a number of substances from plant emissions. The cost of removing sulfur dioxide, nitrogen oxide, particulate and other pollutants is significant and consumes a portion of the power produced by the plant. Growing awareness of environmental considerations makes it unlikely that the regulatory climate will ease in the future.

This brings us to natural gas — the fuel of choice for electric utilities at the present time. Gas-fired turbines can be built quickly (two or three years) in relation to other types and they produce little pollution. Many utilities are now building gas-fired plants. In fact, the demand for these units has outstripped the capacity to build them and the waiting list to purchase a gas turbine is at least three years. Gas represented 19 percent of the installed capacity in the U.S. in 1997.

Gas units can be used for either peaking or built as base load plants. A peaking unit is intended to operate only on days when demand for power is inordinately high. A base load plant is intended to operate most of the time. In 1973, experts predicted shortages of natural gas and encouraged citizens to conserve. We must now wonder if the consumption of gas by new power plants will deplete gas reserves and lead to future shortages or increased prices. Only time will give us the answer to this question.

In the past only electric utilities built power plants. Today others are building and owning power plants. Independent power producers, natural gas companies, foreign utilities and others are building plants and selling wholesale power. Some are seasoned utilities, while others with little experience have recently entered the industry.

"Price spikes, contract defaults and other widely publicised events indicate that some market participants are not ready to participate in a deregulated market."

At present the United States does not have a fully deregulated wholesale power supply market. Proponents of the deregulated marketplace say that the principle of supply and demand will take over in a deregulated market, and this will solve the power supply problem. It seems to me that we are unsure if the marketplace can supply the electricity we need. Price spikes, contract defaults and other widely publicized events indicate that some market participants are not ready to participate in a deregulated market.

In a perfect marketplace a product can be moved to where the demand is located. Electricity requires transmission lines in order to accomplish this task. At present, our country does not have the necessary power lines to move the quantity of power necessary to accomplish this goal. Organizations called Independent System Operators (ISO's) are being formed to attempt to bring the various transmission systems owned by electric utilities under the control of one operator in several regions of the country. The idea is to be able to fully utilize the transmission system and provide a uniform rate to move power across the region. ISOs are still in the planning stages. When they do become operational they will determine what additional transmission resources are needed and see that they are built. All of this will take some time to accomplish.

It is easy to see that the electric utility industry is undergoing great change. Customers expect utilities to satisfy their demand for electricity, even if it means constructing new plants. Utilities are faced with the responsibility of building necessary generation with no assurance that when completed, they will have customers for its output. If rate increases are necessary, the utility might price itself out of a competitive, deregulated market. The long lead-time, rising costs, evolving regulations and constraints in the transmission system add to the uncertainty. We've lost the security of a regulated power supply.

Many consumers are unaware of the factors affecting the utility industry, other than news reports of summer power shortages and blackouts or the occasional awareness of deregulation discussions by legislators. It is obvious that the current situation was not caused by an abrupt shift in the industry but rather a gradual evolution. From the monopolies of the past, we've moved into an era of deregulation, where the marketplace is expected to supply the power of the future.

The opinions and views of guest commentators are their own and may not represent those of the Association of Illinois Electric Cooperatives or the electric co-ops of Illinois.

6 ILLINOIS COUNTRY LIVING • OCTOBER 1999