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Co-ops managing deregulation's changes

As individuals, change is difficult for us to accept. As a nation any kind of major change becomes a political nightmare, fraught with special interests and diverse agendas. However, change does occur and those companies that manage the process the best tend to meet with consistent, long-term success.

The cooperative program has met the challenge of change numerous times since its humble beginnings.

Our business model has truly withstood the test of time. Today, with deregulation, coops are once again faced with the challenges of change. By following co-op principles, they're doing quite well.

David Tudor
David Tudor, ACES President/CEO

Although the economy has cooled, America's economic strength over the past few years has brought substantial electrical load growth. While there were a few isolated power supply problems in the summers of 1998 and 1999, there has not been a major crisis in most co-op operating areas. There is a general belief that the problems of California are unique. So, one might ask, what has changed and why should co-ops be doing something now?

What has changed? Basically, wholesale power has been deregulated. The power supply and transmission components of the electric industry are no longer totally regulated. This creates significant price and operational risk for the power supply segment of the cooperative program. It can have an indirect effect on the distribution segment if not managed properly.

Generation and transmission cooperatives (G&Ts) usually have a fixed price and floating-load sales contract with their distribution cooperative owners. However, in the wholesale power supply market co-ops can no longer rely on "cost based" economics. Instead co-ops have been thrown into a world of volatile prices and reliability uncertainty. Since most G&Ts do not generate all of their power, they have substantial price risk for the rest of the power supply they need to meet their members demand for power.

One other problem few in the media have explained is the lack of transmission line access. Like a large pipeline for electricity, transmission lines that before only delivered power from one specific point to another, are now being asked to ship power in an open market. The transmission grid that once served virtually closed markets is now asked to become the interstate highway system for electricity. Electricity must be moved in "market value" directions. Because the transmission grid was not designed for this, reliability risks have surfaced.

Over the past five years a frenzy of mergers has occurred in the investor-owned utility sector creating utilities that have both product (natural gas, oil and power) and geographic diversity. Basically, they have become nationally-focused energy companies versus regional utilities.

Many of these large utilities have created regulated and unregulated divisions of their corporations. They continue to earn regulated rates of return on their regulated utility operation and utilize the cash flow and earnings to invest in their unregulated businesses. The earnings of some of these unregulated subsidiaries have been phenomenal.

These unregulated entities flourish on price volatility. Their integrated operations allow them to make "pancake" returns as they trade natural gas and oil, supply their own merchant power plants, and sell power into the daily market. The flexibility in their asset portfolio and trading positions allows them to make money all along the value chain.

There is nothing illegal or even immoral about their methods. In fact, what they do is the essence of "free enterprise." However, this creates significant problems for G&.T co-ops and their distribution co-op

continued on page 6

David Tudor joined the Alliance for Cooperative Energy Service (ACES) Power Marketing in 1999. ACES Power Marketing is a national wholesale energy and risk management cooperative owned by seven generation and transmission cooperatives, including Southern Illinois Power Cooperative. Before joining ACES, Tudor was in charge of risk management and software for Pacific Gas and Electric.

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.


Illinois Commentary (Continued from page 4)

owners. The cooperative business model is based on providing reliable power at the lowest price possible in a non-profit manner. Cooperatives do not want price volatility. Instead they prefer consistent, low prices and efficient operations.

G&Ts find themselves in a very different world today and have been forced to change. The most efficient changes are difficult to identify in advance and to prioritize. The very essence of the cooperative business model is under attack both commercially and politically. So, how do we change to meet the operational demands of the market and not abandon our business model? The answer lies in our time-tested cooperative principles.

I believe that in order to meet the challenges of the deregulated wholesale world, we must follow the principles that have guided us through the years. G&Ts must cooperate on a national basis, federate their services in this new business, and meet the change head-on. Many G&Ts are proactively modifying their power supply strategies to manage this new risk. For example, the organization I am so fortunate to represent, ACES Power Marketing, has federated 18 G&Ts into one national risk management organization.

The size and strength of the G&Ts working together on a national front will allow them to be competitive on a regional basis. We do not need to abandon our business model, instead we need to use it as the guide to again manage change and strengthen our cooperative foundation. Change does not necessarily mean adopt. Sometimes it simply means focus. As co-op members and leaders, let's focus on how we can use the principles of cooperation to manage our businesses through deregulation.


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