Posted on: 10-05-2011 at 3:41pm
By Stream Energy’s Director of Market Research Mike Rowley
This week, our Ignite marketing channel management was asked to supply a student at an east coast university the answer to this question: “What does Stream Energy/Ignite look for in a state when considering it for our market expansion?” Without addressing profitability and only the market’s legislated/regulated structure, the following was our answer to this student’s question.
Creating a successful transition from the regulated vertically-structured utility industry to a deregulated retail electricity model
The current monopoly utility service consists of:
- Wires – Transmission and Distribution
- Generation – Power Plants, Power supply contracts
- Customer service – Customer Care and Billing, etc.
- Regulatory Management
- Social Programs – Low-income assistance, etc.
- Regulatory programs – Nuclear decommissioning, renewable energy, energy efficiency, etc.
In a successful deregulation of this vertical structure, the main issue is creating a level playing field for the new market entrants, i.e. retail electricity suppliers and independent power producers.
The vertically structured utility needs to become three separate companies:
- Regulated wires company – still receives a regulated rate of return on capital investments
- Generating company – standalone company competing to sell its product for the best possible return on investment
- Customer service company – customer service and billing, wholesale energy procurement for resale
These three companies, although they may be held by the same mother company, must operate independently.
The regulated wires company will have no competition because it still holds a franchise via the regulatory compact with the state regulating body. The wires company owns the meter at the power plant, the meter at the consumer and all wires, transformers, switches and breakers in between the aforementioned meters. Its electricity delivery service will be used by the consumer and either be billed directly by the wires company, or the wires company charges will be collected by the retail electricity suppliers and passed through to the wires company. This regulated (franchised) entity will also collect funds from the customer that will be used for government-mandated social and regulatory programs, with this entity being common to all customers in their franchised area.
The newly created generating company will compete with the independent power producers (and other generating companies created, by deregulation, from other formerly regulated utilities) to supply the retail electricity suppliers. There will be a financial issue about the fact that the existing power plants, in the old paradigm, were built for specific utility consumers under a regulatory compact. The generating company will want to collect on any uncollectable “regulatory assets” that are stranded in the paradigm shift. To set the value of these power plants, the generation company will hold an auction and put every plant up for sale. These formerly vertically-structured utilities can purchase their own plants in the auction with no actual cost, being the buyer and the seller. If the sale price of the power plant portfolio exceeds the book value of the portfolio, there is no “stranded investment.” If the book value exceeds the sale price, the “stranded investment” will be collected as a “transition charge” paid by consumers over a designated period of time, via the wires company charges, as another regulator-mandated program.
Retail Electricity Suppliers (REP)
The only true assets of this company are the customer contracts. The REP holds no wires, meters or generators. It has the opportunity to collect and service customers and process data. This company will purchase wholesale power from the generation companies for the intent of resale, having it drop-shipped to its customers directly by the wires company (generation meter to consumer meter). This company will be limited, by law, from competing with the generators by owning generation assets. The state regulatory body will manage/mandate/oversee the REPs’ customer service policies to insure fair business practices.
Level Playing Field
The REP that is affiliated with the formerly vertically structure utility (Affiliated REP) will have no rights beyond those of the new market entrant REP (Competitive REP). The generating company that was also part of the vertically structured utility will have an arms-length relationship with its Affiliate REP and affiliated wires company in order to allow the Competitive REP equal access to the energy produced from the generators. No customer shall be penalized for switching from any REP to another within the switching rules of the state and his or her current REP’s retail contract.