An Update on Industry Restructuring

Management Quarterly, Fall 1997 | Go to article overview

An Update on Industry Restructuring


Retail wheeling. Customer choice. A paradigm shift in our business. These are the words used to describe our fast-changing industry. As Washington Post columnist Jane Bryant Quinn recently wrote:

"For some utilities - it's too late to survive. For others - there's a three-year window in which to recreate themselves. For the future - Watch out, as marketing of electricity becomes North America's most costly and risky business. Not a soul knows how it will all turn out."

This article is designed to address these issues. These are the key questions:

* How is the electric utility industry being restructured?

* What has happened in the states that have approved retail wheeling?

* How do the rules differ in the states?

* What are cooperatives doing to address industry restructuring?

This article began with a quote from Jane Bryant Quinn. Focus on her last sentence: "Not a soul knows how it will all turn out." This is important. We are dealing with uncertainty. We don't know if there will be retail wheeling on a national basis or in every state. We don't know exactly how the industry will be restructured. And we don't know if the restructured industry will work well.

This is what we do know. Eight states have passed customer choice legislation, and utility commissions in six additional states have approved it. But other states have said "no," at least for now. There are many critics who argue that retail wheeling won't benefit most residential consumers and small businesses - that it's a bad idea. We'll have to see.

To address these issues, we will summarize the first report of the NRECA Advisory Task Force on Competitiveness. The Task Force is composed of distribution, G&T, and Statewide managers, and representatives from CFC, NRTC, and the NRECA board. It was formed to identify and assess the key issues driving the industry into the next century. Here are its five initial conclusions:

1. In the future, customers will have a choice of electric energy provider.

2. There will be increasing pressure to regulate distribution functions.

3. The future of all power supply entities, including G&Ts, is unclear.

4. Our advantage comes from our strong relationship with our consumers.

5. Our future success requires us to be competitive in terms of price, service and reliability.

Let's briefly examine each issue.

First, customers will have choice. The Taskforce believes that consumers will be allowed to choose their provider of electricity. This is retail wheeling. It refers not to the distribution function, but to generation. Consumers will be able to choose their power supplier, which will compete much like long-distance telephone companies compete today.

Second, distribution functions will likely be regulated. There probably won't be substantial duplication of transmission or distribution facilities, and these functions will become regulated by state agencies. According to this scenario, the distribution company will function as an energy access provider, as a LINECO or WIRECO. It may also function as - or compete with - what is called a SERVCO, a company that brokers for electric power on behalf of consumers and that may offer other services like home security, telecommunications, and appliance warranties.

Two charts show what is being proposed. Exhibit 1 represents the current structure. Generation, transmission and distribution are functionally bundled together. Exhibit 2 presents the new approach. On the left are the deregulated segments of the industry, generation companies and SERVCOs. On the right are transmission and distribution. Transmission is unbundled from generation and in most cases regulated by FERC, the Federal Energy Regulatory Commission. Distribution companies make up the final segment. They provide energy access, much as the local telephone company provides dial-tone access. …

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