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IEU-Ohio
Samuel C. Randazzo, Counsel
21 East State Street, 17th Floor
Columbus, Ohio, 43215
phone 614.469.8000
fax 614.469.4653
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Electricity Restructuring: Ohio & California (5/2001)

Understanding how Ohio's energy environment differs from California's is important to customers looking for opportunities in competitive electrical markets.

Note: When an industry moves from a regulated environment to a competitive one, the structure and functions within that industry must be re-designed to facilitate a smooth transition. While electric industry restructuring approaches are varied, Ohio and California are two states whose legislation includes similar elements with very different designs and, so, very different results. The design of Ohio's restructuring legislation avoids many of California's problems. The chart that follows, while not a point-by-point comparison, looks at five restructuring elements and the differences between the two states' restructuring approaches.

OHIO CALIFORNIA
Element:
Power Supply


[i.e. electricity, capacity, generation]
  • Ohio currently has 4,050 MW of proposed new capacity awaiting Ohio Power Siting Board approval;
  • Since 1999, the Ohio Power Siting Board has approved 3,775 MW of new generation capacity;
  • Of this, according to the PUCO, more than1300 MW will be available for the summer of 2001;
  • Financial tools are available to utilities, suppliers and customers to hedge against spot market prices and build balanced power portfolios. This avoids over-reliance on any particular source;
  • The North American Electricity Reliability Council's ("NERC") November report forecasts adequate capacity (within our region) for the near term due to merchant (non-utility, for-profit) plant proposals.
  • Very limited new capacity construction; price caps create disincentives for construction as do frequent changes to price caps;
  • Increased demand not matched by new supply; in addition, regional increases in demand limit imports;
  • Site permitting process is long and costly, and causes delay in plant siting;
  • Inflexible Environmental Protection Agency ("EPA") siting requirements and emissions restrictions contribute to supply emergencies; in other words, available generators cannot operate and so contribute to the shortages;
  • Available power supply to utilities is limited to "spot" market purchases which have the highest prices in times of rising demand;
  • Financial tools, such as a portfolio approach including long-term power contracts, are restricted by the state legislation.
Element:
Transmission

[i.e. facilities that move electricity from a generation site to a local delivery system]
  • With Ohio as part of a Midwest (or regional) transmission area, our supply is available from all directions;
  • Ohio's transmission system has experienced summer constraints; necessary construction and upgrading can best be defined by a single regional transmission operator;
  • The national electric reliability organization (NERC), in formal comments to a U.S. Department of Energy Inquiry, plainly states that the U.S. transmission system is "increasingly at risk. The question is not whether, but when, the next major failure to the grid will occur.";
  • A recent Federal Energy Regulatory Commission ("FERC") Staff Report states that transmission expansions are not being planned by individual utility transmission owners; this status threatens transmission reliability;
  • A single, regional transmission operator ("RTO") for the Midwest area is imperative in order to determine needed maintenance and construction of regional transmission;
  • Ohio has competing RTOs (FERC-approved Midwest ISO and the proposed Alliance RTO) that must be merged to ensure efficient and cost-effective regional transmission.
  • Supply available only from north and east, but most transmission runs north-south, limiting eastern power imports;
  • Facilities lack maintenance and upgrading, so lack of capacity further constrains power supply; serious bottlenecks in southern CA;
  • According to the leading industry research group, The Electric Power Research Institute ("EPRI"), the U.S. demand for electricity has strongly out-paced the updating and addition of transmission facilities to carry that electricity. Over the next decade, in fact, demand is expected to increase five times faster than transmission lines are upgraded or built, but California, says EPRI, is projected to add fewer lines than other Western states;
  • New construction is hindered by environmental and siting constraints, and public opposition (NIMBY); limited financial incentive to build or upgrade facilities;
  • California's Independent System Operator ("ISO") has a limited focus, while power markets are regional in nature. So, the state transmission operator is constrained by its own geography and unable to use regional resources to mitigate the California situation.
Element:
Supply & Demand
Economics
  • Ohio's electricity demand has increased steadily over the last several years, but we have limited demand-side or usage programs implemented or incented;
  • Ohio's 5-year transition period is a time for consumer education on competitive market economics: customer demand influences supply market terms and conditions;
  • All customers must be educated about competitive markets: customer usage (not regulation) shapes market pricing and market conditions;
  • Ohio's large industries have experienced increased load curtailments and curtailments of longer duration over the last few years.
  • Customer demand (usage) increase is far above projections for last few years;
  • Until recent emergencies, limited demand-side energy management encouraged or incented;
  • Price caps insulate consumers from competitive market economics and so discourage consumer conservation;
  • Curtailment of large industrial loads, a traditional "demand-side" approach, is not adequate for California's current shortages; it's "too little, too late."
Element:
Market Development

[i.e. planned approach to transition from regulation to competition]
  • Ohio's competitive market will develop over a 5-year "market development" period; by the half-way point, 20% in each customer class of each utility must switch suppliers; to encourage such market activity, the PUCO has authority to adjust switching incentives;
  • Local government aggregation options assist small users in learning the marketplace and in establishing group power supply portfolios;
  • Legislation provides PUCO authority for oversight of utility participation in an RTO;
  • Ohio's electricity consumers are urging FERC to mandate a single Midwest RTO to help ensure development of a strong competitive electricity market.
  • Legislation constrained market development; all sales and purchases required to go through the state power exchange ("PX"); no financial tools used to manage risk; price caps established and then changed several times, confusing suppliers and discouraging new capacity additions;
  • Inadequate supply, increased demand and consumer insulation from market conditions forces heavy "spot market" purchasing;
  • California's legislation takes a parochial approach to the electricity marketplace, when physics and facilities require a regional approach;
  • The California ISO, while operational for several years, is not working effectively and its problems have not been timely addressed.
Element:
Pricing
  • Since Ohio's legislation became law, many new generation projects are awaiting Power Siting approval, so supply shortages should not have an undue effect on development of the marketplace;
  • PUCO has authority to encourage customer switching by adjusting the shopping incentive, thus stimulating customers to shop and suppliers to participate in the market;
  • As of 1/1/01, Ohio had certified over 40 retail service providers, with another 20 plus applications awaiting approval. Power brokers, marketers, suppliers and aggregators are indicating interest in Ohio's developing market;
  • Financial planning tools available for use by service providers and customers to limit exposure to volatile markets.
  • Price caps (often changed by regulators) discourage new capacity and limit supplier participation; this increases the demand and price of available supply;
  • Purchase of spot market capacity has created billions of dollars of debt for utilities while price caps prevent pass-through to consumers; financial institutions have downgraded utility ratings, making suppliers unwilling to deal with "financially unstable" utilities; the possibility of suppliers unwilling to sell power into California resulted in the federal government invoking its authority to require suppliers to sell electricity to the California PX;
  • California is not an example of a functional competitive market; the legislation curtails useful pricing strategies and prevents effective and efficient market activity.

Conclusions

Ohio's electricity restructuring legislation plans for the development of a fully functioning competitive market over a reasonable transition period. It includes benchmarks to measure market functioning and it provides for corrective behaviors to the market if it is not developing timely and effectively. With proposed new generation, Ohio's electricity supply is sufficient to cover projected growth and include some reserve.

However, the FERC must act now to mandate a single, regional transmission system operator to ensure that the electricity "transportation highways" are open, coordinated and reliable.

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