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United States

Nirvarna or Armageddon?

Debate on retail wheeling is escalating in the United States. A broad range of environmentalists, consumer groups and trade unions have announced their opposition to the policy, which allows users to rove the power system looking for discounts. The issue, still largely theoretical but increasingly imminent as major industrial users push for change, is whether customers should be free to bypass their local utility and buy power from whom they please -- such as an energy retailer selling another utility's electricity or an independent power producer.

Retail wheeling would open the flood-gates to national electricity price wars in an era already marked by increasing competition in the power generation and utility industry. It is one of the most heated debates today. Across the country, from New Mexico to Minnesota and Massachusetts, the matter is being raised by legislators and regulatory commissioners, consumer advocates and environmentalists, prompted by a market in which natural gas prices remain low.

On April 20, the California Public Utilities Commission (CPUC) proposed a broad system of retail wheeling, starting in 1996, for large industrial customers, with residential customers phased in within six years. The CPUC's dramatic proposal, to be finalised in August after public hearings, could lead the way for the rest of America. There are several indications of the country moving towards a free electricity market:

¥ a law to allow retail wheeling, the Electric Utility Competition Act, was recently introduced in Ohio

¥ a law was passed last year to allow a major steel company in Nevada to use retail wheeling

¥ and regulatory proceedings are underway in a number of states, including Connecticut and New York.

Those who advocate the concept, such as major industrial users, say it will be nirvana -- both cheaper for consumers and better-paying even for producers such as wind developers. They argue that even wind farms could cut a deal with an end-user, a major industrial concern, and by-pass restrictions such as being forced to accept a low avoided cost. They also say that retail wheeling is inevitable, and indeed almost upon us. Formally allowing it is to unleash the market in a way that is happening anyway.

But opponents, including most utilities, environmentalists and renewables advocates, such as the American Wind Energy Association (AWEA), fear that such a system will discourage utilities from longer-range planning and environmental consciousness and will "strand" small customers, leaving them to shoulder a high-cost distribution system that was built for everyone but now no longer includes the big users. Opinion about the likelihood of retail wheeling appears also to be largely a matter of philosophy. In contrast to proponents, critics say that allowing retail wheeling is a specific political decision, not an inevitability. As for wind, they say wind farms would seldom benefit from retail wheeling and that wind is better off within a system where short-run price is less powerful. They point out that since wind is intermittent, it is better off as part of an integrated, diversified system, taking it for granted that such a system is not possible in a free market.

The retail wheeling issue is coming to a head. Two years ago the US government, in the Energy Policy Act (EPA) of 1992, outlawed federal involvement in retail wheeling. Yet since the legislation allowed states to mandate wheeling within their borders, lobbying has intensified at the state level in the two years since EPA was passed by the US Congress. Several states have now debated adopting such a system, but none has yet implemented widespread retail wheeling.

"The real concern is it could undermine the field for integrated resource planning, with its emphasis on environmental values, fuel diversity and the encouragement of new technologies," says Randy Swisher of AWEA. He paints a scenario of a "virtual jungle" of price competition where decisions are made on the basis of cost alone with little room for policy planning. "It's simply a way to reallocate cost away from those with political clout," he says. The residential rate payer would be left with the bulk of the cost.

For their part, most utilities argue that wheeling would wreck their planning and make local demand hard to predict. "We are of course opposed to retail wheeling. If certain customers are allowed to shop, it takes away our ability to provide least-cost planning," says Bruce Edelston, director of bulk power policy of Edison Electric Institute (EEI), which represents most of the country's utilities. "There will be some (retail wheeling) that occurs, we just don't think it will be widespread," he adds. "We think it's just going to occur on a case-by-case basis." He says retail wheeling would mean technical problems for utilities, such as having to re-dispatch the system, which could lead to a reliability problem if a large number of customers purchase through retail wheeling. He also agrees with other critics that it could lead to stranded customers shouldering the burden of a costly system, and that such a scenario would also lead too much to utilities becoming the provider of a commodity rather than a service.

Even so, power generation is already becoming largely deregulated, with more than half of new generation capacity now being built by non-utility companies and with the EPA allowing deregulation of transmission of electricity at the wholesale level. Electricity is becoming so much a commodity anyway, electricity futures will likely be sold on the stock market within 12 months -- leading to great pressures on wind, for example, to lower its costs, says EEI's renewables specialist, Chuck Linderman. Major users are also building cogeneration plants to generate their own power, especially with the low price of gas, says Edelston.

Some individual utilities say that increasing competition can be beneficial but they warn that a concern for long-term environmental and societal responsibilities must be retained. That was the message from a senior utility official from Puget Sound Power & Light Co, the largest investor-owned electric utility in Washington state, at a recent round-table.

A threat to renewables

Indeed, retail wheeling directly poses a threat to development of new, renewable resources such as wind power, Richard Sonstelie, president of Puget Power, told the Seattle Post-Intelligencer in mid-March. He says its emphasis on cheap but short-term power could be a disincentive for investment in such long-term projects as the utility's 140-turbine Kenetech Windpower project near Goldendale, on a ridge above the Columbia River. EEI officials simply say that, although increasing competition in the electricity and power market appears inevitable, retail wheeling is going too far. "There has to be a limit somewhere, and retail wheeling is where we draw the line," says Edelston.

For environmentalists, retail wheeling would definitely be unwelcome, preventing utilities from exercising demand side management and warping environmental policies designed to prevent pollution. One of the most outspoken opponents is Ralph Cavanagh of the Natural Resources Defence Council. "It is neither inevitable nor desirable," he says bluntly. Cavanagh says retail wheeling, by converting the market into a commodity market rather than a service market, is bad news for consumers concerned about the environment. "Electricity is not just another commodity. Its environmental importance is far too great," he says. He also takes issue with the contention of proponents of retail wheeling that the issue is new. He says major industrial users have been trying to change the rules of the electricity market-place to their advantage for ages. Cavanagh adds that retail wheeling does not fit well with wind power. "The notion of an individual customer electing to get all of its power from wind machines is preposterous," he says. "Wind energy needs [utilities as] portfolio managers." Under retail wheeling all that matters is how cheaply you can sell kilowatt hours, he says.

But competion is healthy

Wheeling advocates, led by the Electricity Consumers Resource Council (ELCON), say that the evolution towards letting big customers buy power wherever they want is on its way and is good for smaller consumers -- who, they say, can form co-operatives to gain clout. Competition leading to least cost is even best for the environment because it will force down costs, making companies comply with environmental laws already in place, says John Hughes of ELCON, which represents 23 major companies -- such as General Motors and Ford Motor Co -- which together use 5% of the nation's power. "We think it's a good idea. Our members are very aggressively trying to bring in retail competition," he says. "If there's no competition, there's no efficiency." Hughes also argues that retail sourcing of power is happening anyway; major users are already opting out of the system, whether by building cogeneration plants or by municipalisation in the communities in which they are situated. "If retail wheeling doesn't happen, they'll find other ways to by-pass the system," he warns. "If the economics is there, the industrials will leave anyway."

ELCON also says that a high cost system, burdened with too many power generators such as in New York state, is not the responsibility of major users. "They did not require it, so why should they pay for stranded costs?" asks Hughes. He adds that utilities have a monopoly and so are predictably going to fight against what he prefers to call retail competition. Hughes even says there will be more stranded customers without retail wheeling, because they will be stranded by higher costs.

What the regulators say

While the two camps are increasingly polarised in the debate, utility regulators are wrestling with the issue. Questions and concerns are being raised. So far, a few utility commissioners have made decisions, while others are still considering it. Their views vary. One regulatory official, who preferred to remain anonymous, says the environmentalists and renewables lobby are too used to seeing the traditional vertically-integrated utility as a one-stop delivery mechanism for demand management and for acquiring diverse, environmentally-sensitive resources. "It makes sense to plan for retail wheeling," he says.

But Merton Lott of the Washington Utilities and Transportation Commission stresses that the market power of major industrial customers is a concern. "That is obviously a potential problem," he comments. There is less of a drive to beat the existing system in a state such as Washington, because of cheap hydro-power, whereas in California and Arizona large customers are pushing harder to by-pass the system, he says. And though Paul Redmond of Washington Water & Power recently said the system will be driven towards retail wheeling by the customer, Lott says it must be remembered that there are different types of customer. He notes the "captive" or "stranded" customers who are forced to stay on the system because they have less political clout.

Whether retail wheeling becomes a reality or not, opinion remains sharply divided. Major industrial users are adamant that it is not only good for America, but inevitable and on our door-step. Its detractors say the system would be unfair, another example of how the big boys can take the money and run, with little concern for smaller or intermittent producers, consumers or the environment. For others, the truth may be somewhere in-between. There will be increasing competition and a break-down of the old vertical power structure of utilities, but there are still grave societal concerns that must be addressed. One thing is certain -- it is a question of our electricity future. As AWEA's Randy Swisher defines the issue, "What will be the shape of the electric power market?"

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