Challenges of Electric Power Industry Restructuring for Fuel SuppliersSeptember 1998This report was prepared by the Energy Information Administration, the independent statistical and analytical agency within the Department of Energy. The information contained herein should not be construed as advocating or reflecting any policy position of the Department of Energy or of any other organization.
This report, Challenges of Electric Power Industry Restructuring for Fuel Suppliers, was prepared jointly by the Office of Coal, Nuclear, Electric and Alternate Fuels (CNEAF), the Office of Oil and Gas (O&G), and the Office of Integrated Analysis and Forecasting (OIAF) in the Energy Information Administration. General information concerning the report may be obtained from B.D. Hong ((202) 426-1126) of CNEAF, who coordinated the preparation of this report, and technical information about the preparation and contents of the report may be obtained from the following analysts:
PrefaceSection 205(A)(2) of the Department of Energy Organization Act of 1977 (Public Law 95-91) requires the Administrator of the Energy Information Administration (EIA) to carry out a central, comprehensive, and unified energy data and information program that will collect, evaluate, assemble, analyze, and disseminate data and information relevant to energy resources, reserves, production, demand, technology, and related economic and statistical information. The purpose of this report, Challenges of Electric Power Industry Restructuring for Fuel Suppliers, is to provide an assessment of the changes in other energy industries that could occur as the result of restructuring in the electric power industry. This report is prepared for a wide audience, including Congress, Federal and State agencies, the electric power industry, and the general public. The legislation that created the EIA vested the organization with an element of statutory independence. The EIA does not take positions on policy questions. The EIA's responsibility is to provide timely, high-quality information and to perform objective, credible analyses in support of deliberations by both public and private decisionmakers. Accordingly, this report does not purport to represent the policy positions of the U.S. Department of Energy or the Administration. This report can be accessed from EIA's World Wide Web site at http://www.eia.doe.gov. Contents1. Impacts of Electric Power Industry Restructuring on the Coal Industry
2. Impacts of Electric Power Industry Restructuring on the U.S. Nuclear Power Industry
3. Challenges, Risks, and Opportunities for Natural Gas from Electric Power Industry Restructuring
4. Impacts of Electric Power Industry Restructuring on Crude-Oil-Derived Fuels 5. Issues for Renewable Fuels in Competitive Electricity Markets
6. Quantitative Impacts of Electric Power Industry Restructuring on Fuel Markets
Appendix A. Pending Federal Legislation Relative to the Restructuring of the Electric Power Industry Tables1. Electric Utility Net Generation and Coal Receipts by NERC Region, 1996 3. Coal Production by Mine Size 4. Average Coal Prices Delivered to Electric Utilities 5. Coal Mine Productivity by Mine Type 6. Coal Production by Mine Type 7. Announced Coal Tolling and Energy Swap Transactions 8. Coal Transportation by Mode, 1996 9. Recent Railroad Spur Development Activity 10. List of Recent Nuclear Plant Closings as of January 31, 1998 11. Electricity Generation from Renewable Energy by Energy Source, 1993-1997 12. Renewable Electric Utility Net Generation by State, 1996 13. Nonutility Gross Generation from Renewables by State, 1996 18. Comparison of Selected NEMS Assumptions 19. Electricity Generating Capability 20. Electricity Supply, Disposition, and Prices 21. Renewable Energy Capacity and Generation 22. Energy Consumption and Prices for Electricity Generation 23. Natural Gas Supply and Disposition 24. Coal Supply, Disposition, and Prices 25. Total Energy Supply and Disposition Summary Figures1. Status of State Electricity Utility Deregulation Activity as of July 1, 1998 4. Production and Number of Operating U.S. Coal Mines 5. Average Minemouth Price per Ton by Mine Type and Mine Size, 1996 6. Distribution of Contract Coal Tonnage by Contract Duration 7. Above-Market Contract Coal Returning to Market, 1995-2015 8. Simplified Depiction of Potentially Stranded Nuclear Cost 9. Comparison of Average O&M Costs for U.S. Nuclear and Coal-Fired Power Plants, 1981-1996 10. Variation in O&M Costs for U.S. Nuclear Plants, 1994-1996 11. Variation in O&M Costs for U.S. Nuclear Plants by NERC Region, 1994-1996 13. Spot-Market Price for the U.S. Uranium Market, 1976-1996 14. Auction Markets, January 1996-November 1997 15. Volatilities for Natural Gas (Henry Hub) and Electricity (California-Oregon Border) 16. Electricity Futures Contracts 17. Spot Prices, November 1996-December 1997 18. Utility Consumption of Fossil Fuels, 1965-1996 19. End Uses of Residual Fuel Oil, 1965-1996 20. U.S. Fossil Fuel Consumption, 1965-1996 21. Prices of No. 2 Heating Oil, Winter, 1989-1990 22. Illustrative Schematic of a Gasification Power System 23. The Largest Electricity-Consuming Industries and Their Generation, 1994 24. Differences in Capacity Additions from the No Competition Case 25. Electricity Generation by Fuel Type, 1997, 2005, 2015 26. U.S. Electricity Generation Shares by Energy Source, 2015 27. Variation from No Competition Case Projections of Natural Gas Production 28. Lower 48 Average Natural Gas Wellhead Prices, 1996-2015 IntroductionThe movement toward a competitive electricity generation market has been underway for several years. Many consumers, producers, and regulators see increased competition as a key to more efficient production of power and lower end-use prices. With the electric power industry accounting for more than $210 billion in annual sales, the implications of deregulated electricity generation markets for capacity choice, operating costs, and fuel choice are significant. This report examines potential impacts of restructuring and deregulation of the electric power industry on the markets for electricity generation fuels—coal, nuclear, natural gas, petroleum, and renewable fuels.1 The U.S. electric power industry is in the midst of a transition that is changing electricity generation operations from regulated monopolies to entities that operate in competitive markets. As the transition progresses, the competitive pressure for lower electricity prices could alter the Nation's power generation fuel mix. The possible ramifications vary in likelihood and complexity. Generating companies may change their fuel purchase arrangements and inventory practices. Higher cost generating plants may be retired in favor of more efficient, low-cost power plant technologies, and the shares of electricity generation from different fuels may change. (For example, legislation may be enacted to ensure some level of market share for renewable fuels in the generation mix.) Electric power industry restructuring may lead to new financial risks and demands on the supply and transportation infrastructure of the fuels used for electricity generation. This report analyzes issues that electricity restructuring creates for each fuel market. Major Restructuring Changes Already in ProgressNumerous structural changes in the electric power industry are yet to come. Already, however, there has been significant progress by regulators, legislators, and the utilities themselves toward a competitive electricity market. FERC ActionsPerhaps the single most sweeping change so far has been the outcome of recent actions taken by the Federal Energy Regulatory Commission (FERC), which has the responsibility for regulating the Nation's interstate trade in electric power. Pursuant to guidelines set forth in the Energy Policy Act of 1992 (EPACT) regarding open access to transmission services at equitable rates, the FERC issued Orders 888 and 889 in 1996. These orders were designed to remove impediments to competition in wholesale electricity trade and are expected to bring more efficient, lower cost power to the Nation's electricity consumers. On February 26, 1997, in response to various rehearing requests, the FERC announced a number of minor adjustments to the rules, to become effective 60 days after they appeared in the Federal Register.2 Order No. 888, entitled Promoting Wholesale Competition Through Open Access Nondiscriminatory Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, requires all public utilities that own, control, or operate transmission facilities to provide nondiscriminatory open access transmission services by filing tariffs that offer others the same transmission services they provide to themselves. In addition, it provides for a stranded cost mechanism to aid in the transition to a more competitive industry. Stranded costs are those that utilities prudently incurred to serve customers under a regulated environment, which could go unrecovered if customers switch to other suppliers. The FERC stressed that providing for stranded cost recovery would ensure the financial viability of utilities that provide reliable, essential electric service. Order No. 889, Open Access Same-Time Information System and Standards of Conduct (OASIS), further ensures nondiscriminatory transmission service by requiring public utilities that own, control, or operate transmission facilities to develop an Internet-based bulletin board system that provides same-time information about electricity prices and the availability of transportation capacity on transmission lines. This rule requires public utilities to obtain information about their transmission system for their own wholesale power transactions in the same way their competitors do—through the Internet OASIS system, which began commercial operation in January 1997. It also requires them to separate their functions of wholesale power marketing and transmission operation. As a result of the FERC Orders, many investor-owned utilities that own transmission lines have begun to establish independent system operators (ISOs) to manage and operate the transmission systems in their regions. Eleven ISOs have been approved, proposed, or are under discussion, covering all parts of the United States except the Southeast. Utility participation is fragmented, however, and issues have arisen regarding participation by Federal and other publicly owned utilities. As of April 1998, four ISOs were operating: California ISO; ISO-New England; Pennsylvania, New Jersey, Maryland Interconnection; and the ERCOT ISO. Each has procedures for pricing transmission services—in particular, when congestion occurs in the transmission system. It is too early to determine what, if any, changes may be seen in generation patterns and fuel consumption as a result. Congressional ActionsWhile no Federal legislation that applies directly to electric power industry restructuring has been enacted, a number of bills have been introduced in recent years, and Congress has been actively pursuing the matter (see Appendix A). Electricity workshops and Congressional Committee hearings have been and are being held to investigate the issues and impacts and to hear industry views on the role the Federal Government should play in restructuring the industry. Restructuring legislation was introduced but not passed during the 104th Congress. Revised legislative proposals have been introduced and are being debated in the hopes of mandating a federally guided approach to restructuring before the end of the 105th Congress. On June 26, 1998, the Secretary of Energy submitted to Congress the Administration's proposed legislation to implement the Comprehensive Electricity Competition Plan that was released by the Administration on March 25, 1998. The common theme among the proposals is to set forth guidelines that will benefit and protect electricity consumers by giving them the right to choose among competitive suppliers while securing lower rates and higher quality service. Some proposals encourage energy conservation and efficiency programs and the use of renewable sources of energy. One bill that contains the most proactive measures concerning renewables, H.R. 1359 introduced by Congressman Peter A. De Fazio (D-OR), instructs the Secretary of Energy to establish a National Electric System Public Benefits Board to fund programs related to renewable energy sources, universal electric service, affordable electric service, energy conservation and efficiency, or research and development in each of these areas. The bill also provides for a renewable energy portfolio standard and for renewable energy credits. Two bills set forth a date certain for retail competition. H.R. 655, the Electric Consumers' Power to Choose Act of 1997, introduced by Congressman Dan Schaefer (R-CO), specifies December 15, 2000; and S. 237, the Electric Consumers' Protection Act of 1997, introduced by Senator Dale Bumpers (D-AR), specifies December 15, 2003, as the date by which all retail customers will be able to choose their electricity providers. Also included in the Federal proposals are bills to repeal the Public Utility Regulatory Policies Act of 1978 (PURPA) and the Public Utility Holding Company Act of 1935 (PUHCA), both of which are being identified as impediments to a truly market-driven electric power industry. Some groups believe that PURPA and PUHCA repeal should be instituted, but only as part of legislation that would comprehensively address the many issues associated with restructuring. Additional issues—including privatization of the Federal Power Marketing Administrations, Federal Power Act amendments prescribing State parameters relative to instituting retail competition, the recovery of stranded costs, and the role that the Federal Government should play in restructuring the electric power industry—are addressed in various bills. Appendix A summarizes pending Federal legislation and the Administration's plan3 for the restructuring of the electric power industry, including an overview of the major issues contained in each. State ActionsRetail competition is being deliberated on a State-by-State basis. The utility regulatory commissions and the legislatures of nearly all 50 States and the District of Columbia are in different stages of the implementation process, from informally studying the idea to passing legislation that specifies the date and conditions of full retail competition. In order for a State to make the transition to a fully competitive market, its legislature must first pass legislation that authorizes the conversion to deregulation. Only then can the State regulatory commission proceed with approved implementation plans. Six States, however, have been able to initiate competition through regulatory orders only. Figure 1 shows the progress being made throughout the United States toward establishing full retail competition. As of July 1, 1998, 12 States had enacted restructuring legislation. On March 31, 1998, California became the first State to open its retail electricity market to competition. Retail access pilot programs are also underway in a number of States, including Idaho, Illinois, Massachusetts, Michigan, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Texas, and Washington. While there are similarities among them, each pilot program contains specifications (regarding size and duration, flexibility, billing and metering, targeted customers, etc.) that vary from one program to another.4 Pilot programs are being instituted to provide insights into the workings of retail access. The lessons learned will serve as the building blocks for full retail competition. Also being examined by those involved in formulating retail competition guidelines are Federal and State jurisdictional issues. Some groups believe that, while States may be in a position to direct certain aspects of full retail competition, the Federal Government is in the best position to address broader aspects, such as the environment, rules of reciprocity, and a date certain for customer choice. The rules of the game have been and will continue to be redefined by Federal and State regulators and legislators. Some of these issues are discussed in more detail in two other Energy Information Administration reports, The Changing Structure of the Electric Power Industry: An Update and the recently released The Changing Structure of the Electric Power Industry: Selected Issues, 1998. The Role of Fuel Markets in Electricity GenerationMore than one-third of the primary energy consumed in the United States is used to generate electricity. In 1996, the Nation produced 3,447 billion kilowatthours of electric power. Of that amount, utilities accounted for 3,077 billion kilowatthours and nonutilities generated the remaining 370 billion kilowatthours.5 Coal-fired generation has been and continues to be the largest contributor to the supply of electricity, followed by nuclear, natural gas, renewables, and petroleum. In 1996, utility purchases accounted for 87 percent of the U.S. coal market, 53 percent of the renewables market, 12 percent of the natural gas market, 2 percent of the oil market, and virtually all the uranium available in the commercial market.6 Investor-owned utilities spent approximately $22.8 billion on coal in 1996, $7.4 billion on natural gas, $3.0 billion on nuclear fuels, and $2.4 billion on petroleum.7 Because fuel costs account for two-thirds of utility power production expenditures,8 the future price of fuels is a critical issue for utilities facing the change to a competitive market.
Keeping fuel costs down is a major goal for electricity producers in maintaining competitive prices. As a consequence, fuel suppliers will be faced with many challenges to cope with the coming changes to their industries and remain competitive. Chapters 1 through 5, on the fuel markets, examine some of the challenges and opportunities brought about by electric power industry restructuring. Each fuel market is addressed in a separate chapter, where issues important to that particular market are discussed. Because the fuels vary widely in their economic and technological characteristics and in their alternative power uses, there is no consensus set of issues applying to all markets. As a result, the individual fuel chapters vary in the depth and scope of their analysis. Chapter 6 presents the results of a quantitative analysis conducted to estimate the magnitude of the impacts that competitive electricity generation markets could have on the fuel supply industries, based on model projections from EIA's National Energy Modeling System. Endnotes1. Renewable fuels are hydroelectric (conventional), geothermal energy, biomass (wood, wood waste, peat, wood sludge, municipal solid waste, agricultural waste, straw, tires, landfill gases, fish oils, and/or other waste), solar energy (solar thermal and photovoltaic), and wind energy. 2. For further details concerning FERC actions regarding electric power industry regulatory reform, refer to Energy Information Administration, The Changing Structure of the Electric Power Industry: An Update, DOE-EIA-0562(96) (Washington, DC, December 1996), Chapter 7. In addition, EIA has recently published a report entitled The Changing Structure of the Electric Power Industry: Selected Issues, 1998, that updates information on restructuring activities by the FERC, Congress, and the States. 3. U.S. Department of Energy, Comprehensive Electricity Competition Plan (Washington, DC, March 1998). 4. Energy Information Administration, The Changing Structure of the Electric Power Industry: Selected Issues, 1998, DOE/EIA-0620 (Washington, DC, May 1998), Chapter 4. 5. Energy Information Administration, Electric Power Annual 1996, Volume II, DOE/EIA-0348(96/2) (Washington, DC, December 1997), pp. 13-14. 6. Energy Information Administration, Annual Energy Review 1996, DOE/EIA-0384(96) (Washington, DC, July 1997), pp. 211, 265, 195, 161, and 259, respectively. 7. Energy Information Administration, FERC Form 423, "Monthly Report of Cost and Quality of Fuels for Electric Plants" (1996); FERC Form 1, "Annual Report of Major Electric Utilities, Licensees, and Others" (1996); and estimates made by the EIA Office of Coal, Nuclear, Electric and Alternate Fuels. 8. Energy Information Administration, Financial Statistics of Major U.S. Investor-Owned Electric Utilities 1996, DOE/EIA-0437(96/1) (Washington, DC, December 1997). 9. Energy Information Administration, Annual Energy Review 1996, DOE/EIA-0384(96) (Washington, DC, July 1997), p. 181. |
