Challenges of Electric Power Industry Restructuring for Fuel
Suppliers
September 1998
This 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:
Introduction
|
Rebecca McNerney
|
rebecca.mcnerney@eia.doe.gov
|
(202) 287-1913
|
Coal
|
William Watson
|
William.Watson@eia.doe.gov
|
(202) 287-1971
|
Nuclear
|
Kenneth Wade
|
kenneth.wade@eia.doe.gov
|
(202) 426-1248
|
Uranium
|
William N. Szymanski
|
william.szymanski@eia.doe.gov
|
(202) 426-1177
|
Natural Gas
|
William A. Trapmann
|
william.trapmann@eia.doe.gov
|
(202) 586-6408
|
Oil
|
Charles P. Shirkey
|
charles.shirkey@eia.doe.gov
|
(202) 586-6567
|
Renewables
|
Fred Mayes, Jr.
|
fred.mayes@eia.doe.gov
|
(202) 287-1750
|
|
Mark Gielecki
|
mark.gielecki@eia.doe.gov
|
(202) 287-1729
|
Quantitative Impacts
|
Robert T. Eynon
|
robert.eynon@eia.doe.gov
|
(202) 586-2315
|
Preface
Section 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.gov.
Contents
Executive
Summary
Introduction
1. 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
Tables
1. Electric Utility Net Generation and
Coal Receipts by NERC Region, 1996
2. Coal Production Trends
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
14. Cost and Performance
Characteristics for Combustion Turbine and Renewable Generating
Technologies, California-Southern Nevada (CNV)
15. Cost and Performance
Characteristics for Combustion Turbine and Renewable Generating
Technologies, Southwest (RA)
16. Cost and Performance
Characteristics for Combustion Turbine and Renewable Generating
Technologies, Northwest (NWP)
17. Cost and Performance
Characteristics for Combustion Turbine and Renewable Generating
Technologies, Electric Reliability Council of Texas (ERCOT)
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
Figures
1. Status of State Electricity Utility
Deregulation Activity as of July 1, 1998
2. North American Electric Reliability Council
(NERC) Regions for the Contiguous United States and Alaska
3. Average Power Production Expenses for Major
U.S. Investor-Owned Coal-Fired Electric Utility Plants
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
12. Fuel as a Share of Average Power Production
Expenses for Plants Owned by Major U.S. Investor-Owned Electric
Utilities, 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
Introduction
The 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
fuelscoal, 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 Progress
Numerous 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 Actions
Perhaps 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 dothrough 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 servicesin
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 Actions
While 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 issuesincluding
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 industryare 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 Actions
Retail 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 Generation
More 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.
|
Figure 1. Status of State Electric Utility Deregulation
Activity as of July 1, 1998
|
Since 1986, there has been a downward trend in fuel costs. In the coal
industry, increased productivity, lower transportation rates, and
changing market conditions have produced a steady decline in coal prices.
Average prices for natural gas to electric utilities have generally
trended downward from a 1983 peak to a 16-year low in 1995, although they
recovered somewhat in 1996.9 A large
worldwide surplus of uranium has also caused its prices to decrease
precipitously over the past decade or more.
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.
Endnotes
1. 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.
|