Transmission & Distribution World: Surveying the Utility Landscape

Transmission & Distribution World magazine, along with Convergent Group, convened a roundtable at the T&D World Expo in April 2000 to discuss some of the topics affecting electric industry leaders today. Following is an edited version of the comments made during the day-long session.

T&D World: How has this whole area of convergence affected utilities and forced them to reshape and redefine what is going on in their business units?

David Owens, executive vice president, Edison Electric Institute: In the transmission area, you're going to see a different kind of convergence taking place. My general viewpoint is that you're going to see a consolidation of transmission businesses. You will see independent system operators, but you're also going to see companies seeking to create transmission companies. For transmission companies to meet the size and independence requirements that the Federal Energy Regulatory Commission laid out in its Order 2000 on regional transmission organizations, innovative approaches aimed at enhancing transmission as a business will evolve. Utilities increasingly will examine such options as spinning off or selling transmission assets leading to the formation of large transmission companies. These transmission companies potentially will operate under an independent system operator. Of course, tax issues associated with these options need to be resolved.

At the distribution level, you're going to see something very unique. The companies that have decided they don't want to be in the supply business-because they're not big enough, the margins are not significant enough, they don't have the flexibility to be in regional markets-are going to focus on local markets. They see tremendous value in relationships with their customers. Their emphasis will revolve around becoming a full-service company. They're saying, "We want to be an electric supplier. We want to be a water supplier. We want to be a natural gas supplier. We want to be a telecommunications supplier. We want to provide energy conservation services. We want to do your maintenance. We want to provide some Internet services. We want to be a one-stop shop for all the customers' needs. And the key to success is our relationship with the customer."

Danny Stockdale, vice president, construction and maintenance, Owen Electric Co-op: We rely upon our local reputation. We're providing services that we weren't several years ago. I think everybody's trying to get in a more consumer-friendly atmosphere. We allow customers to pay by credit card, bank draft, anything that makes it easier on the consumer to pay their bills or to deal with us in person or over the phone. We put in 24-hour dispatching. For outages or problems, they can call one number and get an answer. We've looked at providing cable TV and gas, but our northern territory is overrun with Internet providers and natural gas providers. For us to get in that market would be very tough.

David Mohre, executive director, energy and environmental department, NRECA: We have a number of cooperatives who look at these additional businesses in the same way Owen Electric does. They ask: "Is it available in our area?" If there are four or five competitors that already offer service in the area, co-ops typically won't get into that business. However, if it's not being offered in the area and it's needed, or if it's being offered poorly, then co-ops will get into it. And that's whether they're in states with competition or without. So we have a lot of folks in states without competition who are looking at these various businesses based on what's good for the local community, or to help their local community develop.

John Baker, director, customer care and marketing, Austin Energy: Montana Power took a look at telecom and decided it was a much more attractive business than energy. It is quite a radical statement for folks out in Montana to say, "Hey, we've been in this business for decades, but it's not the future. We're going to get out. We've sold our generation, we're going to dispose of our distribution and transmission, and we're just going to focus on telecom." It might not be attractive for all utilities, but there are electric utilities around the country that are very intrigued with fiber and other communications opportunities.

T&D World: On a one-to-ten scale with zero being old-style monopoly and 10 being wide-open deregulation, where will the United States be in five years, in 10 years?

Chuck Newton, president, Newton-Evans Research Co.: I think the scale will grow from a current two-three to a five or six in the mid period, depending in part on which administration is in power and on the economic outlook. But I think a series of unplanned events may cause the pendulum to start swinging back over the longer term. What I am looking at and concerned with is infrastructure spending levels, and we're still not spending enough to replace or upgrade or retrofit our G, T & D infrastructure. Too many blackouts will affect the country's voters. These millions are going to cause relegislation that may bring us back to a four-five level over the 10-year-forecast range. As far as market openness, until we get it straight, which won't be until we've shored up the infrastructure, I don't think we are willing to do that right now. It's going to be reaction to political as well as market- and event-driven forces.

John Baker, Austin Energy: In Texas, the Electric Utility Restructuring Act, Senate Bill 7, passed last summer. We are in the midst of rule-making activities within the state. We have been looking at what competition might mean for Austin Energy for a number of years. Austin Energy has focused primarily on controlling costs and increasing productivity. Where we had the opportunities, we've gone through a couple of restructurings and are in the process of taking a look at other efficiency gains. With the advent of legislation, we've seen that our customers and our local presence are really our strengths. We're looking at strengthening our customer relationships much more today than 10 years ago.

T&D World: If you have independent transmission companies (ITCs) and independent system operators (ISOs), who would own the wires?

David Owens, executive vice president, business operations, EEI: The ISO should not be an owner of the wires, in my opinion. The ISO should have the responsibility of preserving short- and long-term reliability, making sure the network is expanded appropriately, making sure efficient transactions occur, ensuring there are no bottlenecks, and ensuring technologies are enhanced and new transmission is constructed. You have to distinguish the role of the ISO from the role of private investment in new transmission. If you seek to merge these functions exclusively under the ISO, I strongly believe that you will be unable to attract the new investment capital needed for the expansion of the wires business to remove congestion and bottlenecks. Reform in transmission pricing also is essential to enhance the grid. In the future, I do believe that transmission companies will evolve under ISOs. Hybrid organizations will exist.

Matthew Cordaro, president and CEO, Midwest ISO: At Midwest ISO, we don't own the wires. We are a nonprofit, non-stock corporation. Basically, we have operational, functional control of the transmission systems. We also have tried to structure the organization to accommodate different types of transmission ownership, including both vertically integrated utilities that would like to retain ownership of transmission and independent transmission companies, or TRANSCOs. The independent transmission company could be a member of the ISO, just as a vertically integrated utility would be. The big question remains how much authority an ISO cedes to an independent transmission company.

T&D World: How has deregulation affected reliability?

Owens, EEI: As far as engineering goes, reliability separates into two components: security of the system and adequacy of the system. If we look at the adequacy of the system, the questions become, "Do you have sufficient supply to meet instantaneous demand to customers? Do you have sufficient transmission to permit flows, so you can get the supplies to the areas that need it?" In the supply question, there are issues about whether there's sufficient supply in certain regions of the country and whether there are sufficient price signals to stimulate new construction.

While the problems that occurred in the Midwest and in other parts of the country in recent summers were unfortunate, for the most part, the overall reliability of our system remains the best in the world. The issue is whether the customer in the future will be demanding better reliability. As we evolve to a digital economy and as we begin to increasingly rely on having better quality of power, the public is going to demand that we provide even better service. Right now in the electric area there is 99.99 percent reliability. Customers are going to demand almost perfection. And that's where the crises and the challenges are going to occur unless the infrastructure for the supply and delivery of electricity can properly be simulated through market forces.

Cordaro, Midwest ISO: A lot of people confuse distribution reliability with the other types of reliability. I have been involved in distribution and see the games you play managing and maintaining a distribution system. A lot of times it is a competition for internal funds. I have been there cutting budgets, and I know the easiest place to cut a budget is in the distribution side because it doesn't show up for a long time. It's a little bit like Russian Roulette. When the problems start to occur, it's hard to fix them, and you cannot do it overnight. Just as it may have taken many years to reach that point, it takes many years to come back from a reliability standpoint.

T&D World: Matt, what if you find that you're running out of capacity? If you are responsible for ensuring that you have adequate capacity, but you don't own the line, then you cannot go out and build it; you have to get somebody else to build it.

Cordaro, Midwest ISO: Right now when we see the need for a transmission line in our planning process we request the transmission owner in whose area the need exists to build the line. It falls into a gray area if the transmission owner resists such direction. Our agreement is structured so that if someone can claim hardship on the ability to construct transmission, then all the other owners would share the cost for building those facilities. We're supposed to plan expansion, look forward, determine where lines are needed and determine where generation should be connected. This will be a test for us in the future.

Owens, EEI: In an ideal world, the regional transmission organization would make the decision about the optimal transmission plan. You also have to improve the pricing. You have to give adequate incentives for the construction of new transmission. We have not had a major new transmission facility constructed in this country in more than 10 years, but the transmission system is being used very differently than it was designed to be used. In the past, we built transmission to enhance reliability, and we located our plants close to the load centers. Today, there is an explosion of transactions on the system, and increasingly, the markets are becoming regional in nature. That means there will be different demands and potentially tremendous congestion as the grid is operated like an interstate superhighway rather than a two-lane road. We need to construct new transmission. You get that through adequate pricing incentives so the marketplace can respond appropriately.

Cordaro, Midwest ISO: There's a real problem with transmission siting certification today. There are a number of transmission lines needed. It's almost a crisis situation. And these lines are stalled in some cases due to disagreements among neighboring states. It may be that FERC or some other regulatory entity has to have the authority to order the siting and construction of a transmission line.

Everyone has noted there's a problem. There are a number of industry groups who are aware of the problem. The Department of Energy is obviously aware of the problem. But in this country, a lot of times before you can get people to move off the dime you have to have a crisis, not the threat of a crisis. You have something like a blackout in the Northeast where power is lost for a significant amount of time.

T&D World: Would a utility owning or investing in telecom make financial sense?

Mohre, NRECA: Fiber's a very good play. In fact, it's been somewhat underutilized and disregarded by utilities. We've been busy putting up fiber-optic cables all over the place for our own communications needs and have overbuilt to a significant extent. It represents a significant resource. The only hesitation on the part of utilities is what do you do with it? What's the best way to put it into play? What's the best business arrangement? That's where the hesitation is.

T&D World: What role will alliances play in the future?

Mark Shirman, executive vice president and CTO, Convergent Group: If you look in the regional markets, there's strong brand loyalty to utilities. If utilities can play off the fact that they own the customer, what do they want to do with it? It depends upon the financial situation in any one spot. You may want to buy a few cable companies or alliances because you can trade off that brand. The promise of e-business is that it allows a flexible business model and allows it to be somewhat transparent to your customers. So you can offer these services without having to take ownership of all of the assets.

Mohre, NRECA: There's a downside to that. One distribution manager who did that told me, "You know, since I formed that alliance, I sleep like a baby; I wake up every two hours and cry." The fact of the matter is, he's lending his brand name to somebody else whose business practices may be no where near as consumer-oriented as the cooperatives. It is a balance, and good partnering is a core competency. It's not something where you can just shake hands and think everything is going to go okay forever.

Michael Hill, vice president, information services, PPL: You have to carefully choose your partner. Wall Street is looking at companies and the growth of companies. Unfortunately, the value that I might observe in the electric business might not be the value that Wall Street has observed. Three to 5 percent growth used to be something that was richly rewarded by high returns. Today, Wall Street looks at that and shakes its head. As far as Montana Power goes, who would have thought a utility would have said, "Let me spin off the utility and keep the telecom business?" That happened because Wall Street is looking at these markets very differently than they did previously. Similarly, utility executives are looking at ways they can richly reward their shareholders and still be viable concerns. We routinely put in fiber-optic networks to control our power systems, and many utilities have significant dark fiber-there's potentially a business opportunity there. I don't think utilities will consider themselves big telecommunications providers, but many companies are looking at partnering with some viable entities to get the significant value of those assets so that Wall Street will look at them more favorably.