Energy Regulation: Watts Up With That?

The world has become obsessed with climate change and green initiatives, making energy a hot topic. Many of us who participated in the pioneering days of telecom deregulation (e.g., the breakup of the Bell System in the 80s and the Telecom Act of 96) are taking notice of energy market restructuring.

Most observers expect to find an energy parallel to equal access with a nice set of uniform regulations across the country; but thats where energy and telecom take different paths. As of today, 13 states and the District of Columbia have reasonably competitive markets, although theres a great variance in methodologies and regulations among them. Pennsylvania led the way in 1995 as the nations first state to legislate retail electric market reform. However, it will not be until January 2011 that the majority of commercial and industrial customers in Pennsylvania will have a true choice for their commodity electric supply service. How could that be?

A major differentiator between telecom and energy deregulation is that state regulators have had to deal with the fact that most electric utility companies owned and operated power generation plants. The first order of restructuring was to require these companies to divest their generation facilities and focus exclusively on distribution operating the local grid and delivery of electricity to the end user. The sale of generation facilities typically resulted in high stranded costs for the utility companies (and their ratepayers). As a result, in many areas, the market cost for power (commodity supply service) was set at fixed levels through rate caps that existed for several years or more. Unfortunately, as market-based power rates moved with actual costs and demand levels, they exceeded the rate caps that were set at artificially low levels. As a result, these markets were competitive in name only.

It wasnt until the expiration of rate caps that markets experienced true competition for commodity supply service and only after experiencing price shock with the move away from rate caps that had been in existence for several years and were below current market prices.

As we all know, telecom is famous for its acronyms and typically has offered a consistent naming convention for its competitive pioneers. No matter where you were in the United States, you knew what was meant by the terms IXC, CAP or CLEC. Common terminology is uncommon in todays retail electric markets, as each state legislature and public utility commission establishes its own version of restructuring and its own lexicon. For example, a competitive supplier in New York is referred to as an Energy Service Company (ESCO). In Pennsylvania, its an Electric Generation Supplier (EGS). Meanwhile, in Texas, the competitive supplier is known as a Retail Electric Provider (REP).

So, what exactly is the competitive supplier selling? Do they own any power generation facilities the telecom equivalent of a facilities-based provider that operates its own voice/data network? No. Do they own any power transmission facilities? No.

The supplier represents the interests of its customer base in acquiring electricity at market-based prices. Essentially, the supplier buys electricity on the wholesale market, which is a system of hourly power auctions managed by an independent, quasi-governmental agency. These agencies are typically referred to as Independent System Operators (ISOs) or Regional Transmission Organizations (RTOs).

What is the typical customer experience? Just like the pioneering days of telecom, there is a great deal of marketplace confusion. This represents a real opportunity for energy sales agents to get involved and serve as trusted advisers to their clients.

While Texas is the first state to present a true open market for retail electricity, most states have a puzzling array of rules in which the local electric utility company remains the provider of last resort. Therefore, the utilitys commodity prices often drive the actions of the competitive suppliers rather than a true open market driving commodity prices. This would be the equivalent of having the RBOCs selling long-distance service in the days of equal access!

Its fair to say that the value proposition for electric supply service changes substantially from state to state and even between utility regions within a state. Again, this presents an excellent opportunity for energy sales agents to offer a clear voice to their trusted clients. The critical factor for the channel partner is to establish relationships with energy suppliers or brokers that have the resources, systems and programs to educate and support the sales agent. Given the unique dynamics of the energy markets and the varying rules and regulations, the sales agent needs to choose wisely in selecting its energy partner.

Looking for More?

Join us at the Spring 2010 Channel Partners Conference & Expo, March 1-3, which will include a workshop on energy sales. For more information, visit www.channelpartnersconference.com.

Ken Rowen is vice president of

PAETEC Energy

, a division

PAETEC

founded in 2004 to address the parallel between telecom and the emerging competitive energy markets. He can be reached at

[email protected]

.

Glossary of Common Energy Terms

AMI (Automatic Meter Reading) AMI allows the electronic reading of electric meters and enables two-way communication to allow consumers to react to market price signals or power grid emergencies.

DAM (Day Ahead Market) Pricing Market-based electric prices that were established approximately 24 hours prior to the current hour. This is a common method used for determining electric supply pricing for residential and commercial customers.

DR (Demand Response) A program employed during periods of peak power demand that compensates customers for curtailing their power use for a specific period of time. Demand response also is used to counteract periods of peak market pricing.

GHG (Greenhouse Gases) Gases released into the atmosphere largely due to emissions from power generation, transportation and industrial production. The EPA announced in December 2009 it will be setting rules for regulating emissions of six greenhouse gases including carbon dioxide and methane.

Market Restructuring The changing of a highly regulated segment of the energy complex to a fundamentally open market design. While limited government oversight continues, the new structure is expected to deliver improved operations and efficiency in power generation and lower market pricing for residential, commercial and industrial consumers.

PHEV (Plug-in Hybrid Electric Vehicle) One of the largest sources of carbon emission is vehicular transportation. PHEVs have lower emissions than traditional automobiles with gasoline combustion engines. A smart grid is required to assimilate PHEVs without causing strains on the grid. With two-way communication of market price signals and RTM (real time market) pricing, the charging of PHEVs can be accomplished during non-peak hours.

RPS (Renewable Portfolio Standard) Formal goals established by states and regional coalitions to achieve specific levels of renewable energy in the overall mix of power generated within a specific state or region.

RTM Pricing (Real Time Market) Electric supply prices that reflect the current dynamics of the market typically in five-minute intervals.

Smart Grid An emerging set of standards and rules that will improve power grid performance and efficiency through actionable intelligence and enhanced management capabilities. A hallmark of smart grid is high-speed, two-way communication for real-time information exchange that enables utility companies and consumers to react to the state of the power grid and changes in market pricing.

Source: Ken Rowen