New forces are on the loose that may transform the nation's power grids.
The utilities' decades of monopoly have ended. Now, pushed by free market pressures and stiffer environmental requirements, many are frantically experimenting to keep costs down and hold on to their customers.
"A couple of decades ago, all utilities were exactly the same and they all did business in the same way," said Philip Edwards, an energy analyst at Standard & Poor's Corp. "But factors are changing now, and we now see utilities becoming less and less alike as they compete against each other for bulk power, transmission, and new projects."
Utilities will be forced to delve into a myriad of alternatives for power and conservation to maintain competitive rates in the new free market environment -- an environment, observers say, that was unthinkable just 10 years ago.
"We're entering a very unique period of time, and the industry is in an evolutionary stage," said Alan Spen, an analyst with Fitch Investors Service. "The utilities with the shrewdest and most creative management will be the ones that keep rates down and do well. The ones that can't may be absorbed to one degree or another or may see their credit quality suffer."
The door to competition was opened in 1978, with the passage of the Public Utilities Holding Act, making way for independent power producers to gradually begin generating power alongside the public and private utilities.
Traditional providers, saddled with the overbuilding of the 1980s and such soured ventures as nuclear power plants, often found themselves undercut by their new rivals. They could have made their rates more competitive by building generating facilities in public-private joint ventures, but the Tax Reform Act of 1986 had reduced the incentives for that.
A Secure Foothold
As a result, by the late 1980s, the independents had gained a secure foothold alongside the traditional players, even providing them with power as the old guard struggled to cut costs.
Utilities began to compete for bulk power sales, and the new independent power producers and affiliated power producers began to require increasing transmission services through areas that were long held to be the territory of one utility.
Now capacity is beginning to dwindle again in certain regions of the country, and industry players old and new are gearing up to meet peaking needs in the mid-1990s and base-load requirements at the end of the decade.
Construction costs are on the rise and the industry is still stinging from the last decade's overbuilding. As a result, utilities eager to keep their competitive edge are looking for cheaper alternatives to baseload construction.
"The fact is that because of the way energy has been priced in this country, there haven't been many incentives for utilities to conserve," said William Chew, an analyst at Standard & Poor's Corp. "There is a growing consensus that there will have to be major cost cutting, downsizing, and diversification to become more cost effective."
Public utilities are trying to gain access to century-old power monopolies that are held by investor-owned utilities -- 75% of the nation's power capacity is owned by 260 private utilities. There are about 2,000 municipal systems, which account for a scant 11% of generating capacity in the nation.
Who Gets to Use Power Lines?
In addition, the majority of transmission lines also are owned by private operations, sparking a bitter debate over the question of fair access.
"Probably one of the greatest risks facing municipal utility systems and rural electric cooperatives is their limited ownership interest in the nation's transmission system," according to Fitch's Mr. Spen. "Investor-owned companies control these lines; they do not want partners. The reason: Potential profits are too great."
With the Federal Energy Regulatory Commission divided on the issue, utilities have been left to argue out what constitutes fair access. Some public utilities in California are negotiating directly with private utilities for access, while in other states, such as Wisconsin, there is angry debate between public and private utilities.
David Penn, general manager of Wisconsin Public Power Inc. System, who is also chairman of the Transmission Access Policy Study group, maintains that broader access is a must for the industry.
"Transmission access is the single most effective ingredient for a truly competitive bulk power market," he testified last May at hearings on the Public Utility Holding Company Act held by the House Energy and Commerce Committee's subcommittee on energy and power.
"Transmission lines are the highways that carry electrons from the points of production to the points of use," he said. "With monopoly control of most transmission lines, private utilities exploit these highways for anticompetitive and anticonsumer purposes."
The stakes also are high, observers say, for independent power producers who can produce cheaper power but need to market what they produce.
Increasingly high-tech, industry demands more power to produce and companies are shopping around for the best contracts available, forcing the independent power providers to offer cheaper and cheaper rates or other benefits. But without access to transmission, those independent power producers are left with no way to get their power to their customers.
Also, many industries are considering using their own factory processes to generate power rather than buy it from utilities.
"Industry can choose co-generations to meet their needs," Mr. Edwards said. "The industry can even sell any excess power back to a utility, adding to the complexity of the marketplace."
And as their franchise contracts come due, large cities such as Chicago are indicating interest in alternative power providers.
Rural Co-ops Get Squeezed
Change also is coming to rural cooperatives, which until now have operated largely unnoticed in territory that traditional utilities passed over as unpromising.
But in many cases, especially in the Southeast, growing populations have caught the attention of the larger utilities and independent power producers.
"These rural areas have taken on a lot of aspects of the suburbs and have become more attractive to investor-owned and municipal utilities," said Marla Fox, an analyst at Standard & Poor's Corp. "The big threat is transmission access. They're much more open to mergers or consolidation. The stronger credits are the ones that have territorial integrity. There are going to be a lot fewer co-ops by the year 2000."
In addition, cooperatives may lose needed aid as the federal budget tightens, increasing their disadvantage.
The common goal of the new power competitors is to maintain the lowest rates -- utilities must be as cost efficient as possible.
Efficiency of plant operations, diversity of generating resources, fuel arrangements, system load factors, reserve margins, load growth, and customer profiles all play an important role, Mr Edwards said.
To achieve efficiency and remain reliable, new power sources such as gas turbines, demand-side management, and customer savings incentives have become a large part of a new conservation effort.
"We're seeing an increasing range of new options emerge," Mr. Edwards said. "In order to have competitive rates utilities must operate efficiently. That means diversification so that the utility can call on what is the most economical energy source at the time."
Offering consumers energy-saving equipment, such as low-power lights, can make a big difference to a utility's bottom line.
"Utilities are already cutting costs as much as possible," Mr. Spen said. "They're doing it through fixed charges and even refunding some of their high-interest bonds. The bottom line is good service, and if you can do that, you'll fare well."
Last year's passage of the Clean Air Act also will have a large impact on the industry, but here municipal power providers enjoy a distinct advantage. In general terms, the legislation requires 50% reduction in the emission of sulfur dioxide from 1980 levels and a reduction of two to four million tons of nitrogen oxide. The reduction take place in two phases. First, 111 specified plants, mostly in the Midwest, must reduce emissions by 1995. Then the entire industry must meet the emission cap by 2000.
Compliance requires the installation of costly scrubbing mechanisms and other emission reducing equipment. The technology is expected to cost the entire industry an estimated $4 billion to $7 billion annually, according to a recent report by Standard & Poor's Corp.
But Standard & Poor's notes that public power systems face relatively low amounts of near-term capital and operating costs necessary to comply with the emission requirements.
Most municipal plants are relatively new and have had to comply with emissions limits during construction, and there is a new law that offers exemptions from the emissions caps to smaller utilities, which are almost all publicly held.
"When compared to competing investor-owned utilities, this may give some public power systems an important competitive advantage," the Standard & Poor's Corp. report says.
Although this may offer an advantage in the short run, municipal operations may run into problems associated with emission and future generating capacity. The Standard & Poor's report notes that, "after 2000, every utility system will be required to operate under an emissions cap with a predetermined amount of emissions allowances.
"Allowances may be earned by cleaning up existing generating sources, or they can be purchased through a trading system which will be established in the future," the report says. "Most of the unused allowances are likely to be held by utilities that have the most initial cleaning up to do under the act, primarily investor-owned utilities in the Midwest."
This issue, coupled with the uncertainty over the trading of allowances, could become another source of competitive tension between public and investor-owned utilities as they bid for new projects that will provide power into the next century.
