The Forces of Change: Technology and Deregulation

The Forces of Change: Technology and Deregulation

By Ed White, Utility Translation Systems

The utility industry is undergoing a dramatic restructuring driven largely by deregulation and shifts in the economy. Rapid change looms on the horizon, especially for the electric utility industry. While it is always difficult to predict the future with certainty, history gives us useful guidelines about what is likely to happen as restructuring moves forward.

Based on the evolution experienced by other industries during times of deregulation (the telephone industry in the late 1980s is a primary model), we can confidently expect the following scenario to emerge in the utility industry–a major reduction in prices, a rapid decline in the ratio of long-term to short-term contracts, a proliferation of new products and services, an increase in mergers and acquisitions, and global expansion. It is also likely that deregulation will cause the industry to segment. Utilities will no longer attempt to do everything. Instead, they will try to focus on specific areas: generation, transmission, distribution, power markets, energy services and information, or technology-based products and services. There will be many contenders fighting for their share of each of these segments.

Changing regulations and market forces, however, will not be the only factors that have a defining influence on the industry. When the telecommunications industry was deregulated, new service providers began offering a wide variety of new products–three-way calling, voice mail and Internet service, to name just a few. All were supported by relatively new technologies or by the new application of technologies originally developed for other purposes (such as the Internet). By making new value-added services possible, technology significantly advanced competition in the telecommunications industry. It made it possible for smaller companies to eat away at the customer base of much larger companies. The same principal holds true for the utility industry.

Economic Drivers

Because of its unique position in our economy, the utility industry in the United States has been slow to deregulate. In the 1950s, during the height of the post-war economic boom, energy costs were relatively low. Technological advancements in energy production and improved manufacturing processes resulted in lower capital, operating and maintenance costs when compared to similar costs in the decades before the second World War.

In those days of low-cost energy, large and small utility customers did not mind that competition among energy suppliers was stifled by the government regulations. In fact, monopolistic, vertically integrated utilities (MVIU) were then considered the optimum form of operation for the market. In the 1970s, however, all this began to change. Energy prices climbed and the promise of cheap nuclear power fizzled. Industrial customers were most vocal in their reaction against higher energy costs. Because energy costs comprise approximately 5 percent of total operating costs of most manufacturers (and as much as 30 percent in such energy-intensive industries like aluminum processing or steel making), many manufacturers threatened to move unless they were granted lower rates.

The final blow to the prestige of MVIUs came in the 1980s as the economy shifted away from a manufacturing-based economy to a service-based economy. As a result, demand for power decreased while utilities found themselves with surplus capacity amid higher fuel and capital costs. Large disparities in rates arose; consumers in some parts of the country found themselves paying twice or three times what customers in other areas paid. Deregulation, which began in the natural gas industry, attempted to correct these problems. Order 436, which Federal Energy Regulatory Commission (FERC) first issued in 1985 and finalized in 1992, provided for open access to distribution networks for all gas utilities. This meant that gas companies were mandated to open up their extensive systems of pipelines and gas distribution infrastructures to competitors. Predictably, this ruling led to fierce competition and was followed by other FERC rulings which put forth even tougher equal access mandates.

The most obvious change brought about by the deregulation of the gas industry is that light commercial users have become free to contract for transportation gas supplied by utility-independent third-party brokers on a price competitive basis. This has put considerable pressure on gas utilities to reduce prices or lose customers. In response, many gas companies have turned to new technologies–specifically meter reading and monitoring systems–to more closely track usage and transportation.

The $250 billion U.S. electric industry–approximately 3,300 electric utilities–is now on the threshold of revolutionary structural change. This includes private investor-owned utilities, public power agencies, municipal electric utilities and public power cooperatives. Most investor-owned utilities remain fully integrated generation, transmission and distribution companies, which is not to say that deregulation hasn`t already affected the industry. Thanks to the development of new generating technologies, the independent power producing sector was formed in the 1980s. In short order, smaller generating companies began attracting margin-sensitive industrial and commercial customers by offering cheaper prices. From 1980 to 1992, the percentage of total U.S. electricity generated by non-traditional utility sources rose from 2.9 to 9.9 percent. Over the next three to six years, these industries will fully develop and significantly reshape the electric industry.

In order to open the industry to competition, producers and purchasers of electricity must have access to the transmission grid. Since most investor-owned utilities still have control of their transmission grids, access to a transmission grid is the single greatest impediment to competition. As a result of the availability of cheaper power, customers and legislators have pushed for greater competition within the wholesale market through the 1992 Energy Policy Act, which mandates access to the transmission grid for wholesale wheeling. State regulators are now deciding if they want to extend this policy to retail wheeling.

Utilities themselves have reacted to impending deregulation. For example, several of the largest utilities on the West Coast have joined forces with other regional suppliers and users to propose the country`s first truly deregulated electric transmission network. In addition, utilities throughout the country are quietly forming partnerships and are reassessing their operations in anticipation of increased competition in open markets. If we look abroad, we can find numerous examples of what happens when electric companies are deregulated. The trend in countries such as the United Kingdom and Australia is to privatize the power supply industry, splitting it into three distinct entities–power generation, transmission and distribution. In addition to privatization, competition is promoted at both the generation level with power generators competing to supply electricity to a power pool and at the retail level where industrial customers above a certain size can purchase power from any of the distribution, transmission or generating entities.

As soon as utilities move into free markets, they begin to act much like other companies and become highly motivated to protect their markets by improving customer satisfaction. Among their first priorities are large commercial and industrial accounts, which can represent as much as 70 percent of revenue. To distinguish themselves in the market place, utilities must learn what customers want (and the wants are likely to be diverse) and deliver better products and services than the competition and at the lowest possible price. Value-added service is one solution if the price is right.

Flexible, change-oriented computer systems and networks enable electric utilities to accomplish many of these goals. Demand-side management, load research, tailored billing systems and real-time pricing head the list of required applications for larger customers.

Software specifically designed to enable utilities and their customers to monitor energy consumption patterns and adjust energy usage in response to prices or available supplies is already in use in the United Kingdom. For example, the U.K.`s Pooling and Settlements Agency uses Utility Translation Systems software to collect data from more than 24,000 large power customers and settle the pool each trading day.

The Importance of Wireless Technologies

Another important driver of change is the recent maturity of wireless computer networks. Under the old monopolistic model, utilities invested billions of dollars in equipment to meet the demands of industrial, commercial and residential customers. In a competitive environment, many of these costs could become stranded. This is a major issue that has to be resolved before utilities can move into a truly competitive market place. Wireless AMR solves the problem of stranded assets by making maximum use of existing metering equipment and utility communications infrastructures. This technology first took hold in the gas industry in the mid-1980s and was initially seen as simply a way to increase meter-reader productivity.

The first wireless AMR solutions were walk-by and drive-by systems. Both systems, which remain in widespread use, collect readings from existing or new meters equipped with tiny computers and radios. Walk-by AMR uses hand-held computers with transceivers to interrogate meters and drive-by AMR uses a computerized transceiver housed in a utility vehicle. Drive-by AMR–currently the most popular form–uses essentially the same technology much more efficiently. With these systems, a utility vehicle carrying a computerized transceiver cruises through neighborhoods to pick up reads. Drive-by AMR can read 3,000 meters per hour as opposed to about 1,000 per day by walking meter readers. The customer gets a more accurate bill than ever before, and the utility saves on labor costs.

Since its introduction, wireless AMR has expanded to include electric and water meters. But the most significant development in this area has been the deployment of two-way fixed network systems designed for interconnectivity to other data gathering systems. Wireless fixed networks that blanket entire metropolitan areas, such as Denver, Pittsburgh and Baltimore, are a quantum leap forward in AMR technology. These networks are able to make full use of AMR meter modules, in effect turning them into high-speed information vehicles that do much more than simply provide monthly meter readings. With a fixed network, AMR module-equipped meters become conduits for the two-way flow of information. Any meter, or any selected group of meters, can be interrogated at any time.

With near real-time two-way exchange of information, utilities can immediately determine meter tampering, do virtual connections and disconnections of service, monitor brownouts or blackouts for electric utilities and check leaks for gas companies. They can offer customers better rates for energy use during non-peak periods. All of this greatly improves customer loyalty–a significant factor in a free market. If they conform to industry standards and are designed for interconnectivity, fixed networks can also be used as gateways to a wide variety of other systems. For example, when wireless residential networks are combined with telephone-based commercial and industrial (C&I) applications, utilities have an effective, low-cost way to solve virtually all of the information needs of the customer base.

Combined wireless and telephone-based fixed network systems greatly benefit a utility`s commercial and industrial customers–factories, hospitals, universities, etc. Because they would receive real-time data, companies with several plant sites could better coordinate production and energy use. For example, a fixed network system interconnected to an internal automation system could turn on one machine and then, after it receives a signal that the machine is fully operational, signal the next machine in the manufacturing sequence to come on line. Similarly, these systems could automatically turn off all the other machines in a manufacturing sequence should one of the machines malfunction.

Production schedules for two or more facilities could be timed for more efficient use of equipment through two-way communication afforded by fixed networks. Manufacturers will be better able to adjust production rates, control shift schedules and minimize swings in staffing. Such service obviously provides better economy of operation to the customer.

Finding New Markets

A hybrid fixed network can also help formulate much more effective marketing plans for C&I and residential customers. Utilities can use information gathered over the network to develop new services and products for niche markets. And many of these products could actually be delivered back to customers over the network itself.

The interconnectivity of fixed networks offers numerous other possibilities. For example, in the near future it will be possible for the utility`s fixed network to serve as the communications backbone for home automation systems. This means that residential customers could automatically turn on or off dishwashers, heating systems, air conditioners or pool heaters to take advantage of cheaper rates–something that many cost-conscious customers would desire. Similarly, fixed network systems could facilitate the development by utility companies of home and business security services.

Fixed networks also have the potential to allow utilities to become information providers to third parties–a major revenue generating opportunity. Energy and water companies will be able to break out the information they have collected over fixed networks in any number of ways–by neighborhoods, income level, usage patterns, time of day and so forth. With knowledge of machine footprints and usage patterns, utilities will have useful information that appliance manufacturers and other service providers will want. A manufacturer could even ask a utility to do real-time monitoring of how its products are being used at multiple, or even individual, locations.

The Scramble to be First

As deregulation moves forward, more and more utilities will be turning to territory-wide automation systems. This means that for the foreseeable future, the major competitors of energy and water companies will be other utilities using hybrid networked solutions. Combined wireless and telephone-based fixed network AMR systems will make utilities major information providers and communication managers in the coming decades. These systems will become essential shapers of a much more efficient utility industry, as well as providers of much better service for all of us. Those utilities that move forward most aggressively with these technologies are likely to be tomorrow`s winners.

Author Bio

As president of Utility Translation Systems (UTS) since its inception in 1980, Ed White has helped revolutionize the way utilities throughout the world collect and analyze energy use data. Prior to founding UTS, White was employed by the Westinghouse Electric Corp. meter division for 13 years. White has a bachelor`s of science degree in engineering operations from North Carolina State University.

Previous articlePOWERGRID_INTERNATIONAL Volume 1 Issue 6
Next articlePOWERGRID_INTERNATIONAL Volume 2 Issue 1
The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at

No posts to display