ELECTRICITY DEREGULATION

DEREGULATION is the removal or simplification of government rules and

regulations that constrain the operation of market forces.

Reference: Sullivan, Arthur; Sheffrin, Steven M. (January 2002). Economics: Principles in

Action. New Jersey: Pearson Prentice Hall. ISBN 0-13-063085-3.

Deregulation is an act by which the government regulation of a particular industry

is reduced or eliminated in order to create and foster a more efficient marketplace.

Deregulation does not mean elimination of laws against fraud, but eliminating/
reducing government control on business methodology, thereby moving toward a
more free market.

Deregulation is usually enacted to weaken government influence and forge greater

competition.
Thus, deregulation creates an economic environment favorable to upstart
companies that were unable to enter the industry prior to the passing of
deregulation.
Deregulation often serves as a catalyst for increased innovation and mergers
among weaker competitors.

Industries that have undergone deregulation include communications, banking,

securities, transportation, as well as power and utility.

Although deregulation might purge government influence all together, usually

some government supervision remains.
TRADITIONAL POWER SYSTEMS
Traditionally, electricity customers had to purchase power from their regional
utility at its set rate. In return, the regional utility had an obligation to serve those
customers with the most reliable electricity technologically possible.

Electricity was produced and distributed regionally with consumers paying the
regional rate.

Consumers located near to large hydroelectric plants had to pay the least
amount.
Consumers living in areas that relied on natural gas or coal generation
frequently paid two to three times the hydroelectric rate.
Conservative Business Approach:

Utilities tended to be conservative and took few risks that might endanger their
ability to serve their customers.
New products and system expansions were planned years in advance.
This approach to business led to a very reliable, but somewhat costly, supply of
electricity.
Motivation behind deregulation
A look at the nationwide cost of energy in the United States can easily explain the
need of deregulation.

For example, consumers in different states were paying following regional energy
costs on the same day:

State Cost ($/ MWh)

Texas $41.50
Arizona $49.50
Chicago $28.00
Source: www.enerfax.com, dated 27 August 2001
Reference: Mariesa L. Crow, “Power system deregulation,” IEEE POTENTIALS, DECEMBER
2001/JANUARY 2002, pp.8-9.

This difference in energy costs from one region to another was the driving force
towards deregulation. Consumers need the cheapest energy sources without any
consideration for their location.
ELECTRICITY DEREGULATION
Electricity has special physical characteristics that make electricity markets
different from most other commodity markets.

Unlike many other commodities such as gas, metal etc., electricity cannot be
easily stored—it must be produced at the moment of need.

Electrical energy is injected into the transmission grid by all generators and
withdrawn by all end users. There is usually no way to identify the power
generated by producer A to match with the power utilized by consumer B.

Electricity grid can be analogous to a big pond with producers (generators) putting
water (electricity) into the pond (grid) while consumers are simultaneously
withdrawing water (electricity) from the pond (grid).
However, the injection and withdrawal of energy must he carefully regulated, as
electricity cannot be stored economically, therefore

The amount generated at every point in time must equal the amount consumed.
The characteristics of the delivered power must be carefully maintained.
In order to maintain the frequency within a certain narrow hand of tolerance,
the quantity injected must closely match the quantity withdrawn moment by
moment.
To extend the pond analogy, it is as if producers must fill the pond at the same
rate consumers withdraw from it. The level of the pond must be nearly constant at
every point in time for the system to operate properly.

Therefore, along with the ability to generate the electricity, the ability to
transmit it from the point of generation to the consumption point must also
exist.
Although cheap generation resources may exist, if the electric power cannot be
transmitted to the demand site, the customer does not benefit from the lower
prices, or vice-versa.
Therefore, electric power deregulation is a two-sided issue: it concerns both the
generation and the transmission of electricity.

One problem that unbundling transmission and generation has produced is the
increased overload of certain transmission corridors. Like highways during rush
hour, transmission lines are also susceptible to congestion and overload.

Before deregulation, when generation and transmission were jointly controlled,

generation was decreased at one site and increased at another site, to load
alternate transmission paths. This relieved the congestion.
 In deregulated scenario,

The electricity suppliers do not always cooperate with transmission providers

to balance the power flow across the system.

Contracts between supplies and customers typically specify a single contract

path along which the contracted amount of power will flow. The transmission
provider (along which the contract path occurs) approves this path.

In reality, however, power flows across the path of least impedance. The power may
actually flow over a collection of parallel paths to its destination.

This can cause overloads on transmission lines covering large geographic areas. These
overloads are very difficult to predict and control.

Systems that suffer from severe congestion are said to be transmission limited
and are susceptible to cascading failures.

On the other hand, systems that do not have sufficient generation are said to be
generation limited.
In the regulated power system, an electric utility was responsible for generating
electric power, transmitting that power from the generator to a substation, and
distributing it to consumers (domestic, commercial, and industrial) within its
service area.
 At the point of consumption, the utility maintaines a meter to measure the amount
of electric energy used by the customer, for a fixed cyclic duration (preferably
monthly) which used to serve as the basis for electric service charges, i.e. single
rate applied to the number of kilowatthours consumed.

This rate incorporates charges for all of the various functions involved in supply of
of electric service to the consumer.

In the deregulated electric market, no single entity is responsible for all of the
operations, i.e. the generation, transmission, and distribution of electric power.

one entity will be responsible for generating electric power, another for the
transmission of power from place to place, another for the distribution of that power to
the consumer, and possibly another for the metering thereof.