TransActions - April 2000 (Vol 200)

DISPERSED GENERATION: WILL IT BECOME THE AMERICAN WAY?

It May Depend On Who You Are
Dispersed generation (also known as distributed generation) and its value can take many forms, and your perspective of it will likely depend on your role in providing electric service to the retail customer. The view of dispersed generation by those in the power supply end of the business may range from it being an important component of the overall generation mix on one end of the spectrum, to being a threat to the all-requirements contract or increasing the potential for stranded investment on the other end. Distributors may view dispersed generation alternatives as a way to improve system reliability, or they may think of it as simply an economic (but sometimes burdensome) option in response to the power supplier’s wholesale rate structure. Retail customers have long considered self supplied generation as a way to better ensure reliability for critical processes or as a response to peak shaving opportunities provided by retail price signals.

Dispersed power generation and cogeneration technologies include among others, natural gas-fired microturbines, fuel cells, reciprocating engines and solar technologies. Their generating capacity may range anywhere from 1 kW to 10,000 kW. Experts in the industry believe that many of these evolving technologies have the potential to compete with the cost of centrally generated power, but there are also applications today that may offer economic solutions to cost and reliability concerns. What all this means to you probably depends on whether you are a power supplier, a distributor or a retail customer.

Power Suppliers
Many generation and transmission cooperatives and municipal agencies around the country are facing the issue of dispersed generation. For many years, distributors have sought to use dispersed generation as means of responding to high, embedded-cost price signals in the power supplier’s wholesale rate structure. Anticipating a more de-regulated industry, wholesale customers may be asking for increased flexibility in making power supply decisions. To help secure the power supplier’s revenue stream, "traditional" all-requirements contracts are structured to prohibit the ownership of generation by distributors. However, other power supply arrangements have been established recently which provide for ownership on a limited basis; either for peak shaving or load growth purposes. If the option to install generation is available to the distributor, it’s important that the supplier offers price signals to encourage their distributors to make economic decisions. That is, a price signal should not encourage customers to make a decision to install generation (or load management) at a cost higher than the supplier’s cost to provide the same amount of capacity and energy. If the distributor makes an uneconomic decision due to inefficient price signals, then the costs to serve the system has been unnecessarily raised.

Reciprocating engines, with their relatively lower fixed costs and higher variable costs as compared to central station alternatives, may be a viable economic component of the overall power supply mix. Depending on circumstances, analysis has shown that diesel generators can produce lower overall generation costs for up to 300-400 hours of operation per year. Opponents argue that diesel-fired generation, with its purported environmental impacts and higher maintenance costs may not be a viable long-term power supply alternative.

Distributors
Like other businesses, many distributors like to stick to their core business – providing energy and energy related services to their customers. While some staffs have engineers who would love to tackle the challenges of a generator, it’s likely that most distributors do not care to make power generation one of their daily business activities. Distributors sometimes view dispersed generation as a means of reducing purchased power cost, although ownership may not always be feasible due to wholesale power contract limitations. However, even if limited by its wholesale power contract, distributors can implement partnership arrangements to purchase and finance customer-owned generators to assist those customers that have special reliability needs and are willing to share in the costs of achieving the extra level of reliability.

The purchase of generation facilities represents a relatively sizeable investment for many distributors (and customers.) One way to "test the waters" before making a permanent decision of this magnitude is through the short-term rental of generation. There appears to be a growing market for such arrangements with new vendors and increased fleet sizes of existing vendors. Vendors of diesel generator rentals offer a variety of generator sizes, rental terms and service agreements. Rental generation may provide an economic, low risk opportunity to meet a short-term need.

Retail Customers
Investment by commercial/industrial customers in dispersed generation technologies to achieve a greater level of reliability or to save money on their power bill is not a new phenomenon. However, the available technologies and range of price incentives (avoided costs) is growing in number and complexity. Historically, customer-owned generation has been operated in response to peak load conditions to reduce demand charges or receive credits. Pricing incentives are now often based upon highly variable and volatile real-time energy charges that track prices in the wholesale spot energy market. These energy-based pricing incentives can offer lucrative savings to commercial/industrial customers, but customers may need assistance in determining the potential level of savings from their actions. Also, communication channels need to be developed and implemented to deliver accurate prices to the customer.

Net vs. Dual Metering
Approximately twenty states have implemented "net metering" rules for small commercial and residential generation installations, as compared to dual metering where there are separate meters to measure power flow in each direction. The advantage of net metering is that it only requires the use of one meter. The arrangement allows for the electric meter to run backwards if extra energy is fed back to the utility. At the end of the billing month, if the generated energy exceeds the energy used, then the customer is usually paid for the energy at the utility’s avoided cost rate. If the customer uses more energy than generated, then the net amount is billed at the regular retail rate. Some argue that net metering imposes adverse financial impacts on other customers, but many state commissions have found it to be cheaper and more administratively feasible than the dual meter configuration.

Regardless of your role in the electric power industry, you will find that dispersed generation has both its supporters and detractors. Like most decisions we act upon, the rewards offered by dispersed generation are not without possible risks. As the adage goes, "Anyone who has never made a mistake has never tried anything new."


For more information, contact Brent Saylor at 770-425-8100 or e-mail: info@gdsassociates.com.



PROTECT YOUR WATER UTILITY FROM THE TAKEOVER THREAT!

Water utilities are getting a lot of attention these days. And it’s not because of widespread water quality concerns or skyrocketing rates. Now, municipally owned as well as smaller investor-owned water and wastewater utilities are potential takeover targets of larger investor-owned electric and water companies nationwide. There is keen interest in acquiring the small or municipal systems and/or providing operational services to them on a contract basis. International companies are involved.

Times have really changed! Until now, water utilities were ignored as investment opportunities. No one paid them any attention unless the spigot was dry or the water tasted "funny."

Investor-Owned Companies: Acquire or be Acquired
For investor-owned companies, the handwriting is on the wall. They must acquire…or be acquired. As a result, larger investor-owned companies are promoting themselves as the more efficient alternative . . . the professionally managed utility, capable of stabilizing or lowering rates. They are even willing to take on the additional financial responsibility of regulatory compliance and infrastructure improvements. They are hopeful that their aggressive growth strategies will increase the size of their operations and give them a competitive advantage attained through the consolidation of administrative, customer service, financial and technical support functions. In essence, they are striving to create greater economies of scale that would widen any efficiency gaps that may exist between the way they do business compared to their competition and takeover targets.

The investor-owned electric and water companies contend that through the acquisition and consolidation of several utility systems, they can improve customer and shareholder value on a scale that would be difficult to attain independently. Even though municipally-owned utilities have always enjoyed some competitive advantages over their investor-owned counterparts, (they do not pay income and property taxes, and they have access to lower-cost financing) investor-owned companies have been able to offset these advantages in many cases by operating more efficiently and providing excellent customer service.

A Specialize Approach for Municipalities
Contractors who specialize in operating water and wastewater utilities say they can reduce expenses and stabilize rates under their particular mode of operation. With this approach, the municipality continues to own the system; however, the contractor is given the authority within a definite contract period to significantly change the way the system is managed and operated while seeking to reduce overall expenses. They also attempt to take advantage of economies of scale as a result of their having several systems under contract and the availability of centralized supporting staff. Contractors offer to share with the municipality the cost savings that are projected through privatizing. Similar to the "sale of assets" alternative, this option also promises stabilized or lowered rates and the transfer of operational responsibility to the contractor. Many times, companies that are interested in acquisitions are also marketing operational services.

In either case, the municipal utility owners are able to solve other problems within their communities with the cash received, usually only one time, from the transfer of their utility assets. The investors or contractors are motivated by an opportunity to improve shareholder value and market share.

Three Significant Challenges
All water and wastewater utilities are facing at least three significant challenges: (1) Increased operating costs, (2) Insufficient capital to make necessary upgrades, and (3) The threat of higher rates. (There is always pressure from the customer to stabilize or reduce rates. Also, competition for economic development opportunities is keen and utility rates may determine whether a community is successful or not.)

Many times, the operating changes proposed to meet these challenges by the investor-owned company or contractor are ones that were available to the smaller utility all along, but either the improvements were not recognized or there was a reluctance to implement them. By failing to make changes necessary to capture available operating efficiencies within their own systems, the utilities with less efficient operations are making themselves vulnerable as possible takeover or privatization targets.

Benchmarking and Technology to Narrow the Efficiency Gap!
Several progressive utility managers have recognized that they can significantly minimize the takeover threat by "narrowing the efficiency gap" that may exist between their utility and the most efficiently operated utilities. They measure their performance indicators against those of the best practice organizations by conducting benchmarking and other comparative analyses to identify their greatest opportunities for savings. Once the utility recognizes and understands these differences and opportunities, appropriate improvements can be made and it can work toward capturing these savings. This process often includes redesigning its work processes and taking advantage of new technology. Many utilities have learned that when it comes to favorably competing with the privatization alternative, they must make changes.

Advances in technology are available to all utilities and are becoming increasingly more cost-effective. Today’s water and wastewater utilities have more tools at their disposal than ever before to improve their competitive position. Integrated data processing and information sharing systems give all personnel the ability to operate more effectively and knowledgeably. Improved SCADA systems offer the utility such options as automating its plant or optimizing energy expenses. With the ongoing deregulation of the power industry, utilities have another opportunity to reduce energy expenses. Individualized training programs can provide more job effectiveness.

The investor-owned utilities and operating services contractors would love to have the chance to use the efficiency gap to their advantage, to show that they can do it better and to put the cost savings in their own pockets. But if the targeted utility has optimized its operations and minimized its efficiency gap, the privatization alternative will be much more difficult to justify and support. But most importantly, these re-engineered utilities will be better able to serve their communities and give their customers the best value.


For more information, contact Larry Hensley at 770-425-8100 or e-mail: info@gdsassociates.com.