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The Odyssey of Affordability:How Can Regulators, Utilities & Consumers Reconcile the Need to Raise Rates with Affordability?
A presentation by:Dr. John A. Anderson, President & CEO
Electricity Consumers Resource Council (ELCON)
Washington, D.C.At the:
2010 MARC ConferenceKansas City, MO
June 8, 2010
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What Is ELCON?
The national association for large industrial users of electricity in the U.S. Founded in 1976 Members from a wide range of industries
from traditional manufacturing to high-tech
The views today are mine alone
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Current Economic Conditions We are in the midst of a terrible recession
Unemployment is at historical levels The Bureau of Labor Statistics has found:
US employment declined by 4.7 million in 2009 alone – the largest calendar-year job loss since 1939
⅓ of the total manufacturing jobs have been lost since 1998
This truly is the worst recession since the Great Depression of the 1930’s
The next two slides vividly demonstrate these conditions
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The Importance of Energy Prices to Manufacturers
Energy prices impact both the quantity and location of manufacturing jobs Studies suggest that a 3% increase in
energy prices results in roughly a 1% decline in manufacturing jobs Clearly, the impact varies by type of
manufacturing Some industries are far more energy
intensive than others
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The Importance of Energy Prices to Manufacturers (Cont.)
Manufacturing is a multi-stage process Each stage has varying energy intensity Often the most energy intensive stages
are upstream I offer a couple of examples
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Aluminum Bauxite ore is processed to make alumina
Bauxite comes from (in descending order): Australia, Guinea, Brazil, China, India, Jamaica and
Vietnam Aluminum metal is refined from alumina in a very
energy-intensive electrolytic process “Pot lines” can consume over 400 MW at a single
location The load can be ramped up and down very quickly,
making them prime candidates for demand response Electricity represents over ⅓ of the total costs
Aluminum ingots can (and are) made anywhere in the world and shipped to markets for final processing
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Integrated Steelmaking The basic raw material is iron ore
Iron ore comes from (in descending order): China, Brazil, Australia, India and Russia The ore is combined with a carbon source (usually coke) and
limestone and is heated to a very high level to remove oxygen and other impurities to make iron
Basic steel making further refines the iron by removing carbon, silicon, sulfur, phosphorous and manganese
An integrated steel facility can consume hundreds of MWs at a single location The load can be ramped up and down very quickly, making
them prime candidates for demand response Electricity represents 15% to 20% of the total costs of
integrated steel making Steel ingots can (and are) made anywhere in the world and
shipped to markets for final processing
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Electric Arc Furnace Steelmaking Scrap steel is placed in a “scrap bucket” (a
very large clam shell shaped container) The bucket is “charged” by lowering electrodes
into the bucket, thus melting the scrap The type and quality of the steel is a function of
the type of scrap and additives The load of a single arc furnace is in the
range of 70 MW The load can be ramped up and down very
quickly, making them prime candidates for demand response
Electricity represents 30% to 35% of the total costs
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The Importance of Energy Prices to Manufacturers
Increases in energy prices may not drive entire industries offshore But they may well drive certain stages of
manufacturing to other locations And such dislocations will result in
Losses of domestic jobs Increased world-wide emissions And tremendous lost opportunities for very
significant demand response
15
Stated Objective of this Panel This panel is based on the assertion that there is a
“need” for capital investment for new energy infrastructure Generation, transmission and/or distribution
But what is meant by the word “need”? Is infrastructure “needed” to meet requirements of
legislation? Or is it intended for some future requirement(s)?
Is infrastructure “needed” for reliability? Is the “reliability trump card” validated?
We certainly understand that new infrastructure is needed But we don’t necessarily agree that a complete
overhaul of the electricity grid is justified
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If Infrastructure Is Truly Needed
At the outset, I emphasize: If consumers understand that new
infrastructure is both truly needed and implemented at least cost, consumers more than likely will agree to pay
However, if consumers are not convinced that the expenditures are needed and/or are not least cost there will be strong opposition
I raise several areas of concern
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Is the Infrastructure Really Needed?
If infrastructure is truly “needed” Which customers should be required to pay? As simply an example:
We agree that improvements to the grid may well bring benefits to customers
But are the improvements truly “cost-effective” For instance: Do we really need a completely
new 765 kV overlay transmission grid? It MAY well be justified
But many consumers have not yet seen the evidence that it is truly “needed” today
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Is the Infrastructure Really Needed? (cont.) Do we need to spend hundreds of billions of
dollars on a “smart grid” that isn’t yet defined? Will we get HD DVD or Blue Ray? Will the smart grid be internet or wireless driven? Can radio controlled switched on customers’ appliance
work as well as sophisticated, centrally controlled devices?
Are “smart meters” needed for environmental purposes – Or just to bring real-time prices to residential consumers?
Are there cyber security and privacy concerns? Such proposals MAY well be justified
But we have not seen the evidence yet that they are truly “needed” today
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How Should Costs Be Allocated? Should costs of infrastructure be socialized across
regions? As an example: Wind power may be plentiful in the
mid-west – a region particularly hard hit by the recession But the power may be needed in load centers on the
coasts Transmission may then be needed to move the wind
power from source to sink We know that customers will pay – they always do
But should it be customers in the regions where the transmission is actually located?
Or should it be the customers that benefit from the renewable power – and hence the transmission?
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How Should Costs Be Allocated? (cont.) Further, should the costs be socialized
across customer classes? As an example: It is often asserted that energy
efficiency (EE) is a very low cost option (too cheap to meter?)
And that utilities may be key to the development of EE programs
But world-wide competition has forced many (most?) industrials to implement cost-effective EE on their own
Should they be required to pay for EE that benefits only other customers?
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Recommendations Understand the interaction between your
regulatory decisions and the economy Unnecessary energy price increases may bring
both job losses and environment harm There is no such thing as a free lunch And nothing is too cheap to meter (measure and
verify) Scrutinize carefully all proposals brought
before you Be sure that the option chosen is truly the least-
cost And actually will achieve the desired result
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Recommendations (cont.) Recognize that the role of regulators is (or
should be) to regulate Not to set broad social or environmental policies Regulators should only require those things
actually required by law It is true that today some regulators are
instructed by lawmakers to: “promote energy efficiency” or “increase
the use of renewables” or “protect the environment”
However, in these very difficult economic times we simply cannot afford the luxury of over-implementation
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Recommendations (cont.) Finally, make every effort to understand
who benefits (and who doesn’t) It is often difficult to identify the beneficiaries However, socialization of costs is only justified if
benefits are uniformly distributed to all or most affected consumers Obviously, socialization is appropriate if
everyone benefits equally But that is the exception – rather than the rule
Socialization is never justified if the degree of benefits is unknown or cannot be reasonably estimated
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To Contact ELCON
Phone: 202-682-1390E-mail: [email protected] site: www.elcon.orgAddress: 1111 19th Street N.W.,
Suite 700Washington, DC 20036