Competition, Energy Efficiency Forge the Utility of the Future

REVOLUTION is under way in the utility industry:

* Executives who once scoffed at conservation's potential are pushing energy efficiency as a primary solution to America's growing power needs.

* Deregulation has spurred competition from independent power producers.

* Renewable energy sources will displace much of the oil burned to make electricity, utility planners say, although the use of coal and natural gas will not drop.

Two California utilities - Pacific Gas & Electric and the Sacramento Municipal Utility District - embody the radical shift away from a "more power is better" attitude. Energy efficiency and environmental goals are the new focus.

"This industry used to operate on economies of scale - the larger the capacity, the cheaper it was," says Stephen Metague, manager of electric resources planning for Pacific Gas & Electric (PG&E) in San Francisco. "Technology has now pushed us into a position where that is no longer the case."

More and more, the utility's function will be to carry power from an outside producer, maintain the quality and availability of electricity, and provide billing and other retail customer services, according to industry chief executive officers and experts. The utility of the future will be more focused on electricity services rather than strictly on power production.

Utility regulators have prodded utility executives forward by changing rules so the utilities can profit by helping customers conserve electricity. Power not used by one consumer is available for new homes, appliances, or factories to come on line. Big utilities thereby avoid the need to build new expensive and financially risky power plants to meet new demand.

Dramatic changes at the customer end of the electric supply grid are matched by a revolution on the production side of the grid.

"We are on the threshold to go beyond both nuclear and fossil fuels," says S. David Freeman, general manager of the Sacramento Municipal Utility District (SMUD). "Don't sell your utility stock yet," he says. But "the days when electric power utilities can sit back with their monopolies and let the revenues roll in are long over."

Just as deregulation has remade the airline, telephone, and trucking industries, utilities got a jolt of competition in 1978. That was the year Congress passed laws guaranteeing independent power producers (IPPs) access to the utility grids that deliver electricity to consumers. Last year's National Energy Policy Act, signed by President Bush, opened the power market further to IPPs.

Electric companies were concerned about the reliability of service, rate stability, and quality of power supplied by independent producers. "It wasn't too long ago that utilities were very nervous about that, but it's working," Mr. Metague says.

"The central station generator has served its function, and may disappear in the future," Metague adds. "Small, distributed generation is the big force that is going to change the shape of the industry and make it almost unrecognizable in 10 or 15 years.... You're going to see more independent players demanding a place at the table, and they're going to get it."

Utilities are now viewing themselves as competitors that have to quickly pare costs, find sources of clean power, and mend fences with customers who have been taken for granted in the monopoly setting that utilities have enjoyed.

IPPs currently provide more than 6 percent of US electricity capacity. By the year 2000, IPPs will provide as much as 15 percent of the nation's power, according to an Edison Electric Institute study.

Planners at both PG&E (the nation's largest investor-owned utility) and SMUD (a publicly owned utility) say that customer energy efficiency, also called demand-side management, will provide the lion's share of new capacity needed in the future. In addition, both companies project that efficiency efforts and renewable energy resources will largely displace power production using oil.

Last month, SMUD published the final draft of an aggressive resource plan to develop a host of advanced and renewable sources, including solar, wind, geothermal, and fuel cell technologies for the next century.

"We certainly don't expect all these items to be winners," SMUD's Freeman says. "We'll winnow them out as we go along."

"We want to build the next set of plants that will cope with the coming scarcity of fossil fuels," says Robert Wichert, SMUD's generation systems planning supervisor. "Eventually we're going to have to have clean, high efficiency, and renewable power."

The 1990 amendments to the Clean Air Act will penalize utilities unless they move in the direction of renewable technologies. "I'm running the most promising air pollution control program in this county, with all due respect to the air quality people," Mr. Freeman says. "They're reacting and trying to regulate. We're putting together the technology that's going to clean up the air."

Congress threw some weight behind renewable energy by granting a permanent 10 percent business tax credit for solar and geothermal energy projects and a 1.5 cents-per-kilowatt-hour production tax credit for electricity produced from wind and organic sources.

Looking at the change happening in the utility industry, SMUD's Freeman says that "quite frankly, the roof caved in on utilities in the '70s when all of a sudden the price of fuel shot up and the environmental movement descended on us.

"Utilities have been on the defensive for a long, long time. [They are] finally recognizing that if you can't lick 'em - join 'em."

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