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P. 1
Unit - 1

Unit - 1

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Published by Pavan Khetrapal

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Published by: Pavan Khetrapal on Feb 01, 2014
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For nearly a hundred years, from the late 19
 century to the end of the 20
 century, the electricity supply industry operated as a “regulated monopoly”. During the nineties decade, many electric utilities and power distribution companies in many  parts of the world hae been forced to change their ways of doing business, from traditional ertically integrated mechanisms to open mar!et systems. "his can be specifically obsered in #weden, $ngland, %olumbia, &ustralia, 'orway, Finland and many other parts of the world. "he reasons for introducing change hae been many and hae differed oer regions and countries. &mong the deeloping countries, the main issues hae been a high demand growth coupled inefficient system management and irrational tariff policies, among others. "his has affected the aailability of financial resources to support inestments in augmenting generation and transmission capacities. (n such circumstances, many utilities were forced to restructure or deregulate their power e)isting power sectors under pressure from international funding agencies. (n deeloped countries, on the other hand, the main motie force has been to proide customers with electricity at lower and cheaper prices and to offer them a greater choice in purchasing economic electrical energy. *eforms hae been underta!en by introducing commercial incenties in generation, transmission, distribution and retailing of electricity, with, in many cases, large resultant efficiency gains.
 1.1 Regultion
 *egulation means that the goernment has set down the laws and rules that  put limits on and define how a particular industry or company can operate. 'early all the industries in all nations world+wide are regulated to some e)tent, een if it is only with laws that constrain them to do business under “fair” or fully disclosed business  practices, or to operate their facilities within recommended safety guidelines. *egulation of electric utilities is not the only way a goernment can control the electric power industry within its urisdiction. "he another popular way is either to own and operate the power distribution company directly, as a goernment or municipal utility, or to set up an agency or administration that proides some or all of the electric power industry functions, thereby haing a hand in fashioning what the local power industry is and how it operates.
 1.1.1 T!e Originl Need "or Regultion 
-oth goernments and business faored utility regulation during the early history of the industry. ften, they ehemently disagreed on the details of what and how
regulation would be implemented, but from the beginning, both groups recogni/ed that it was necessary. From the perspectie of the businessmen running the early utilities, regulation brought seeral important benefits.a.(t legitimi/ed the electric utility business. oernment franchises and regulation clearly implied to a possibly s!eptical public that ciic leaders thought electricity was a “good thing”. b.(t gae utilities recognition and limited support from the local goernment, in approing *ight+of+way and easements, and by generally cooperating with them as they e)panded their embryonic companies.c.(t assured a return on inestment, regulated as that might be.d.(t established a local monopoly. $arly utility leaders could focus on building up their systems and the uality of them, without haing to worry about competitors undercutting prices to gain mar!et share, etc.-eyond the reason discussed aboe, and perhaps most important for both goernment and business, regulation offered an acceptable, ris!+free way to finance the creation of an electricity supply industry. &t the dawn of the electric era, goernment leaders were not about to inest large amounts of  public capital in a new and untried technology, no matter how attractie it appeared. *egulation too! care of that+the businessmen would ris! their money, not the goernments. "rue, the goernment was guaranteeing them a fair return on their inestment, but only through regulated rates. (f electric technology didnt wor!, or if this new energy source didnt sell in the mar!etplace, then the businessmen lost money, not the public.
 1.1.# $!rcteri%tic% o" Regulted Electric Utilit& Structure 
*egulated electric utilities proided the industry with stable growth and good serice for more than a century. "he !ey characteristics of the *egulated $lectricity (ndustry are as follows3a.
Mono'ol& Frnc!i%e
3 nly the local electric utility can produce, moe or sell commercial electric power within its serice territory. b.
O(ligtion to Ser)e
3 "he utility must proide serice to all electric consumers in its serice territory, not ust those that would be profitable.c.
Regultor& O)er%ig!t
3 "he utilitys business and operating practices must conform to guidelines and rules set down by goernment regulators.d.
Le%t*$o%t O'ertion
3 "he utility must operate in a manner that minimi/es its oerall reenue reuirements 4amount it must bill its customer base5.e.
Regulted Rte%
3 "he utilitys rates 4prices5 are set in accordance with goernment regulatory rules and guidelines.
Wit!out utilit& regultion nd go)ern+ent %'on%or%!i' or (c,ing o" electric utilitie%-  uni)er%l electric %&%te+ rec!ing ll !o+e% nd (u%ine%%e%- nd t!e in"r%tructure to %u''ort it- ould ne)er !)e (een (uilt.
A%%ured Rte o" Return
3 "he utility assured a “fair” return on its inestment, it conforms to the regulatory guidelines and practices.
 1.1./ Structure o" Regulted Electricit& Su''l& Indu%tr& 
& typical structure of a ertically integrated electric utility or regulated electricity supply industry is shown in figure 1.1
Figure 1.1 #tructure of a *egulated (ndustry(n figure 1.1, the money flow is unidirectional, i.e. from the consumers to the electric company. #imilarly, the information flow e)ists only between the generators and the transmission system.
1.1.0 Pro(le+% it! Regultion
"he most common argument for the deregulation is the inefficiency of regulation. *egulation has two fundamental problems3415(t cannot proide a strong incentie to suppliers as cheaply as can a competitie mar!et, and425*egulatory bodies themseles do not hae proper incenties. 6ell+trained regulators could proide much better regulation. -ut for goernment to proide competent regulation, the political process would need to change. "he first  problem, that of incenties proided by regulators is more susceptible to analysis.
 T!e Regultor% Dile++
 "ruly competitie mar!ets do two things at once7 they proide full+powered incenties 415 to hold price down to marginal cost, and 425 to minimi/e cost. *egulation can do one or

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