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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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Unemployment

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Recessions Over Time

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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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An Aluminum “Pot Line”

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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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Basic Integrated Steelmaking

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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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Electric Arc Furnace Steelmaking

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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

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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: elcon@elcon.orgWeb site: www.elcon.orgAddress: 1111 19th Street N.W.,

Suite 700Washington, DC 20036