Private Energy Distribution & Its Effects Essay Sample
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Introduction of TOPIC
Public utilities are required to comply with regulations whether at state level or at municipal level. Those who support a deregulated utility system argue that it increases market power, enhance competition and bring market stabilization. As a result of the introduction of holding companies policy, private utilities have come up notably Florida Power and Light Company which is the largest and fastest growing electric utility in the United States. FPL has adopted a multi-thronged approach to production of power with a powerful fuel mix earning it the repute of a most successful clean energy company. Currently FPL power output comes from 52% natural gas and 19% nuclear. The company is projected to add greener solutions to its output in the coming years as it positions itself to meet industry and environmental needs besides to remaining competitive.
Distinction between a Private Utility Company and a Public Utility Company
A private utility company is owned by the stakeholders or the investors can carry out any authorized business activity and is governed by the Board of Directors who are elected or chosen by the stakeholders. A public utility company is basically owned and controlled by the state with operations limited to those legalized by the state law, governed by a commission with the manager employed by the commission. The source of capital for a privately owned company is solicited from equity sales, loans from financial institutions or bond sales unlike the public utility company which primarily depends upon bond sales. A private utility company may offer a number of utility services ranging from, telecommunications, electricity, sewer, water, garbage and natural gas whereas public utility companies only provide, sewer services, water and electricity except in some states where they may provide telecommunication services and/or natural gas because its activities are restricted by the law. Public utility companies are not for profit (Braden, 2004)
What they are allowed to do, what regulations they must follow
The director of the company is to conduct business within the powers bestowed upon him, enhance the growth of the company, exercise individual judgments with diligence and skill, keep from council and avoid at all cost influence from third parties besides declaring interest in intended transactions. Section 172 stipulates that any decision taken by the company relation to the promotion and/or success of the company must consider the expected consequences of such decision, interests of employees, effect of operations on the locals or community and ecosystem, reputation of the company.
The company can engage in a contracts contingent upon board approval. The shareholders must approve any contracts by the companies including the director’s tenure at the company with the minimum number of directors set at one. Section 101 establishes the Public Company Accounting Oversight Board which regulates the audit of companies with the sole purpose of protecting the inventors and the public interests by the preparation of independent, accurate and informative audit reports. This board is a non profit co-operation and can only be dissolved by the Congress. Membership to the board excludes individuals from the Federal Government. All companies are required to be registered with the board and its unlawful for any company not to. This board ensures compliance of all companies with the rules. All companies are required to disclose their financial transactions with reports on financial changes within the company (Bridgin, 2007)
The Public Utility Regulatory Policies Act (PURPA)
It was enacted in 1978 by the Congress which stressed the exploitation of renewable energy. It requires all utilities to purchase services from certified utility producers
The Federal Energy Regulatory Commission is independent of the Department of Energy and is not subject to the Congress but can only be reviewed by the courts. The FERC was formed during the 1977 reorganization of US Department of Energy.
The Federal Energy Regulatory Commission regulates also regulates the private utilities through regulating the production, transmission and distribution of natural gas including resale across the states. Secondly the FERC overseas the interstate oil transmission. Thirdly, the FERC is charged with licensing and control of state and private hydroelectric production. Fourthly, it co-ordinates the siting of gas facilities in addition to abandonment of production and storage. Fifthly, the FERC ensures that the interstate transmission of utility services is reliable and of high quality. Sixthly, the FERC keeps trends of the energy markets through thorough investigation. It is also charged with arbitrating in environmental issues that arise out of utilities besides implementing the policy initiatives. Lastly it administers the financial regulations and the stipulated conduct of utility companies (Mansueti, 2008)
Meaning of deregulation
This is where the state or the government relinquishes regulations on the industry to bring competition and efficiency in near monopolies. The 1990s experienced fundamental and expedited regulation especially in the utility sectors (Knowledgerush, 2003)
History of what caused so many private utility companies to take over states more than public
The history of regulation dates back to the 1187 when the Interstate Commerce Commission was set up to arbitrate in the disputes between the shippers and the rail roads. This process has been thoroughly followed through the 1930s with the aim of dealing with problems in the utility sector. The Federal Communications Commission was formed to solve issues in the communication sector whereas the Civil Aeronautics administers contracts in air mail (Louis, 2000)
Deregulation was informed out of the decision that they served the interest of the state than that of the consumers. For instance restrictions by the FCC and the CAB not allow more players in the industry led to higher prices and inefficiencies. Most economists contented that regulations of entry and prices brought inefficiencies. An example was the transportation sector which came with high costs and reduced technological development while regulations in the gas and the oil sectors resulted into low prices that led to shortages and sub-par production. Therefore the concept of deregulation has the effect of reducing the operations cost. These utility companies used to manipulate the regulatory agencies t just to serve their own interests (Louis, 2000)
Before deregulation came into play, utilities like electricity were delivered by monopolies right from the generation pants to the transmission. For instance the California state ensured that controlled the rate of return through insisting on factoring the cost of services. This system was enormously abused by politicians and was also influenced by the service providers. California builds expensive power plants and transferred the cost to the consumers who had no choices to reject but comply. This made firms like of Enron to push for deregulation in the industry and the bill was drafted mainly through the efforts of California utilities (Hauter, 2001)
Currently there is a total of 21 private utility companies at state level in Florida and another 8 at municipal level (Mansueti, 2008)
History of How FPL became the biggest Utility Company
FPL was formed in 1925 as part of the larger American Power and Light Company but is later declined in 1950 and listed at the NYSE. FPL Group holding company supplies electricity in Miami to an overwhelming 7.3 million consumers and to other 14 states. FPL and Florida Power & Light are the subsidiaries of FPL Group, Inc. It supplies natural gas, oil and electricity to a wide array of consumers ranging from residential to commercial customers. It’s the biggest wind power generator in US with modest power rates that are unmatched. It has received accolades for engaging in ecological friendly power generation products. FPL FibreNet distributes fiber-optic services t telecommunication companies in Florida (Funding Universe, 2009)
The FPL came into being when a vast number of utility companies were being consolidated by then giant American Pow
er and Company. In the year 1930 it recorded a profit of $2.7 millions with $11.4 million revenue.
Come 1952 the company embarked on a $332 million construction expansion project to increase its production capacity. Under this program 10 power stations were constructed and in 1954 $410 million were injected into its ten year plan which resulted into an expanded customer base to 1.54 million. It gas wing was also expanded to cover 300 miles with plants in Florida, Lake land, Miami, and Palatka but later sold three to Houston Corporation. FPL clients increased to 2.7 million in 1964 and revenue touching $235 million. In 1964 it entered into 20 year contracts with Florida Gas Transmission and Pan-American Petroleum Corporation for gas supply. It was during this time that FPL decided to engage in nuclear power generation culminating into two nuclear plants set up in Turkey Point in 1973 at a price of $240 million (Funding Universe, 2009)
Following the 1973 energy crisis, FPL was granted go ahead to recover the incidental cost by surcharging consumers which resulted into 1974 ruling by Attorney General in Florida that costs of production shall not be passed to the consumers. This dealt a blow FPL which was planning a bond offering to boost its capital. The company was ridden with power failures because it was separated from US power grid. This coupled with an increasing demand forced the company to inject another $335 million which saw the construction another two power lines between Miami and Georgia. The company also rode on major rate increases of $256 million, $ 101 million and $238 in 1981, 1982 and 1983 respectively. The two nuclear plant located in Turkey Point had bee damage by corrosion, issues which put in on collision course with the Nuclear Regulatory Commission causing FPL to rebuilt them to the tune of $ 500 million.
These developments made FPL to adopt Japanese management, a style that ushered in quality control, formation of teams and a track record to power failures and other associated problems. As a result service outages declined from 100 minutes for every client per annum to 43 minutes per annum, not to mention the declines in employee injuries and resolved customer complaints. The company registered 130,000 clients every year making other managers to ape the revolutionary leadership style from FPL. In 1974 the FPL Group, Inc earned the holding company status with FP&L as its main subsidiary and managed to raise $75 million for product differ nation. Under the stewardship of John Huding and Marshall Macdonald the company bought Colonial Penn Life Insurance for $ 565 million and brought forth ESI Energy Inc to primarily engage in non-utility programs. It emerged 4th position in electric utility industry in 1985 in United States and supplying 700 communities in Florida. The addition of St. Lucie nuclear plant reduced oil consumption to a mere 13 % while at the same time raising peak prices and reducing in off peak seasons. In 1989 it received the Deming Prize previously held by Japanese companies (Funding Universe, 2009)
James Broadhead 1989 entry abandoned this Japanese management style, addressed the Turkey Point maintenance problem and discontinued the troubled Colonial Penn Life. These radical changes reduced profits to $6 million in 1990. FPL managed $ 677 million towards its expansion program to increase up to 5, 400 megawatts and bought 76 % shareholding in Georgia Power Company for $ 614 million. By 2000, the company production mix was 26% of nuclear, 25% and 25 % natural gas and in 2001 it increased revenues to $ 8.47 billion and became position 226 on the Fortune 500 ranking. Florida Power& Light accounted for $695 million and FPL Energy contributed $ 105 million.
75 years down the line, the rates of FPL are 23 % cheaper than the US national average. The firm has since bought SeaBrook Nuclear Generating Station for a whooping $ 836.6 million (Funding Universe, 2009)
Florida Energy Broker
The Broker has been existence since 1978. It’s also referred to as Florida Electric Power Coordinating Group, Inc it’s a power pool of Florida’s electric utilities and acts like an umbrella body for Florida representing private utility companies including municipals and co-operatives in rural electric. It also advocates for environmental issues in the utility industry. Currently it has got 28 members including FPL. The member utilities normally send in their offers and bids to Florida Energy Broker who matches them according to set policy standards and gives feedback on the best contracts and costs.
Once agreed the utilities can undertake the exchange and incase of disagreements they can again recommence for another hour the result being efficiency in the utility markets achieved as a result of substituting high cost of a utility with a lower cost. Florida Energy Broker coordinates the arrangements, building and utilization of production and distribution facilities in greater Florida. It enhances and coordinates the exchanges energy by FEB facilities. The FEB administers an hourly operation for the whole system seeing to it that no energy is untrained when the incremental cost is below the avoided price to an anticipated buyer. The members have agreed to a policy and mechanism of transmitting net savings (Cohen, 1982)
Why it’s better for Government to privatize than retain public ownership
Privatization boosts the efficiency of utilities, reduces under capacities and boosts the profitability of firms. An example of privatization is the FPL which has recorded high increases output and profits. Privatization frees the governments from expenditures on these companies and finances other projects that are of public interests. Deciding to privatize increases government revenue from the sale proceeds and subsequent taxation which combined outstrips the gains from running such firms. Also privatization increases productivity of resources used in production. Earning among privatized companies has substantially increased because of the growth of these countries. Privatization has the overall effect of increasing the welfare effects on the consumer. For instance Chilgener privatization resulted into $ 18.2 million welfare gains which were same as 21% of its 1987 market value (Wood, 2004)
Operations of FPL
The general rules and regulations govern FPL service delivery to the customers. To receive a service from FPL one has to make an application by filling an application form with proof of identification and pay a guarantee deposit.
On the application the applicant will provide his personal details and residence and the client will receive communication concerning availability of service at the requested location. By acceptance, the customer enters into a legally binding agreement with the company. Only authorized agents may apply for service and will also enter in a binding contract. In case of default, the company discontinues the services. The company has also a policy on medical essential services where customers who demonstrate medical conditions that need uninterrupted dependency on power. But if the client defaults to pay for the service within a period of 30 days from due date then the service will be discontinued. The client will be required to pay the company incase of violation of any of the provisions in the agreement. The company supplies services within its territory and may extend in accordance with customers request be justified. The clients are not allowed to resell the service (FPL, 2008)
Through the efforts of Everglades Mitigation Bank, 13,000 acres in the wetlands are being revamped to their natural condition. Through this program private developers and land owners can receive credit to carry our projects that address environmentally important issues. FPL recycles to reduce pollution and waste. Some of the recycled materials are: oils, paints, aerosol cans, mercury devices, lead acid, florescent bulbs, solvents lithium and nickel cadmium batteries. It also cleans up hazardous waste and a program that has usefully cleaned up 239,000 tones since 1986 from 13 factories. Through the cleanup process they have come up with more innovative recycling techniques like reuse to make concrete products. FPL is the best utility company when it comes to utility management and as a result it has emerged top in the whole country. Even then it has not relented to adopt most environmentally friendly techniques in the production and utilization of power. It has installed highly advanced plant equipment that is best in pollution control. Sulfuric acid and Aerosol relapses dropped from 2.0 million Ibs in 2005 to 1.2 million Ibs in 2006 whereas Hydrochloric Acid Aerosols dropped from 436,000 million Ibs to 182,000 million within the same period (FPL Group, 2009)
Through partnership with Kitson & Partners, FPL is poised to launch a power plant that utilizes solar. The photovoltaic plants will the largest in the world that will benefit about 17,000 acres of the city and create a whooping 20,000 jobs. The facility is expected to cost $300 million and will be situated on a 350 acre land. This plant will raise the consumer bill by a modest 31 US cents. Plans to introduce smart grid are in high gear which will put management of consumption into the hands of consumers. The 75 MW solar facilities is expected to be operation by the end of 2009 while commercial and residential buildings earmarked to begin in 2010 (Environmental Leader, 2009)
FPL has positioned itself in the industry as the most innovative and efficient power not only inn Florida but in the whole of United States. It has received credits and accolades fro its clean and renewable approach to energy production, an effort that will contribute effectively in reducing the effects of environmental pollution. FPL is a perfect example of gains that can accrue from privatization and deregulation of public utilities. Through innovative technology and exemplary management style, FPL will continue to roll out cutting-edge products and services in the power utility sector.
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