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The Market Transition: Is FERC Pricing Policy on the Wrong Side of the Road?

Fortnightly Magazine - February 15 1995

last fiscal year. Yet, the FERC has been racing ahead without considering the correct charges for these items or who will pay what portion (and they will cost much more in the United States than in the United Kingdom because our domestic market is larger).

When the natural gas market was deregulated, meters and other equipment had to be added to make the system function and to collect all of the necessary data to control it properly. Suppliers were allowed to collect for these items. These items are already in place in the electric system, but utilities should be allowed to collect for them. Microwave systems, computers, reserves, frequency control, black start capability, and area control services are essential to operate the transmission system, and require billions of dollars of hardware and software. Shouldn't sellers be required to pay for this service and meet operational guidelines? Shouldn't all sellers of electricity be licensed (em or, at least, required to comply with guidelines imposed by the North American Electric Reliability Council (em and pay market for all services they use?

Some Thoughts on Generation

Let's consider another critical area of deregulation: Who should construct new generation, and for whose benefit? Moreover, whose interests were served by prior plant construction? Do utilities deserve compensation for departing customers?

Over the years, many state commissions have raised the price of electricity for large customers to ease the burden on residential customers or promote social programs. Under these circumstances, large customers have every reason to leave the system. Again, regulated pricing, when applied to a free-market system, produces strange results. These customers don't necessarily want to generate their own power. Nor do they necessarily want utilities to build for them. They want cheap power at market rates (em and nothing more. Unless we honor that simple need, those customers will leave.

When large electric customers wonder whether to build their own generation, the only price signal they see is the embedded cost of utility generation, plus mandated programs. Seeing this incorrect price signal, they logically decide to build their own "low-cost" plant to obtain the market price. The correct price (em the marginal cost that the utility would incur to generate more energy for the customer (em remains hidden. It makes no sense for a customer to install new generation at 4›/Kwh to escape a utility price of 6›/Kwh if utilities can produce the energy, on the margin, for 2›/Kwh. Yet from a customer's point of view, the correct decision has been made. Thus, we have projects being built for the gain of a few; projects that would not be constructed in a free market; projects that are economically inefficient, but look good (em all because of regulated price signals escaping to the free market.

The assets left behind we then describe as "stranded." "Stranded assets" are an artificial creation. They only occur when the FERC or some other regulatory agency switches back and forth between cost and market, whichever is lower, "stranding" those assets priced above the market while "trapping" those below the market.

But for