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

Fortnightly Magazine - February 15 1995

the sake of argument, let's assume that we do need more generating capacity. The question then arises: For whose benefit should we build these facilities? Let's assume the current FERC version of a "market economy" is in place and that large customers, seeing the incorrect pricing signal, build the needed facilities to obtain lower cost.

Most observers would say that the host utilities will suffer a loss. While that may be true, analysis shows that the remaining customers will also bear an opportunity cost. If the host utility had been allowed to expand its generation or purchase additional power, the new low-cost power would have been blended into the power supply; each customer would have received a share of the new cheap power. However, if large customers build the capacity, they acquire 100 percent of the new low-cost power. Residential customers are shut out.

Many of those who espouse competition in generation are, in effect, arguing price relief for large customers. The average homeowner, for instance, cannot install an LM-6000 in the backyard. In fact, if homeowners could collectively install gas turbines, the price of gas might rise significantly, making new construction more costly. Thus, large customers currently enjoy a monopoly on the limited amount of cheap power. Would it be better to mandate that utilities acquire all energy through competitive bids, thus spreading the benefits of new low-cost generation to all customers?

Nobody's Perfect

The FERC should not worry about creating perfect competition. Competition is not perfect. Just listen to Dostoyevsky: "Although, when we're guided by our desires, life may often turn into a messy affair, it's still life and not a series of extractions of square roots."

We cannot go forward with a piecemeal approach to deregulation that exacts an economic penalty from industry and society. The FERC must not deregulate for the sake of deregulation. If it acts, the FERC must replace regulation with a more efficient system, such as efficient competition. And efficient competition requires efficient pricing. The FERC must step back, look at all of the issues and effects, and develop a comprehensive plan (em one that puts us on the right side of the road. t

Charles E. Bayless is chairman, president, and CEO of Tucson Electric Power Co. in Arizona.

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