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Breaking the Bulk-Power BottlenecksWallace Edward Brand

Fortnightly Magazine - March 15 1995

exceptional contingencies (em contingencies those in the trade believe it would be unreasonable to plan for.4 Typically, a utility derives some 50 percent of its wholesale revenues from sale of this guarantee of reliability, usually through an explicit or implicit demand charge. The charge pays for the right to call on a system of generating and transmission facilities created for the purpose of and capable of supplying firm bulk power, and for the confidence that the agreed amount of kilowatts and kilowatt-hours will be there when you want them. PoolCo is premised solely on trading in "electricity" and largely ignores this important part of firm power service.

PoolCo advocates also have not addressed barriers to entry into the relevant market(s). If the barriers are insubstantial, new entrants can enter the market when prices rise above a competitive level; sellers cannot easily impose constraints on the market. But if the market imposes significant barriers, existing sellers can set prices above purely competitive levels and impose constraints that block new entrants. This extremely important analysis is missing entirely from the PoolCo proposal.

Traditional Pooling

Access to traditional pooling places both economy and reliability within the reach of the small-scale entrant and therefore overcomes technological barriers. Two or three types of such pooling are the most important. One is reserve sharing, as ordered by the Federal Power Commission in Gainesville Utils. Dept. v. Florida Power Corp., 402 U.S. 915 (1971). A second is the coordinated development of base-load generating units by means of joint ownership, staggered construction, and the like. A third is transmission sharing.

These types of pooling were often required during the 1970s when the Nuclear Regulatory Commission (NRC) granted licenses to construct and operate nuclear power plants. See, e.g., Consumers Power Co., Midland Units 1 & 2., 6 NRC 804 (1977); Alabama Power Co., Farley Units 1 & 2., 5 NRC 804 (1977). Authority stemmed from section 105(c) of the Atomic Energy Act, which permits the NRC to impose such requirements if the granting of an unconditional license would "create or maintain a situation inconsistent with the antitrust laws."

This pooling will not occur voluntarily in concentrated markets. Most geographic markets for electric bulk-power supply are already concentrated. The movement toward integration in the 1920s concentrated markets in many parts of country.5 Further, power pooling on a coordinated basis developed in the 1960s among the larger of the integrated companies due to the Federal Power Commission's 1964 National Power Survey, which promoted traditional pooling as a way to obtain enhanced economy and reliability. The 1970 National Power Survey documented such pooling and its benefits. Clearly, multilateral or bilateral6 traditional power pooling can provide substantial benefits of economy and reliability. Congress made that finding the premise of section 202 of the Federal Power Act.

Nevertheless, it is well known that the last party to join a pool on fair terms gains significantly more by joining than existing members gain from the addition of the last member. In a competitive regime, this fact quickly destroys the incentive of those already pooling to agree to