When economic reformers in the old Soviet Union searched for a metaphor to describe their move to a market economy, they a spoke of a horseman jumping a ditch. The true test of a strategy was that...
NUGs Take the Cake
I take great exception to the presumption of Messrs. Costello, Burns, and Hegazy ("How State Regulators Should Handle Retail Wheeling," Feb. 15, 1995) that retail wheeling's "day will come." This is the oft repeated but never proven siren's song of Elcon's John Anderson and the other industrial/ cogeneration groups. The authors write: "For retail wheeling to become politically palatable, legislatures and PUCs must address the question of how to minimize the negative effects on core customers in the short term." Why?
Why must core customers suffer any negative effects so that a few industrial customers can benefit in the short term? The incentives are clear. Retail wheeling is attractive to nonutility generators (NUGs) today because the short-term marginal cost of generation is below the average cost of electricity for most utilities. Why should NUGs sell to utilities at a price based on their own marginal cost if they can sell at a discount off the utility's embedded price?
In the 1980s, when the marginal cost of power was higher than the utility's embedded price, NUGs demanded their right under the Public Utility Regulatory Policies Act (PURPA) to sell wholesale at the full avoided cost or above. Core customers overpaid billions of dollars to purchase power at the utility's marginal cost instead of the NUG's marginal cost. Customers on Houston Lighting & Power Co.'s (HL&P's) system paid nearly $2 billion above the production cost over the term of such contracts. Now that these overpayments are coming to an end, NUGs are once again demanding the right to sell power at a marginal cost other than their own. This time it's the retail customer's marginal cost. The NUGs want to sell directly to industrial customers at a price below the utility's industrial embedded cost rate but above its marginal cost. What NUGs propose with retail wheeling are not opportunities to increase efficiencies in providing electric service or to lower total system costs (and thus reduce rates for all consumers). Instead, retail wheeling will redistribute cost, causing increased incremental pricing that will begin with the lowest prices for retail industrial loads. And when the retail price falls below the utility's marginal cost (or the utility's marginal cost once again rises above its embedded costs), then the NUG will return to selling directly to the utility in order to maximize nonutility profits.
Despite the authors' claim that "The Energy Policy Act of 1992 (EPAct) encourages states to look at retail wheeling," the EPAct meant to encourage development of a vigorous wholesale market. In fact, in a letter to former Gov. Ann Richards last year, U.S. Reps. Joe Barton (R-TX) and Ralph Hall (D-TX) stated: "Congress intended to ban mandatory retail wheeling in Texas and throughout the nation. . . . [A]s we understood it during consideration of the EPAct, the prohibition on mandatory retail wheeling was to remain in effect until it is removed by Congress."
Congress intended the development of a robust wholesale generation market to benefit all consumers, not just a select few. This can be accomplished through a regulatory