July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
The Choice of Fuel in Competitive Generation
All versions of the "revolution" in the electric power industry seem to turn on the prospect of competition in generation. This indeed is the vision of things to come.1 The generation in question is either partly utility owned and partly independent or (em in the best of all possible worlds (em all independent, as a result of disintegrating the vertical utility monopoly.2
The startling disparities between the cost of delivered kilowatt-hours in the various utility service territories supply the driving force behind the demand for competitive opportunity and access. Many observers now claim that the "market" price of electricity lies somewhere in the 4 cents per kilowatt-hour (›/Kwh) range, while, in certain service territories, retail rates may range upwards of 10 to 12 cents per kilowatt-hour.3 In general, we are to believe that there is "efficient" generation, which is usually ascribed to more competent management, and "inefficient" generation, which is normally attributed to a correspondingly backward management.4 No wonder there is a demand for competition if good management and bad management can be so sharply distinguished at the bottom line.
The literature on competition, however, has mostly failed to address the specifics of efficiencies in electric generation or the ways in which electric generation will respond to a competitive environment.
Heat Rates, Efficiency, and Vulnerability
Some discussions of this subject have made passing references to heat rates (em the standard measure of power-plant thermal efficiency (in British thermal units per kilowatt-hour). On the face of it, heat rates seem the natural measure of a factor that would respond to competitive forces. Heat rate is a conventional standard and, of course, may be adversely affected by environmental requirements. Increasing plant reliability, lowering fuel costs, and lowering financing costs have also been mentioned as sources of competitive savings.5 But, aside from obvious measures like these, the generation most authors consider vulnerable to competition is nuclear power.6 The question is whether high-cost generation resulted primarily from managerial error or from global factors unlikely to be "corrected" by market factors alone?
Nuclear generation is frequently identified as inefficient or costly. Disparities in the rate levels in adjoining service territories are often attributable to a too-expensive or poorly functioning nuclear unit or units in the disadvantaged territory. Under a competitive regime, this situation may mean that, at best, a nuclear plant can be run to recover its variable cost of operation, hopefully with some contribution to fixed costs. At worst, in the unlikely event the "market" price will not cover even variable costs, the nuclear plant will be wisely shut down. How decommissioning costs will fit into this picture is not entirely clear.7
The number of nuclear plants continuing to run but failing to recover their total costs (including fixed costs) creates a national problem not unlike that of the railroads during the Depression. Utilities are expected to operate with substantial excess capacity and a chronic inability to achieve sufficient revenues to cover costs. The existence and extent of loss depend, of course, on how stranded assets, such as nuclear plants, are actually treated.
But all this