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Fortnightly Magazine - September 15 1995

fair-value compensation for stranded costs, as proposed by Chief Justice Rehnquist in Duquesne v. Barasch. And APPA cleverly refutes the case for good intentions: "Stranded costs ¬ are the direct consequence of monopoly power ¬ over transmission."

Pro Antitrust

Will the NOPR eliminate market power in electric generation? Edison says yes, but EGA and NIEP argue that enough generation market power will persist to foil competition.

LEPA, a state-owned entity that provides generation and transmission to member municipalities in Louisiana, offers a novel antitrust analysis prepared by Massachusetts University Professor William Shepherd. LEPA divided bulk-power generation into two markets: 1) horizontal coordination or exchange services among bulk-power suppliers at the same stage of production, and 2) a distinct "RQ" market, representing vertical ("requirements") transactions between suppliers and distributors that incorporate a "complete assurance of supply."

Wallace Brand, attorney for LEPA, notes that the "RQ" market accounted for 85 percent of all energy sales in Louisiana. When I asked him about generation market power, he explained: "Even after FERC promulgates its open-access tariffs, Entergy would still enjoy monopoly power in Louisiana, based on its 71-percent share of the RQ generation market." Brand added: "Cost and reliability work at cross-purposes in electric generation. Cost-cutting demands scale, which undermines reliability and requires power pools. All that belies the FERC's presumption (Kansas City Power & Light Co., 67 FERC 61,183) that a competitive generation sector lies poised to step in after transmissions opens up."

Just Like Gas?

As part of its comments, PG&E submitted a paper by Michael Schnitzer of The NorthBridge Group, entitled Concerns with Applying the Gas Model to Electric Transmission. The paper claims that electric transmission markets lack two key features that made the FERC's gas deregulation successful in Order 636: 1) well-defined property rights, and 2) a broad distribution of such rights.

Schnitzer argues that parallel loop flows and dynamic capacity availability make it impossible to define or exercise transmission property rights. These failures, Schnitzer says, will frustrate a viable secondary market in electric transmission, especially since transmission rights in most geographic areas are concentrated among a small number of transmission owners. (Schnitzer cites the California-Oregon interface as a notable exception).

Schnitzer offers three solutions: 1) delay formation of a secondary market, 2) reallocate fixed transmission costs where necessary to make rates recover full costs, and 3) encourage marginal-cost transmission pricing with congestion costs thrown in for periods of peak constraints.

Edison also draws on the natural gas experience, citing a 1991 Seventh Circuit ruling (Illinois ex rel. Burris v. Panhandle Eastern Pipe Line Co., 935 F.2d 1469) to show that sometimes a utility can use a monopoly facility to limit losses in a competitive market. In that case, the pipeline denied transportation service to maintain gas sales and avoid take-or-pay liability. As Edison tells it, the court upheld the pipeline's "lawful refusal to cut its own throat."



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