July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
PoolCo and Market Dominance
Imagine if the airlines had followed a utility model when they deregulated back in 1978.You and five other planeloads show up at the airport to catch a flight to Chicago. Every few hours the airport operator holds an auction for the next hour's Chicago flights. Delta offers two new 767's at $200 per ticket. U.S. Air bids one 737 at $300. American has six
DC-9's and bids each one at $1,000 per head. When the auction ends, Delta and U.S. Air fill their planes. American fills two of its six flights. But despite the broad range of bids, you and everyone else pays $1,000 per ticket.
Welcome to electric utility "deregulation," as some envision it. It is known as "PoolCo."
PoolCo has already been adopted in the United Kingdom. It was recently endorsed by a majority decision of the California Public Utility Commission (CPUC), though Commissioner Jessie Knight recommended an alternative direct-access plan in his dissenting opinion.1 If PoolCo is adopted for the electric utility industry, consumers will not enjoy the benefits achieved through deregulation in the airline, telephone, and natural gas industries, because the power supply remains in the monopolists' hands. Ratepayers still purchase from a single monopolist distributor. PoolCo may mean deregulation, but not true competition.
Under PoolCo, utilities ignore traditional service areas and bid resources hourly to supply all the needs of the region or state. The same utilities then purchase power at the highest accepted bid price and distribute it to consumers. In PoolCo theory, the winning bid marks the marginal cost (essentially fuel cost only) of the least efficient resource needed at the time to meet demand.
Recent reports indicate that a compromise solution may emerge in California that contains elements of both the direct access and PoolCo concepts.2 But whatever model emerges, the debate will include PoolCo. In the United Kingdom, two major power producers found they could bid up prices because of limited competition. Some say "it can't happen here." We strongly disagree.
A New York PoolCo?
Let's consider how a California-style PoolCo might operate in New York State.
The hypothetical New York PoolCo would encompass a huge power market with a peak demand of roughly 27 million kilowatts and a supply of nearly 36 million kilowatts (see Figure 1). Under the California model, nonutility generators (NUGs) would be directly assigned to utilities and would not participate in PoolCo, limiting competition. In a New York PoolCo, Consolidated Edison Co. of New York (Con Edison) would be the dominant supplier, with more than 10 million kilowatts, or 30 percent of total pool generation. Two other high-cost suppliers, Long Island Lighting Company (LILCO) and Niagara Mohawk (NiMo), would own another 29 percent of total supply. Four other investor-owned utilities would come in as lower-cost producers, but by themselves could not supply enough power to meet requirements, even during lowest demand periods. NUGs would command a 15-percent share of all supply, which would not participate in the bidding process.
Taking into account that the outage rate of power plants is approximately 20 percent (more than 30 percent for