Expressing concern about price volatility in the natural gas market, New Jersey, Virginia and Michigan regulators have directed local gas distribution companies to try fixed-price contracts and...
Is Bigger Better? Market Power in Bulk-Power Supply: From FDR to NoPR
The merger voltage (I) is rising on the electric grid, but it remains to be seen which will win out: current (E) policy or resistance (R) to it. The textbook formula, I equals E over R, won't help you find the answer to this question.
In its March 1995 Notice of Proposed Rulemaking (NOPR),1 the Federal Energy Regulatory Commission (FERC) accepted two basic assumptions: 1) that in the wholesale market, electric generation is fully competitive (at least for new, as-yet unbuilt plants), and 2) that an open-access regime for electric transmission will eliminate unfair competition in retail markets. But there is room for doubt, since the second theory rests by necessity on the first, which itself has yet to be proven.
That is because the "wholesale market" that many, including Professor Joskow at MIT2 have been looking at, is only the market for the sale of bulk-power supply by one utility bulk-power supplier to another, or by a nonutility generator (NUG) to a bulk supplier. Few have thought to consider the purchase options available to a retail distributor of power not also in the bulk-power supply business, even though this market is by far the largest part of the wholesale supply of electric power.
Consider the distributor that is generation-dependent. This
distributor requires a product suitable for the retail market (em a product that we can define here as firm requirements power ("RQ" power).3 But on one hand, those adjacent bulk-power suppliers that are able to sell RQ power at wholesale that such a retailer might use may fear retaliation by their neighbor (em especially if it's a very big neighbor. On the other hand, NUGs that can't wait to compete may not be able to sell RQ power usable by the retailer.4 A retail distributor without generation can only use RQ power. A municipality served at retail by a vertically integrated supplier can municipalize only if it can call on a source of RQ power that is priced competitively. Other types of power won't do.
In the Louisiana market (a market I have studied) some 85 percent of all kilowatt hours are supplied to distribution systems that can use only RQ power. The nationwide figure is likely comparable. Given these facts, it is important to look at horizontal concentrations of market power in the RQ market to ensure that the only result of a merger is not to enhance the ability to engage in unfair competition in the newly "competitive" market.5
It now appears that Commissioner Massey may have the same concern.
That doubts are rising, even before the NOPR is finalized, can be seen in recent discussions by Commissioners Massey, Hoecker, and others, suggesting a new standard for approval of mergers at the FERC. On October 12, 1995, in a speech presented at the Edison Electric Institute Fall Legal Conference, Commissioner Massey raised red flags several times on the dangers of too much concentration of generating assets:
"One solution [to generation concentration] . . . might be to ensure that consolidation of the grid assets does in fact produce a