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Is Bigger Better? Market Power in Bulk-Power Supply: From FDR to NoPR

Fortnightly Magazine - February 15 1996

RM95-8, RM94-7) illustrates the first part of this computation.

A company whose utility system has no access to reserve sharing or to the coordinated development of baseload units and wants to compete in price and reliability must, in today's market, install 500-Mw, coal-fired steam turbines as its baseload units. Since such a system must maintain installed reserves at least equal to its single largest unit, it is easy to calculate that the smallest system able to install 500-Mw units, (where reserves are only 20 percent of its capacity) is one with a load of 2,500 Mw. But this would hold true only for a static system (em one not growing. All systems do experience growth in load.

When a company with a

2500-Mw annual peak load installs a new 500-Mw unit, it will not be able to use all the additional capacity for several years unless its load growth is 20 percent per year. Twenty-percent load growth is far greater than load growth has been since the oil crisis of 1973. (Even greater than it was before 1973 when load growth averaged 7 percent). Load growth of 5 percent per year on a 2,500-Mw system would require only an additional 125 Mw of new capacity per year, and would take 4 years to reduce reserves back down to 20 percent after adding a new 500-Mw unit. But a system of 10,000 Mw growing at 5 percent could use all the capacity of a new 500-Mw unit in a single year. No excess reserves need be maintained.

Knowing the optimal size baseload generating unit, the system size and its load growth will enable the FERC to determine the size of a company that even without access to reserve sharing and coordinated development of

baseload units could install

competitive-sized baseload units and maintain competitive reliability with reserves at a competitively low level. Then the FERC could factor in whether the institutional arrangements of reserve sharing and coordinated development were available, and reduce the optimal company size if and to the extent they were available.

Applying this standard would also facilitate the FERC's goal of fostering honestly industrial competition in wholesale electric bulk-power markets and avoid the predatory competition that otherwise would run rampant where some systems were far larger than needed to attain scale economies. For example, the Entergy merger created a system with $5 to $6 billion in annual revenues and some $25 billion in investment, a system far greater than needed to obtain scale economies. The major claimed economies of the merger were those from central economic dispatch of the combined Entergy-GSU system, which is a relatively simple kind of coordination readily achievable by contract between two entirely independent systems.

Roosevelt and others who fought fiercely for the 1935 Utility Act would be surprised to find that it (em drafted on the premise that systems larger than needed for scale economies should be dissolved (em is now interpreted to place the burden on the small-scale competitor to establish that proposition. What was mandated in 1935 was a rule that requires those who