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

Fortnightly Magazine - February 15 1996

would concentrate

assets in only a few hands to prove that such increased company size is vital to achieving scale economies.

Measuring Market Power

Utility bulk-power suppliers sell to two classes of customers: other utility bulk-power suppliers and those only in the retail distribution business.

Bulk-power suppliers will normally operate a "control area" by means of a "control center" where dispatchers, ensure 'round the clock that generation equals load.22 When one source of power becomes unavailable, they swiftly become aware of it from the meters and other "remote monitoring" devices at the center and can promptly switch to another source using "remote supervisory" equipment.

On the other hand, a system that is engaged only in retail distribution operates no such facilities or personnel. For these companies, the first indication of a problem will come when an employee notices that his system has gone black. Those in charge of the system may be home in bed when the outage occurs. All they can do is call their bulk-power supplier. If they are a partial requirements customer, they can start up their own local generation to carry at least some of the load center's more vital loads, such as hospitals, water pumping for fire hydrants, police stations, and the like, until the primary source of power again becomes available. If the outage occurs offpeak, the distributor may be able to carry the entire load, but only after it has mobilized the necessary resources to take action. This step may take two or three hours. If it does, the primary source will likely be back in service by then.

While a bulk-power supplier

can use the firm, full-, or partial-requirements power sold to a retail distributor, the distributor cannot use the various kinds

of nonfirm power sold to a

bulk-power supplier by other bulk-power suppliers or NUGs.

These facts led the FERC in 1979 to classify electric product markets into two categories: 1) the power exchange or coordination services market, and 2) the firm, full-, or partial-requirements market.23

These two markets ordinarily would reveal possible adverse impacts from a merger, except that if only bulk-power supply or NUG interests are involved, one would examine only the power exchange market and its various submarkets.24 On the other hand, if a retail distributor complained, then the firm requirements market (full or partial) should also be scrutinized for adverse impacts on competition. This market would become a "relevant market" in deciding the controversy.

The geographic market also plays an important role in identifying adverse merger effects, especially the distance involved in determining whom it is practical to turn to for an alternate power supply. Reliability of supply is a function of distance. Power exchange transactions can take place over long distances because a bulk-power supplier experiencing difficulty in receiving power from one source and operating a control center can easily switch from that source to another. The retail distributor needs complete assurance of supply and will want the facilities of his supplier to be located within the same control area in which load is located, or very close