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To Pool or Not to Pool? Toward a New System of Governance

Fortnightly Magazine - March 1 1996

to national regulators for failures to act in a timely manner, including failures to plan properly or to anticipate unplanned incidents and prepare for them

Correlating Management

with Network Size

Large transmission networks, such as the Eastern and Western Interconnections, may require several different control centers that serve generators, distributors and end users. However, neither control centers nor the governing body of an interconnection is likely to be able to legitimize the rules, fines, and penalties needed to permit such interdependent control areas to perform efficiently and reliably. Instead, both types of organizations must look to regulator(s) to provide forums in which all relevant interests can make their preference known and to make enforceable decisions.

By identifying interactions between control centers and the interests they serve, and shifting the focus on those interactions to the regulatory agency, the regulator can ensure that lines of authority and responsibility are clear. In particular, the regulator can make it unmistakably clear that the regulated monopolist remains fully responsible for ensuring efficient and reliable outcomes.

When regulators cannot design detailed pricing rules for efficient use of networks, they have gathered such networks into a single legal entity and have imposed clear responsibilities for efficient planning and operation. In the electric industry, this solution involves creating large regional transmission company monopolies (TransCos). If that can be done, the functions of the RRCs can be incorporated in the legal entity, and the NERC function can be

incorporated in a "voluntary" association of regional TransCos.

The principal advantage to this approach is that such an umbrella organization can make decisions (em decisions that might be reviewed in customary regulatory proceedings at a later date. Such an organization would not need to involve all stakeholders directly involved in the formulation of detailed operating rules.

Given the urgency of creating governance systems for electric interconnections, I believe the FERC can and should "coach" such organizations into existence. Any

successful coaching must recognize that transmission assets, when made a part of a larger regional TransCo, are "worth more" than when owned by a small firm, and must assure the parties that the FERC will recognize that increase in value when transmission assets are so transferred or merged. t

Charles Stalon works as a consultant in energy regulation out of Cape Girardeau, MO. He served as a Commissioner on the Federal Energy Regulatory Commission from 1984-90, and before that on the Illinois Commerce Commission.

Rules vs. Laissez-Faire

The idea that markets arise spontaneously in a free society and yield just and efficient results finds only modest support in history, restricted generally to 19th century European economists (and perhaps the U.S. during the 1980s).

Instead, the British and American traditions have insisted that a market system, like other social institutions and society itself, must be viewed as an artifact. This Anglo-American view finds support from Lionel Robbins, writing in his 1952 study. The Theory of Economic Policy in English Classical Political Economy;*

[A system of economic freedom] can only come into being if [things] are not left to take their course, if a conscious