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Electric Mergers: Transmission Pricing, Market Size, and Effects on Competition

Fortnightly Magazine - June 1 1996

added cost of transmission limits the number of alternate suppliers to which the buyer can turn without additional significant cost.

How Transmission Rate Pancaking Constrains the Relevant Geographic Market

Given the structure of the transmission grid today, characterized by many utilities and unconsolidated transmission pricing, the cost of transmission often constitutes a significant percentage of the delivered cost of power, thereby affecting the size of the relevant geographic market.

This effect can be illustrated by considering what a distributor will pay in additional transmission charges to three selected utilities that are members of VACAR. Wheeling power through any of these utilities to access a distant supplier would increase a distribution company's total delivered cost by 5 to 13 percent.3

Analyzing the transmission rates of selected utilities that belong to MAIN yields similar results, even though this region boasts average transmission rates 25 percent lower than VACAR. A distributor using any of these utilities to wheel power from an alternative source would face an increase in total cost of 4 to 11 percent.4

These illustrations show that, with pancaked pricing, the additional cost to move power across

a single additional utility

transmission system would in many cases add more than the 5-percent additional cost imposed by the Merger Guidelines to determine whether supplies outside the first transmitting utility's reach lie within the relevant market.5

Why Even Region-Wide, Postage-Stamp Pricing Will Result in Markets No Larger than Areas

such as VACAR or MAIN

One proposed solution to the problem of "pancaked" transmission rates would create regional pools with a single transmission rate for service between any two points on the transmission systems of all participating utilities. This solution could help create a competitive market. To create competition, however, the pool will require at least five, and preferably more, equally sized generating companies, each operating on a sufficient scale to provide diversity and economy in meeting consumer demand and reliability requirements.6 The larger the

geographic area, the larger the number of generating units, the greater the number of companies that could generate, and the more robust the competition in generation.

However, a single transmission price for a large geographic area sends inaccurate price signals of the cost of transmission, thereby encouraging inefficient siting of generating facilities.7 The larger the area in which postage-stamp pricing prevails, the greater its potential to induce inefficient use and construction of transmission. Imagine the inefficiency arising from adding generation in Maine to serve load in Florida, made possible because the price for transmission (including losses) is assessed on a postage-stamp basis for all transmission east of the Mississippi.

It therefore seems likely that the FERC will create power pools that charge a single "postage-stamp" rate across the entire pool, but which span a geographic area no larger than necessary to create effective competition in generation.

How large will these areas be? Predicting the exact size of the areas within which single-system pricing will prevail, and thus the size of the geographic market, requires an assessment of the minimum quantity and diversity of generation assets that each competitor will require to