July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
At the end of May, Consumers Power Co. issued a press release that caught my eye. In four short paragraphs, the company said it had filed an application with the state public service commission (PSC) seeking approval of a private power-supply contract with James River Corp. Consumers Power ranks James River as its 23rd largest industrial electric customer. Under this seven-year contract, the utility would act as sole supplier for the first 20 megawatts of demand sold to James River's Kalamazoo paperboard plant, which makes paper stock for cereal boxes.
But that's not all.
Consumers Power added this comment: "Assuming PSC approval of the application, Consumers Power will have secured long-term energy contracts with more than 87 percent of its at-risk industrial electric load." Note particularly the use of the words "long-term" and "secured."
I congratulate Consumers Power on its success in locking up seven-eighths of the market. But I wonder if that's what Michigan regulators had in mind back in 1994 when they announced their retail wheeling experiment.
Sadly, Michigan's initial five-year wheeling experiment for Consumers Power and Detroit Edison is tied to solicitations for new capacity, conducted through a competitive bidding process with requests for proposals. Without a solicitation, nothing happens.
What we have right now is a market with a modicum of competition at the supply end, but still no meaningful choice in distribution. Those few customers with clout (those large enough to dabble in the generation sector) can compete directly against the utility. They can negotiate rate concessions (em benefits that some suggest will come out of the hides of customers that are not so well-heeled. Meanwhile, the utility gets a headstart against the eventual competition.
It's like what they say about gun control: "If monopolies are outlawed, only outlaws will have monopolies."
A couple of months ago I attended a luncheon where Federal Energy Regulatory Commission (FERC) chair Elizabeth Moler was talking about how to make natural gas markets run more smoothly and temper capacity turnback on the pipelines. One idea involved negotiated rates for natural gas pipelines. As proposed by the Interstate Natural Gas Association of America (see, FERC Dkt. Nos. RM95-6-000, RM96-7-000, Jan. 31, 1996), shippers would negotiate transport rates with pipelines. A default rate would serve as a fallback.
Kathy Edwards, a natural gas lawyer (Travis & Gooch, Washington, DC), asked Moler whether that plan would meet the test of the Natural Gas Act, which prohibits rate discrimination by pipelines. Moler answered, in so many words, that as long as the parties remain free to negotiate, the FERC would assume no further need to protect shippers. The default rate would serve, even though, as Edwards has pointed out on other occasions, pipelines can essentially control the default rate by deciding whether to go in for a rate case, and if so, for how much.
That's what we've got now in electric markets. Horse trading masquerades as competition, but not everyone can take part.
John Hanger, a utility commissioner from Pennsylvania, has questioned this trend, most recently in a case involving special discount