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Order 888, Between the Lines

Fortnightly Magazine - July 1 1996

to reduce variable costs, therefore one party cannot hold another to ransom. While new generation remains exempt from cost-based regulation, the Order states that existing generation will continue to be cost-regulated unless utilities can demonstrate a lack of market power. Although the old first- and second-tier criteria are not meaningful, the FERC offers no new guidance on how market power will be assessed.

The Real Ball Game

Once, however, one aims to move to retail access, the ball game gets serious because the players can hurt each other. And once one considers allowing existing generators to bid, market power becomes a major issue that will link in with merger policy and divestiture.

Market power can create three problems in electric markets (em problems with which the British are fully (and, in some respects, expensively) aware. First, one or a few dominant players can control the margin and hence set prices. Second, some generators own units that must run to prop up the load in certain parts of the transmission system because of constraints. Third, some generators can create constraints through their bids and then profit from owning a plant that has to run because of the constraint.

Once one proposes moving to bidding, the issue of market power will move center stage and influence merger policy, which the FERC is now reviewing. Market-power concerns will also drive divestment. In proposing that PG&E and Southern California Edison should, perhaps, divest themselves of generating assets, the California Public Utilities Commission is probably flagging the trend of the future as the industry restructures. Perhaps mergers will be allowed only if significant generation capacity is divested.

The real significance of Order 888 is that it pushes Pandora's box farther open. It endorses the principle that stranded costs should be recovered (em an idea that, if delivered, will reduce utility opposition to retail access. The Order defines the mechanics of transmission access (with more to come) as well as the principles of the ISO. And it lays the philosophical foundation for the unavoidable evolution of retail access, which is another (em and more complex (em issue.

Over to California for the next steps on that front. t

Alex Henney has been involved since 1987 in the restructuring of the electricity supply industries in England & Wales and in Scandinavia. He is secretary of the Association of Power Exchanges, a director of EEE Limited, and a partner of Competitive Electricity Strategies, Inc., Arlington, VA, a joint venture with Resource Dynamics Inc.

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