July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
One thing that adds some fun to my job (notice, I did not say that my job is fun) is the chance to compare similarities between the gas and electric markets. If you can be sure of anything, it's that any mistake committed first in the gas business is never so unique that it cannot be replicated later for the electric industry.
Rooting Out Market Power
These days, the Federal Energy Regulatory Commission (FERC) finds itself hard at work pulling on both ends of the same rope (em trying to create competition by prescribing conduct, instead of just letting go.
On the gas side, the FERC finds itself hard at work redesigning rules for a market in pipeline transportation that was considered a model for deregulation not so very long ago. It is now acting on applications filed by interstate gas pipelines (at the FERC's invitation) to participate in a pilot program to relax the price ceiling that applies to certain released pipeline capacity and pipeline sales of interruptible and short-term firm capacity.
The idea is to test whether pipelines can exert market power when competing with shippers that release capacity for short-term transactions, because the time it takes to process a capacity release places releasing shippers at a disadvantage when competing against short-term capacity offered initially by the pipeline (which serves as a product substitute for released capacity). Also, the FERC wants to test whether distributors enjoy market power in selling gas to buyers behind the city gate, because the buyers are limited in their choice of delivery points. See, Secondary Market Transactions on Interstate Natural Gas
Pipelines, FERC Dkt. Nos. RM96-14-000, RM96-14-001, July 31, 1996,
61 Fed.Reg. 41046 (Aug. 7, 1996) (Notice of Proposed Rulemaking and Proposed Experimental Pilot Program).
These two questions bear a remarkable similarity to questions about market power that have taken center stage on the electric side since the FERC issued Order 888, setting up a regime for open-access transmission markets in the electric industry.
There, the FERC (and others) wants to know whether and to what degree owners of generating plants can exert market power through their control over transmission pathways. Also: Do transmission constraints in certain geographic areas narrow the supply choices available to customers located in those areas, again because of a limited choice in delivery points?
Unfortunately these efforts will drag on forever (and maybe that's the point), unless the FERC can somehow develop the will to mandate authentic secondary markets for capacity on gas pipelines and the transmission grid.
Ignoring Secondary Concerns
From what I've heard in talking with people whose views I respect, the surest way to extinguish market power is to give it away. Create an authentic secondary market. Treat purchasers of transmission capacity (electric or gas) as owners of private property, allowed to sell to anyone they please, in any market, and at any price.
However, the FERC steadfastly refuses on the gas side to allow owners of pipeline capacity to freely sell their rights; instead, they must release capacity back to the pipeline (doesn't that just increase