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Generation, Deregulation, and Market Power: Will Antitrust Laws Fill the Void?

Fortnightly Magazine - October 15 1996

factors would be predatory in effect, such conduct would not be actionable, in most instances, when accessed against prevailing antitrust doctrine. Prices will be conclusively or presumptively legal in most jurisdictions. If prices are above average variable cost but below average total cost, challenges may be raised in jurisdictions that follow the Inglis Transamerica test, but the prospect of adducing extrinsic evidence of predatory intent would be daunting. Proof of predation would be particularly problematic where utilities bid into a power pool and distant generators can reach the market through open-access transmission.

Should Regulators Intervene?

Whether predatory pricing should be proscribed on a regulatory basis depends, in large part, on the complexion of the future electric service industry that regulators hope to achieve.

On the one hand, the objective of restructuring is to lower prices. Regulators wish to encourage vigorous competition between generators, which will be manifest in slashing prices to maintain existing load and gain new load. In some cases, utilities may find it economically rational, during certain periods, to offer power below cost (em indeed, even at a negative price (e.g., to avoid temporary shutdowns). The existence of excess capacity represents economic inefficiency. A vigorous price war may quickly eliminate excess capacity and encourage mergers that provide greater operational efficiencies. And consumers, or at least some consumers, will benefit from perhaps drastically lower prices for power.

Three factors, however, may warrant some degree of regulatory oversight, at least during the transition process.

Utility-owned Generation.

First, in its NOPR on open-access transmission policy, the FERC observed that from 1989 through 1993, facilities owned by independent power producers (IPPs) and other nontraditional generators (other than qualifying facilities (QFs)) increased from 249 to 634, and their installed capacity increased from 9,216 megawatts (Mw) to 13,004 Mw.13 In fact, in 1992, IPPs added more generating capacity than utilities.14 The vast majority of nonutility capacity additions are gas-fired; established utilities rely primarily on coal-fired and nuclear generation. The FERC further found that the emergence of these new nonutility generation sources created the competitive alternatives that make restructuring possible. Moreover, the FERC has found that the facilities brought to the market by nonutilities tend to be the most efficient providers of electricity on an average total-cost basis. But, as discussed above, the electric service industry fits the paradigm of radically different capital-/operating-cost ratios. New competitors and potential entrants remain the most vulnerable to predation through marginal-cost pricing. Moreover, although nonutility generation additions have been impressive over the last several years, existing utilities continue to own approximately 90 percent of the capacity in the United States. To the extent that generation diversity forms an essential predicate to restructuring, regulators may wish to consider whether unbridled pricing competition, which will likely claim new entrants as its first casualties, is consistent with their long-term objectives.

The New Construction Cycle. Second, the present surplus of capacity will likely vanish in the reasonably near future. At the end of 1993, fossil-fueled steam capability accounted for 72 percent of U.S. electric utility net summer generating capability; however, by 2003, a large percentage