Half-Hearted Competition Christopher Seiple & Barbara O'Neill

Fortnightly Magazine - May 15 1997
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With the implementation of the Energy Policy Act and the FERC's Orders 888 and 889, competition has been introduced into wholesale power markets. It is limited in scope, however, as utilities are still able to recover their fixed generation costs and embedded cost of capital from their captive retail markets. This limited competition impedes progress towards the development of a more efficient generation system in the U.S. and provides only modest benefits to retail customers.

Currently, generators compete only in wholesale markets and not in retail power markets. This restriction has created a temporary, bifurcated market. Utilities are guaranteed recovery of their fixed costs from ratepayers in the retail market. Similarly, nonutility power producers who signed contracts in the late 1980s or early 1990s get full recovery of their costs from long-term, fixed-price contracts with utilities. Competition, therefore, occurs only on the margin in the wholesale market, with the price of electricity determined by the short-term marginal cost. Even in bidding for new capacity contracts, the price seldom reflects the full value of capacity because utilities with excess capacity already recover fixed costs from captive customers.

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