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Frontlines

Fortnightly Magazine - October 15 1997

regardless of the price of power on the open market, are such that the possible gain from switching suppliers is minimal or nonexistent." (Text on ICC's Internet site: www.state.il.libdocs/sb55.)

The situation appears no different on the gas side. In a speech earlier this year, James Hoecker of the Federal Energy Regulatory Commission drew attention to a failure of trickle-down economics in natural gas. I didn't hear the speech, but I read a summary prepared by Consolidated Natural Gas Co. (See, FERC Docket No. PL97-1-000, Issues and Priorities for the Natural Gas Industry.) According to CNG, Hoecker said that while the city gate price of natural gas in California fell from $2.90 to $1.99 per Mcf from 1990 to 1995, the cost to residential customers actually rose (em from $5.99/Mcf to $6.64/Mcf.

On a nationwide basis, says CNG, wellhead costs have declined by 9 percent over the same period, while residential gas prices have increased by 4.5 percent. The company muses on what it all means:

"These and similar price trends may have led Commissioner Hoecker in his speech to suggest that the reason for these trends is that a seamless, competitive gas delivery system has not yet been achieved."

Unbundling Seen Problematic

In its recent position paper, The Future of the Natural Gas Industry, released Sept. 4, the staff of the New York Public Service Commission recommended new strategies for local distribution companies. First of all, "LDCs should exit the merchant function to establish a fully competitive commodity market." (Text: www.dps.state.ny.us/fileroom/doc2990.t.)

Many LDCs would agree. But wait a minute. Once evicted from the merchant business, LDCs will become more like gas pipelines, who were forced out of commodity markets by the FERC in Order 636. And guess what? The pipelines now want back in. They say they need to rebundle commodity and capacity services to stay in business, compete against the "gray market" and capture the "value" of their assets.

Everywhere in energy, regulators are having difficulty unbundling production from pipes and wires. For them it's a matter of survival. Their jurisdiction extends only over transmission, so they must keep it separate from production, or be out of a job.

In electricity, it's an old saw that generation can substitute for transmission, like energy for mass. The most creative proposals for pricing and allocating transmission involve nodal and zonal schemes that analyze differentials in commodity prices. That's what a lot of the debate is about in restructuring power pools (em how to maintain a transparent commodity market that stays independent from transmission constraints.

Now consider this oddity. On Aug. 1 (Decision 97-08-058), the California Public Utilities Commission denied authority to Pacific Gas & Electric Co. to use derivatives (futures, options and swaps) to manage price risk for electricity. Why? PUC rules say that PG&E must buy and sell power through the state-regulated power exchange. But with derivatives, the PUC says, "PG&E could be put in the position of having to take or make delivery of electricity outside of the PX if it is unable to find a buyer for such