Should the power industry adapt its approach to capital markets in this environment? The answer, of course, is yes. Multiple frameworks are necessary to establish a power company’s or project’s...
Regional Power Markets: Roadblock to Choice?
flow." It was coined by the Western Systems Coordinating Council, which bills itself as the world's largest machine. WSCC has a hole in the middle of its grid where few people live. When electricity is shipped from the coal fields of Montana to Seattle, sometimes 40 percent of it goes south through the "loop" via California. Every sale travels by all available routes from point of origin to destination. The market is founded on this fictional "contract path," but the fiction has yet to be resolved, which underlies a lot of the difficulty in bringing customer choice to retail markets.
Another problem, ironically, concerns NERC itself, the guarantor of reliability. In fact, the various NERC regions, though designed to ensure reliability of wholesale power supply and the transmission grid, actually create one of the greatest obstacles to long-distance wholesale trade. Transmission capacity between adjoining regions typically runs much less than 5 percent of generating capacity within either region. For example, ECAR claims about 100 gigawatts of generating capacity, much of it using low-cost coal, but has only about 4 gigawatts of transmission capacity into the East. So in many cases, the NERC regional structure tends to isolate high-cost suppliers from their potential low-cost competitors.
Nevertheless, wholesale trade is not new. It was a major contributor to system operations in the utility industry before deregulation. Resale jumped dramatically, from about 17 percent to 25 percent of all power sales between 1988 and 1992, before wholesale deregulation.
Competition for this trade also pre-dated the new law. Cooperatives routinely bought from multiple suppliers. In the 1980s, municipal utilities in most states formed joint-action agencies, like IMPA, to buy wholesale power competitively. Federal power marketing agencies were active in both cooperative and municipal markets, where they are bound by legal preference. Large IOUs have opted to buy power rather than increase generating capacity; IOU's purchased power costs now equal fuel costs. The control centers also have worked hard to find cheap power. However, only a small fraction of these IOU purchases come from PURPA facilities, 20 percent on average and half of that in WSCC and ERCOT. And this figure should not imply that PURPA sales are competitive; often they are not.
With this robust wholesale trade, concerns turn to the retail front, where slow progress appears to be a problem.
There are several good reasons why, after 5 years, the 1992 act has not created the impact some had predicted. First, competitive wholesale trade was well developed before the law was passed. Interchange capacities between the 10 NERC regions are too small to support much growth beyond this pre-existing level. In fact, the transmission network was not designed to support a robust spot market. Finally, long-term wholesale contracts and a risk-averse customer-base tend to inhibit competition.
History and Geography: Barriers to Trade
Two reasons contribute to the high cost of wholesale electricity, neither of which likely will disappear very quickly when competition moves to retail markets. One is geography (em the distance from the coal fields. The other is historical, accidental or political (em the