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Fortnightly Magazine - March 1 1998

from lower power prices.

What about having the local company sell its generation to multiple independent power producers? Theoretically, the IPPs would compete with each other. However, each IPP would soon realize that it could hold out for higher prices. One can always add more IPPs, but the best one could expect to achieve under this scenario is a price equal to the cost of new capacity. That's not all bad, but local problems with siting, air quality and water rights may limit or bar new construction. IPPs may prefer to build in other locations until those markets become saturated.

Here's another idea: Set the price for local generation equal to the pool price (where applicable) plus transmission delivery charges. Some other posted price could also work, such as the California Oregon Border (COB) market price. However, such prices may not cover the costs of the local generation. Also, any linking of the local price to some market index would call for regulatory action, either state, federal or both. And since COB and other market prices could change hourly, this solution would involve ongoing oversight inconsistent with competition.

All of this leaves society still regulating the generators within load pockets. That doesn't look particularly appetizing, keeping in mind that regulation is like salt and pepper (em a seasoning, not a full meal.

More Regulation?

If we must regulate must-run plants, it may prove more expedient to leave the generation in utility hands. At least the utility is accustomed to it. Investors know what to expect. An IPP might find life more exciting (and profitable) on the outside.

Under regulation, all customers within the load pocket would share the cost of must-run plants during load-pocket conditions. No one customer or group could tie up transmission capacity. But one might expect some political pressure to allocate transmission to the residential class. In fact, there is some precedent for this situation. The Tennessee Valley Authority allocates all of its relatively low-cost hydro to the residential class. Perhaps, in a similar vein, the necessary portion of the transmission system that serves the load pocket could be allocated to the residential class. This solution may offer a greater chance for the residential class to benefit from competition.

The form of the regulated price could be "performance based" or tied to the traditional rate-of-return model, though neither seems destined to withstand the test of time. In this case, let's assume the traditional model wins out.

Recovering the operating costs is easy. Such costs (fuel, primarily) would be recovered dollar for dollar through a fuel adjustment clause, as they are likely to change continually with ups and downs in fuel prices. Adjustments would occur monthly, perhaps with an annual true-up.

Capital and other costs present more of a challenge. In certain conditions, the market-linked generators may be able to recover a portion or all of their capital-related costs, depending on pool or market prices. If the load-pocket generator is reasonably assured of full capital cost recovery through the regulatory process, the consumer may be no better off than under