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Perspective

Fortnightly Magazine - March 1 1998

the status quo. That is unacceptable.

What is needed is a process to simulate how the load pocket generators would price their product under competitive conditions. Tying the price to a pool price or a market index could serve as a "floor," but that doesn't guarantee that load-pocket generators recover all costs. If the load-pocket generator cannot recover costs, the plant may close down altogether. In theory at least, outside the load pocket in the open market other plants would take up the slack if one competitor fails. That may not occur in the load pocket, or at least not quickly enough to meet reliability requirements.

A reasonable compromise would simulate what a new cost-effective generating facility would cost (em both capital and operating. That would likely require a mix of plants. Such a simulation would cover long-run marginal cost, since even in the open market (pool or bilateral) as new capacity is brought on-line market prices likely will follow.

In this way, existing load pocket generating capacity would be reconfigured to simulate the latest generating technology. The capital price associated with such technology would be adjusted annually, continually simulating the long-run marginal costs of providing capacity and energy. Under the plan, regulators must be prepared to allow existing plants to earn market earnings or above if their plants are more efficient or less costly (i.e., depreciated below reproduction cost). Also, under the plan, utilities must be prepared to write-off generation assets that are not market competitive and, depending on regulatory approval, recover such stranded costs through appropriate transition charges.

As with current regulation, this plan is not without risk for load-pocket generators. For one thing, the load pocket might simply go away, leaving the local generator to the whims of the market with capital costs still unrecovered.

Also, regulators might set the allowed rate of return too low for load pocket plants under a "competitive simulation" model.

A Less Complicated (but not simple) Proposal

This problem need not be so serious. From a physical standpoint, as long as the load-pocket plant is running, the load-pocket problem is mitigated. A load-pocket plant need not sell power only to customers within the load pocket. Local generators can sign contracts to sell to customers outside the pocket. Since electrons follow Kirchoff's law, the actual electron flow could diverge completely from the contract path.

Therefore, a utility could spin off or sell its load-pocket generation to IPPs, a separate corporation or a separate subsidiary of the local utility. What is done with the load-pocket generation from an organization or ownership structure is immaterial, because the local generation is not physically required to sell to any customers within the load pocket. Contracts (approved by the regulatory agency) must be in place that require the load-pocket generators to run during periods when the load pocket is short of generating capacity. This operating mode is sometimes referred to as counter-scheduling.

This model would require limited regulation; oversight extends only to the contract prices charged by the local generators to be available to run during periods when the load