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FERC's Plan for Electric Competition

Fortnightly Magazine - July 15 1998

WHY IS ELECTRICITY COMPETITION NOT WORKING? The principal reason is the failure of Order 888 to accommodate the economic and technological constraints of wholesale power markets.

Soon after Congress passed the Energy Policy Act of 1992, to give authority to the Federal Energy Regulatory Commission to compel electric utilities under its jurisdiction to wheel power for others, the FERC correctly recognized that piecemeal wheeling orders wouldn't work well without a tariff. A tariff would make the service quickly available to the user without the need for time-consuming negotiation.

But the devil is in the details. Instead, there is an important difference between electricity and natural gas. In electricity, had the only barrier to competition been the transmission lines connecting a wholesale load to a power producer, Order 888 might have proven as successful as Order 636 in gas. With electricity, however, the FERC failed to take into account a second barrier to entry. That barrier instead results from conflicts between economy and reliability. Despite Order 888, this barrier will prevent entry by small bulk power supply systems that might otherwise compete with established systems in selling the product distribution systems can use.

To sell successfully in a competitive wholesale market, bulk power suppliers must draw on large-scale, base-load units of about 500-600 megawatts, and yet still be able to produce reliable power with reserve capacity of only 12 to 20 percent. These two conditions conflict when a bulk power supply system is small, yet each is required because the wholesale customer -- the electric distributor -- must have access to more economical bulk power. It must obtain reliable power delivered to its load center. That supply can be described as RQ power, or "requirements power." RQ power denotes a commercial product different from exchange power, yet the FERC has failed to recognize this fact.

Ironically, the Commission had gotten it right in the early 1970s. At that time, the FERC had independently reached the same market definitions as the Justice Department's Antitrust Division, namely two distinct markets, upstream and downstream.

The FERC had defined the upstream market as the "coordination services market" (called the "power exchange market" by the DOJ). This market was seen as a "cluster market," featuring a variety of submarkets of nonsubstitutable products sold in conjunction with each other, such as economy energy, unit power, emergency energy and the like, incident to a variety of bilateral coordination arrangements between bulk power suppliers, or multilateral agreements within a power pool. Both the DOJ and the contrasted this upstream market to the downstream "requirements" market, in which a buyer would combine coordination services with generating resources (base-load, intermediate-load and peaking) to build a level of reliability necessary to serve distributors.

Nevertheless, after 1979, and after FERC Opinion 57, %n1%n that distinction was lost. Without explanation, the FERC redefined the two bulk power markets as "short-term firm" and "long-term firm," a structure it retained in Order 888. Today, by blurring the difference between coordination and requirements services, the FERC still fails to recognize the two distinct product markets for electric power.

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