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FERC's Plan for Electric Competition

Fortnightly Magazine - July 15 1998

wins and who loses?

Privately owned and fully integrated distribution utilities are not much affected by Order 888. They always have enjoyed the freedom to trade in power exchange services with other private utilities, using transmission of others, voluntarily supplied. %n2%n However, with some exceptions no transmission was available to the non-profit municipal agencies that integrate bulk power supply systems for member distribution systems, nor to the non-profit cooperative "G&Ts" formed for a similar purpose. Private utilities have to compete with municipal agencies and G&Ts in wholesale RQ markets and with their members in retail markets. In contrast, there's rarely any competition in the wholesale or retail RQ markets between private utilities.

Power marketers, the new private entrants into the power exchange market, would be helped if they could obtain transmission outlets for their product. The FERC's OASIS system was to let all buyers and sellers have an equal opportunity to obtain the use of excess transmission capacity, but there are indications that OASIS is not working well.

One barrier to entry that Order 888 might remedy is to provide transmission access to assist in the coordinated development of large-scale, base-load units. Open access gives small bulk power suppliers an opportunity to obtain small amounts of capacity from larger-scale units. But this advantage is only as good as the availability of transmission and the success of OASIS.

Municipal agencies and G&Ts benefit only to the extent that they lie adjacent to utilities that were not previously subject to wheeling conditions in their nuclear licenses (and obtain a tariff that gives effect to such conditions). Their member distributors stand a chance to gain to the extent that Order 888 helps them obtain a low-cost power supply from their G&T or wholesale agency. However, municipalities currently served at retail under a franchise granted to the bulk power supplier still cannot look to a competitive bulk power supply because wheeling only gives it access to three or four privately owned first-tier suppliers of RQ power. A market that has only three or four dominant sellers will not be competitive where the product is a simple one and it is easy to keep track of the prices of others. This is because of fear of retaliation.

For the retail distributor, however, the relevant market is RQ power; there is no effective substitute. Small retail systems don't want to enter the bulk power supply business. Building a system with 500-MW base-load units on speculation requires a stronger stomach for risk than most investors have. They would be being asked for hundreds of millions of dollars, or even billions. If municipal agencies and G&Ts (which have access to low-cost investment capital) have difficulty in developing an integrated bulk power supply system, one is faced with the question of: How can private entrants, which suffer the same or worse disadvantages, be expected to do even as well?

Order 888 will prove of no use to those who wish to enter the uncomplicated retail electric distribution business without getting into the risks and complexities of bulk power supply. There is