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FERC's Plan for Electric Competition

Fortnightly Magazine - July 15 1998

located in the same control area as the buyer. This rule is reasonable to guard against a cascading outage. But a communications channel involving three or more persons is prone to serious mistakes.

By contrast, a larger geographic market is available for power exchange or coordination services. In that case reliability is not as great a concern, since the power is likely to make up only a small part of the generation resources available to the system operator in the receiving control center. Under NERC rules the operator may rely on the interconnected system for up to about 10 minutes in the event of failure in one of his generating resources or interconnecting transmission. He or his colleagues, the trained system dispatchers, are on duty 24 hours of the day, ready to act. Accordingly, while power exchange transactions usually occur between adjacent control areas, they may involve second-, third- or even fourth-tier areas. Supplies of RQ power from this larger area are not a practical alternative for a retail distribution system which has no control center and no 24-hour dispatchers.

Because the relevant geographic market consists only of the hub and the first-tier distribution systems, many areas will feature at most only four or five competitors (plus the hub, which previously had a de facto monopoly) for sales of RQ power. %n5%n If a market is dominated by as few as four or five sellers and the product they sell is relatively simple to keep track of (such as kilowatts and kilowatt-hours), it is well recognized by those skilled in industrial organizations that the dominant sellers will likely not compete with each other for fear of retaliation. They will compete with new entrants or smaller enterprises within the market. %n6%n The formation of an Independent System Operator, buying from all generators and reselling the product back to all sellers in the same area, only nullifies price competition among suppliers in the sale of RQ power. With those arrangements, all sellers of RQ power have the same bulk power supply costs, as well as transmission and distribution costs; it makes price competition almost impossible.

Ancillary Services:

They Can't Replicate RQ Power

Nearly 20 years ago, Louisiana Power & Light Co. attempted to triple its wholesale power price by terminating its requirements contract with the City of Winnfield and in its place offering to sell power exchange services to the city. It claimed that Winnfield had no need for requirements power because LP&L's license conditions gave Winnfield access over its transmission lines to several other bulk power suppliers.

The FERC in that case recognized the significance of RQ power and ruled that a coordination contract wasn't a realistic substitute. Also, it allowed Winnfield to show when it approached alternative suppliers of RQ power at the periphery of LP&L's system and asked them to serve, there was no contract forthcoming. %n7%n Presently, however, the FERC describes testimony of that sort as anecdotal, refuses to credit it and assumes that under Order 888 a distribution system will receive a competitive offer, rejecting evidence to the contrary.