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FERC's Plan for Electric Competition

Fortnightly Magazine - July 15 1998

The FERC has attempted to remedy the situation by providing in Order 888 for a variety of ancillary services under its pro forma tariff to supplement the short- and long-term firm power that is conceptually available. This is ineffective in transforming these two products into RQ power. Ancillary services only deal with a very short term and don't provide the economical means based on insurance principles of dealing with the risk of forced outage.

So far as is known, to this date no municipal, rural cooperative or independent electric distribution system has canceled its RQ power from a bulk power supply system selling RQ power in favor of a supply from a seller of "short-term firm" or long-term firm" power, even though Order 888 requires the bulk power supplier to transmit and to furnish ancillary services. The FERC's pro forma tariff is silent as to who would have public utility responsibility for the supply of power to the independent distribution system.

In the 1970s, in cases brought under Section 104(c) of the Atomic Energy Act (involving conditions imposed on nuclear licenses to compel wheeling), the Antitrust Division suggested and the Nuclear Regulatory Commission found that three elements were necessary to break the barriers to competition: (1) reserve sharing, (2) opportunities to engage in the coordinated development of base-load units, and (3) opportunities to wheel power over the transmission of dominant utilities. %n8%n

Reserve sharing applies insurance principles so as to deal with risk economically. If a contract for reserve sharing is unavailable, a smaller system must purchase sufficient backup generation (at the time of system peak) to meet the forced outage of capacity at least as great as the system's single greatest generating resource. If a small bulk power supplier seeks to enter the market with no reserve-sharing contract and buys 10 MW of power out of a single, large-scale base-load generating unit (i.e., the FERC's short- or long-term power) it would need to buy 10 MW of reserve. That occurs because the ancillary services provided by the pro forma tariff exclude any responsibility on the part of the transmission provider to offer backup. %n9%n This rule in effect repeals reserve-sharing obligations set out by the FPC in 1968. %n10%n

If an independent power producer, for example, wanted to provide reserve for all his customers, for the sale of power from an optimally sized 500- to 600-MW unit, he would have to buy 500-600 MW of reserve. The power to be sold, therefore, must carry 100-percent reserves as a percentage of the peak load of the customer but it must compete with the power of power systems that have the ability to meet that "single-largest-unit-down" or "single-largest-resource-down" reserve standard, or one even higher. These competing bulk power supply systems, because of their large size, will need only 12 percent to 15 percent reserves as a percentage of peak load even when they are using generating unit sizes of 500 MW or larger. The smaller system can do that only with reserve sharing and opportunities for the coordinated development of base load units.