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FERC's Plan for Electric Competition

Fortnightly Magazine - July 15 1998

If it were to obtain the needed 10 MW by purchasing the FERC's short- or long-term firm power, it would end up supplying its entire load with base-load capacity, not a very economical way to supply a customer whose valley loads may only be 35-40 percent of peak. (See Sidebar, "Unworkable Competition.")

Meanwhile, the competition would have a low-cost mix of generating capacity, and would carry much lower reserves, while still maintaining reliability of power supply as good or probably better than the smaller system entering the market. Finally, the new entrant also would have to carry the burden of "stranded costs," which significantly increases his transmission costs.

Outlook:

What Promise for Retail Competition?

Retail competition won't likely develop when all parties at wholesale will use the same distribution and transmission facilities and incur the same costs for the wires portion of their businesses. The future remains in doubt while so much state legislation is pending, but retail competition could develop in states that mandate divestiture of bulk power supply from retail distribution systems, as long as they avoid creating an ISO to nullify price competition in RQ power and break down the barriers to entry for systems able to sell RQ power.

New federal laws might also help. But to work well, legislation must give the authority to the FERC in many areas, allowing it to:

1. Compel divestiture of bulk power supply from retail distribution and from transmission for systems over the size able to use 500-MW units.

2. Continue to require publication of wheeling tariffs.

3. Coordinate development of base-load generation even where it requires the addition of generation so long as someone else offers to provide the investment capital for such addition.

4. Disallow "alternative pooling concepts" which make price competition impossible.

5. Make reserve sharing available to all sellers of generation.

Such legislation also should continue to direct the Commission to divide the country into districts in which a single joint transmission rate is effective (as suggested in section 202 of the 1935 legislation).

With the optimal size of base load generators down to 500 MW rather that 1000 to 1500 where it was initially thought to be, and with compulsory developmental coordination to obtain even that size, no reason exists for more mergers except to enable systems to expand generation with 500-MW base-load units. In fact, the FERC might do well to break up existing systems: no operating or holding company should be larger than needed to support a generation expansion program with base-load units of 500 MW.

On balance, Order 888 does not enhance competition very much. Why then, all the praise? The economist Schumpeter once noted: "One of the touches that distinguish intellectuals from other people is the absence of direct responsibility for practical affairs . . . the absence of firsthand knowledge which only actual experience can give." F

Attorney Wallace Edward Brand is winding down his solo practice in Washington, D.C., where he has represented small electric systems. In the 1970s, at the Antitrust Division in the Department Of Justice, Brand tried