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Special Report

Fortnightly Magazine - February 1 1999

job done."

Hoecker congratulated the "pretty courageous" attempt by California regulators to reinvent wholesale and retail markets simultaneously, while also creating a trading system and addressing stranded costs.

"They have suffered for that level of ambition," he said. "It has soaked up a tremendous amount of FERC resources. And we are still engaged in ¼ debate about whether this animal out there is subject to FERC. ¼ That kind of confusion can be very costly on the marketplace. And it can be deadening to people's enthusiasm for competition, period."

But even while California's residential participation in electric competition has been mediocre, everyone stands to learn from the experience, he said.

Harry M. Trebing also talked about fearing market chaos and the movement of the commodity component toward the control of very few.

In a session on "The Electricity Commodity Market: Is it Working?," Trebing, professor of economics emeritus at Michigan State and the founder and former director of the Institute, said short-term commodity events such as price spikes are "doughnut holes." They're not the real concern of evolving markets.

"What I see is this moving market, not toward competition, but moving towards the phenomenon called tight oligopoly," he said. He defined oligopoly as four firms controlling 60 to 100 percent of the market. "For the rest of you who think that tight oligopoly is something you take Metamucil to get rid of, you have to seriously consider this problem of growing concentration."

Trebing said there are several developing factors that will lead to more tightly controlled markets.

The commodity market has skyrocketed from 234 million megawatt hours traded in 1996 to 1.2 billion MWh traded in 1997.

The trade ratio - the times a given electricity bundle is traded between speculators before it reaches the final customer - is five times, as indicated by recent data, although some estimates place it at more than 10 times.

Price volatility has swung from $30 MWh to $7,000 MWh in the Midwest. By comparison, stock market volatility is 15 percent on an average annual basis; oil is 20 to 30 percent; and natural gas is 50 percent. Electricity is more volatile than natural gas.

There has been a rapid turnover of players. "The big ones are still there," Trebing said. "Enron, the Southern Co., Aquila/UtiliCorp and Entergy. But the concentration hasn't hit yet, the tight oligopoly level. The top four have 37 percent of purchases or sales ¼ The question is: will [the concentration] come?"

Other indications of oligopoly haven't appeared yet either, Trebing said. "Are the firms holding power off the market in anticipation of higher speculative prices?

"I don't see any overwhelming evidence that the merchant generators [are doing anything.] I think they're far too new, far too dumb, to discover the virtues of oligopoly behavior. What they're more inclined to do at this point is act competitive, which is pretty dense."

But he said alliances are emerging in the electric field that federal and state regulators should begin to worry about.

"EnergyOne was a dog," he said. "It was promoted by UtiliCorp,