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The Baby and the Bathwater: Utility Competition, But at What Price?

Fortnightly Magazine - November 15 1999

better." Yet Justice Breyer pointed out in his concurring opinion that "meaningful competition" actually takes place "in the unshared, not ¼ the shared portions of the enterprise. ¼ " In a "totally unbundled world," said Breyer, "competitors would have little, if anything, to compete about."[Fn.9]

Energy Rulings:

More Calls for Restraint

In the energy sector, the arguments raised in several recent successful appeals of state PUC decisions suggest further reasons to exercise restraint when requiring incumbent utilities to make network systems available to new competitors.

For example, the New Mexico Supreme Court cautioned against gratuitous public policy findings in vacating a state PUC order that had required electric utilities to provide transmission, distribution, and related services to a retail competitor without the state's having first set up a statutory framework for electric competition.

It rejected the PUC's argument that its broad authority to set rates or grant certificates of public convenience justified an open-access mandate:

"The NMPUC makes sweeping pronouncements such as: 'It is the better public policy to always subject utilities to the checks and balances of competition,' and 'the public interest is not served by a policy framework that steadfastly holds to a now defunct scheme.' These pronouncements make clear that the purpose of the [NMPUC's] Order is to carry out broad changes in public policy under the 'just and reasonable' standard."[Fn.10]

This imposing of limits on the PUC's freewheeling pursuit of competition appears consistent with Iowa.[Fn.11]

Similarly, the 8th Circuit in Northern States Power Co. v. FERC[Fn.12] has recognized limits on a federal regulator's ability to control terms and conditions of access to the incumbent's transmission system, where the regulator attempted to extend interstate rights to the nonjurisdictional retail market in native load. In that case the utility had argued that if it was required to provide comparable transmission to its retail and wholesale customers, its native/retail customers would face power outages, contrary to NSP's obligations under binding state tariffs.[Fn.13] In striking down FERC's requirement as an extra-jurisdictional attempt to regulate curtailments of electrical power to NSP's native/retail customers, the court noted that while wholesale customers enjoyed access to competitive supply alternatives, native load retail customers did not.[Fn.14]

The NSP case thus suggests that regulators should limit their pro-competitive intentions where the incumbent's transmission network is not strictly "necessary" to the continued functioning of the wholesale market, even if alternative supplies or self-generation by wholesalers may be more costly than use of the incumbent's network.

Antitrust Law:

Essential Facilities in Network Industries

From an economic perspective, the justification for requiring access is the expectation that forcing open the incumbent's network will accelerate competition sufficiently to outweigh the adverse consequences of meddling in markets. Economists expect such trade-offs to be in the public interest when the network elements in question are essential or necessary for entrants to be able to compete in the retail market.

Fundamentally, this "essential facilities" doctrine represents a trade-off between the possibility of retail gains and wholesale losses. It pits potential welfare gains in the retail market (gains that would be lost if the incumbent were