July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Competition that causes gas transport facilities to be duplicated is ineffective, argues a reader.
From recent FERC [Federal Energy Regulatory Commission] decisions , it appears that the commission is bending over backwards to allow competition between interstate pipeline companies for the provision of natural gas transportation service. How can this be good public policy when applied to a service that is a natural monopoly? Is it really in the public interest for some customers to be connected to more than one pipeline company through wasteful duplication of facilities?
Sure, it is good for those individual customers because they can play one pipeline against the other to obtain discount rates. However, the pipeline's other customers are required to make up for this lost revenue in the form of higher rates. The losing pipeline's remaining customers are left to bear the burden of the stranded cost, also in the form of higher rates.
If FERC continues in this direction, it may be that investors begin to see the pipeline business as more risky. This could lead to the need for higher returns on equity when pipelines file their rate cases.
It is true that regulation at its very best is not as effective as healthy competition; however, competition that requires wasteful duplication of facilities should not be introduced piecemeal into a business that is and will remain a natural monopoly under regulation.
Regulation is supposed to be an effective substitution for competition. Therefore, if FERC is doing its job, the rates set for interstate pipeline companies are already just and reasonable, and there should be no need for some pipeline customers to be connected to more than one pipeline company through wasteful duplication of facilities.
J. Rick Cleckler
Engineering Specialist I
Alabama Public Service Commission
The June 15 "Frontlines" column, "ISO Meltdown?" was properly posed as a question, and the New York Independent System Operator is pleased to offer an answer.
The observations of the electric customers and most of the issues raised by New York State Electric & Gas in its filing with the FERC appear to be reactions to intermittent price spikes in New York's real-time energy market. While the NYISO continues to be vigilant in monitoring market performance for appropriate competitive activity, the rule of supply and demand is the primary force behind real-time prices. But that is only part of the story.
More than two-thirds of energy traded in New York is done so in bilateral agreements, outside the NYISO. The majority of the remaining one-third is traded in the NYISO's day-ahead market at prices that average $35 to $45 per megawatt-hour, with the volume of the more volatile real-time market usually representing less than 4 percent of the total energy traded. The graph below represents the composite average daily price per megawatt-hour of electricity traded in the New York market at the NYISO for the period through May 31. The composite average price includes all parts of the marketday-ahead, real-time, ancillary services, regulation, etc.
To reach its full potential, the market requires a demand side response