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Fortnightly Magazine - April 2004

Banking on Predictability

A renewed capital investment structure is required for long-term investment in power infrastructure.
Frank A. Napolitano

A renewed capital investment structure is required for long-term investment in power infrastructure.

The bank markets and the long-term fixed income markets, or institutional investors, have long memories, and their pain is still fresh. Over the last few years, they have had to watch their investments in power infrastructure become distressed, bankrupted, or reorganized.

keys to Transmission and Distribution Reliability

A coordinated approach helps control costs.
Stephen W. Chapel   Jonathan A. Lesser

A coordinated approach helps control costs.

Historically, transmission and distribution assets have been quiet utility stepchildren- generally ignored by both regulators and senior utility management while, their generating asset relations remained in the limelight. But as restructuring of the electric industry evolved in the 1990s, a looming competitive environment created strong pressures within utilities to reduce spending.

Frontlines

Electricity rates may be heading skyward sooner than we think.
Richard Stavros

Frontlines

Electricity rates may be heading skyward sooner than we think.

Are state regulators in danger of bringing about the thing they most fear-higher electricity rates? Critics charge that some regulators seem to be opening up the cookie jar, letting utilities have as they please with no supervision.

People

New Positions:
We welcome submissions to People, especially those accompanied by a high-resolution color photograph. E-mail to: photos@pur.com

People

New Positions:

Rep. Joe Barton, R-Texas, stepped into the role of chairman of the House Energy and Commerce Committee, succeeding Rep. Billy Tauzin, R-La., who is leaving Congress.

Duke Energy named David Hauser as its permanent CFO. He had been acting CFO since November. He succeeds Robert Brace, who resigned.

Letter to the Editor

The authors respond: Jim Johnston's letter gives us an opportunity to clarify our discussion of electricity pricing. In our article we argued that there were two important defects of traditional electricity regulation from the perspective of economists: excess incentive for capital-intensive generation techniques and the use of prices as revenue-recovery rather than resource-allocation devices. Regulated retail prices for electricity consumption are weighted-average rather than marginal cost and thus incorrectly signal consumers about the true costs of electricity production: too high off-peak and too low on-peak. In a true deregulated market, Johnston is correct that consumers would be offered choices about how much of the continuous wholesale price variation they would face, ranging from all to none-just like mortgage products range from continuously adjustable to 30-year fixed-rate, even though the spot price of capital varies continuously. If genuine deregulated electricity markets are not possible, we argued that regulation could "mandate" real-time pricing. Our use of the term mandate was unfortunate because it implies that we would oppose the use of the risk-hedging and long-term contracts that Johnston describes. In addition, our use of the term allowed Johnston to infer that we favor mandating particular market institutions such as the California spot market. We neither oppose the use of the contracts Johnston describes, nor do we favor mandating any particular type of market institutions. What we do not favor is the suppression of prices as resource allocation signals through regulation. -Jerry Taylor and Peter Van Doren   Articles found on this page are available to subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.
Public Utilities Fortnightly

Letter to the Editor

To the Editor:

Cato's Peter Van Doren and Jerry Taylor analyzed the electricity crisis in the February 2004 issue of the ("Rethinking Restructuring," p. 12) and concluded that the solution to a bad situation is vertical integration and mandatory real-time pricing. In my opinion they have got it half right.

Benchmarks

New England's experience may redefine the term.
Tom Wood, Ph.D.

Benchmarks

New England's experience may redefine the term.

During the 1990s, capacity margins in the United States declined almost one third, falling from 21 percent in 1991 to less than 15 percent in 2001. In some regions, margins shrunk to less than 10 percent. Concerns grew over electricity reliability and possible upward pressures on electricity prices. However, as new gas-fired power plants began to come on line in the late 1990s, the developing electricity generation capacity surplus began to raise concerns.

Perspective

A face-to-face interview with FERC Chairman Pat Wood III.
Richard Stavros

Perspective

A face-to-face interview with FERC Chairman Pat Wood III.

Bold. Fearless. Relentless. These are the words now being used by both critics and supporters to describe Federal Energy Regulatory Commission Chairman Pat Wood III.

FERC's recent policy initiatives and directives mark a strong shift from what was last year regarded as a more reluctant commission.

Commission Watch

Solving the dilemma.
John Seelke

Commission Watch

Solving the dilemma.

The rationale from the Federal Energy Regulatory Commission (FERC) for eliminating through-and-out (T&O) rates while simultaneously imposing a Seams Elimination Charge/Cost Adjustment/Assignment (SECA) is an acknowledgement that FERC is conflicted on a fundamental economic principle: regional transmission organization (RTO) loads use the transmission systems of exporting RTOs; therefore, it is correct for importing customers to compensate exporting RTOs for the use of their transmission syste

Business & Money

Some independent power producers failed to contain capital and O&M costs, adding to financial pressures.
Holt Bradshaw

Business & Money

Some independent power producers failed to contain capital and O&M costs, adding to financial pressures.

Merchant generators can substantially increase cash flow by revamping their capital allocation processes. Based on several recent client engagements, a PA Consulting study found that merchant generators often follow a flawed allocation process that misappropriates cash toward wasteful maintenance and capital expenditures, resulting in reduced asset values and erosion of precious cash reserves.

Technology Corridor

Smaller systems aren't cost-effective.
Gary C. Young, Ph.D., P.E.

Technology Corridor

Smaller systems aren't cost-effective.

It's time for a reality check on the commercial viability of wind farms. Are large wind systems more economical than small wind systems?

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