July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Profit Without Costs
An analysis of participant funding in natural gas and electricity markets.
Of all the issues in the energy industry, no matter how technically or scientifically complex, none is more important than fairness. Price spikes, contract reformation, market manipulation-all hot-button issues during the last four years-revolve around a core value held by practitioners and regulators alike: Are the prices that exist in the marketplace just and reasonable?
Even as administrative and federal courts take on fairness issues, consumers are finding themselves on the front lines of a different pricing fairness issue-one that threatens to saddle them with huge cost burdens for which they receive no accompanying service benefits: Should the cost of transmission infrastructure improvements be rolled-in with the costs shouldered by utility companies and their native customers, even if those customers receive no benefit from the expenditure?
Shot to the Heart
Fairness, it would seem, requires those who request and receive economic benefits from transmission upgrades also to pay for such upgrades. This concept is commonly known as participant funding, and it strikes right at the heart of Entergy's service territory, which happens to include a large number of low-income customers. These customers can ill-afford to shoulder the burden of between $2 billion and $4 billion that Entergy conservatively estimates would be added to their rates to pay for these upgrades-especially when they will see no change in their service quality.
Fairness still would be the issue even if our customers here were largely from an upper-income economic base. But the fact that it affects those with the least makes the potential outcome all the more egregious to me.
I understand the goal of rolling-in these costs-that at some point all customers will theoretically benefit from an upgraded system-and in light of the blackout in the Northeast last summer, I appreciate the importance of an enhanced grid. However, I can't seem to get past the fact that we're asking those who can least afford it to fund these upgrades, when the merchants understood the risk with their investments and were rewarded with market-based rates in exchange for their risk, and all without the traditional regulatory handcuffs.
There are obvious distinctions that argue against applying a traditional rolled-in pricing methodology to upgrades of the electric transmission network. One distinction is that a rolled-in price doesn't work when overlaid on a system that combines vertically integrated utilities and merchant generators selling in a national marketplace. In the electric model, upgrades affect a national marketplace by asking captive customers to pay for upgrades for a new competing company, with market-based rates and without regulatory impediments, to enter the service area and sell to another segment of customers. Costs should follow benefits and there should be a direct relationship between the two. To do otherwise would not build a competitive environment but instead a market without risks.
If any issue could further undermine the general public's confidence in our handling of the American electric infrastructure, that issue could be profit without costs. I think the average customer can accept the idea of a higher