"Sensible Approach" or Misguided Meddling?
The proposal by Reps. Franks and Meehan to sell federal power at market rates provokes conflicting responses from readers.
I am writing in response to an article written by Reps. Franks and Meehan entitled, "The Sensible Approach: Federal Power at Market Rates," published in the Nov. 1, 1999 edition of Public Utilities Fortnightly (see pp. 44-47). I agree that it is outrageous that electricity services for people in the Northwest are subsidized (regardless of the customers' ability to pay) by the rest of the people in this country.
I must note that similar unjust subsidies exist in the telecommunications industry as well. As a direct result of orders issued by the Federal Communications Commission, taxpayers in high-density areas like Illinois, New Jersey and Massachusetts are forced to subsidize telecommunications services in so-called "high-cost" areas. In the March 1, 1999 edition of this magazine, my executive legal assistant, Joe Donovan, and I co-authored an article proposing to revise one of the most egregious examples of these unjust subsidies - the High Cost Loop portion of the Universal Service Fund.
The current High Cost Loop Fund financing system shifts costs among customers regardless of their ability to pay the actual cost of providing local telephone service. Because the subsidy is structured in this manner, the telephone customers in high-density areas, including the poor of Chicago, Boston and Newark are subsidizing customers who live in high-cost areas, regardless of the customers' ability to pay the actual costs of providing service. Unfortunately, the taxes that support these subsidies are also escalating. Recently, the FCC more than doubled the size of the High Cost Loop Fund - which, of course, doubles the taxes the constituents of Reps. Franks and Meehan pay - to subsidize below-cost service to all customers in other areas. We are talking about "real" money!
Just to keep the readers apprised of the latest developments with the High Cost Loop Fund, let's take a look at the figures. As a result of the FCC's Nov. 2, 1999, decision, the updated numbers show the High Cost Loop Fund for non-rural carriers will jump from the current level of $207 million annually to a whopping $438 million. This increase also raises the total High Cost Loop Fund for both rural and non-rural carriers from $1.7 billion currently to an astounding $1.925 billion annually of taxpayer money. Shocking as these numbers are, they don't include the taxes paid by telephone customers to finance the other Universal Service Fund components such as the Schools and Libraries Fund, the Lifeline Fund and the Link-up Fund.
The concerns expressed by the congressmen relative to the electric industry tax subsidies mirror my concerns relative to the telecommunications industry. My proposal would require customers to pay the actual costs of providing service, thus decreasing the amount needed to finance the High Cost Loop Fund. However, if a customer in a high-cost area could not afford to pay the actual cost of service, the High Cost Loop Fund would provide assistance based upon the economic needs of the customer.
I encourage Reps. Franks and Meehan to address this inequity and protect their constituents from this administratively imposed tax.
Ruth K. Kretschmer
Illinois Commerce Commission
On behalf of the Public Power Council (PPC), the regional trade association representing the consumer-owned utility customers of Bonneville Power Administration (BPA), I am responding to the article by Reps. Bob Franks and Marty Meehan, "The Sensible Approach: Federal Power at Market Rates" (Public Utilities Fortnightly, Nov. 1, 1999).The authors assert that requiring BPA to sell power at market rates is both "sensible" and sound public policy, eliminating so-called taxpayer-provided subsidies. I encourage the authors to ponder the following questions in deciding how "sensible" their approach is:
* Market rates may produce shortfalls for the Treasury. Would the government have been wise to sell BPA power at market rates during the mid-1990s, when market prices would not have covered BPA's costs - leaving the taxpayers, not the region, saddled with the unpaid bills? With increasing regional costs for fish mitigation efforts, the price of BPA's power is likely to increase over time. Do the authors wish to jeopardize environmental mitigation efforts?
* Charging market rates would increase the role of government in the marketplace. Despite the authors' desire to reduce the role of government in the electricity market, their proposal could have the opposite effect. Fifty percent of the power in the Northwest is marketed by BPA. If BPA were to sell power at market rates, it would be acting as a "price maker," potentially distorting the market in the Northwest. Is it really a good idea for the government to assume the role of active participant in the market?
* Power is not subsidized. While the authors cling desperately to the belief that BPA power is subsidized, the fact is that hydropower is simply a low-cost resource. Non-federal hydropower projects in the Northwest produce electricity at rates as low - or lower - than the power marketed by BPA. It is not surprising that Northwest private utilities have electric rates that are among the lowest in the country. Are lower rates, resulting from natural resources and geography, automatically and irrevocably a "subsidy"?
* Use of market rates should not be a federal decision. Reps. Franks and Meehan imply that retail ratepayers of utilities that are not "preference customers" pay market rates. The implication is simply not true. The vast majority of consumers do not pay market rates - they still pay retail electric rates that are set by state regulatory commissions to recover the actual cost of production plus a reasonable rate of return. Twenty-four states have adopted retail competition in which consumers could be paying "market rates." The decision to adopt retail rates was made by the individual state; it was not something forced on them by Congress. Do the authors want to preempt state and local authorities and require market rates for all power sales throughout the country?
* All regions have advantages. While the Northwest is blessed with low-cost hydropower, other regions - including the Northeast and Midwest - have considerable advantages (many fostered through government policies). Would the authors, for the sake of consistency, want the U.S. Treasury to recoup from their regions the government-provided financial benefits enjoyed by nuclear power, including DOE research funds, investment tax credits, and liability insurance and limits? Or perhaps businesses in those regions should refund the benefits associated with the government-funded St. Lawrence Seaway, water treatment plants, highways and ports?
It is time to end the interregional food fight and focus on those topics that benefit electric consumers nationwide.
C. Clark Leone
Public Power Council
Ending LMP Would Be a Mistake
Competition would suffer without locational marginal pricing, reader asserts.
David Magnus Boonin and Stephen R. Fernands ("Power Markets Disconnected? How to Reconcile Retail with Wholesale," Public Utilities Fortnightly Sept. 15, 1999, p. 58) make several excellent points regarding the state of electricity markets. In particular, their suggestion of eliminating capacity obligations is long overdue.
Why Require Installed Capacity? In the competitive generation markets being implemented in several regions of the United States, one of the most contentious issues is how to implement a capacity market that effectively and efficiently provides the right reliability signals to market participants. The difficulty stems from the continued reliance on a centrally planned framework for maintaining the reliability of the electrical system. The concept of "installed capacity" harks back to the era of vertically integrated utilities operating in a monopoly fashion with little or no competition from other generation providers. It is simply incongruous to establish a system of centrally determined, mandatory capability responsibilities on top of a competitive, bid-based market for power. The result is a meaningless market for capacity, as evidenced by the present installed capacity market in New England. Most importantly, such a market has failed to deliver its crucial purpose - providing a reliability signal for investment by market participants.
Rather than trying to fit the square peg of installed capacity into the round hole of competitive power markets, why not abolish these capacity obligations, as Boonin and Fernands suggest (albeit for different reasons)? Market participants in New England, New York and PJM have both privately and publicly discussed this alternative. In Australia, there are no obligations or markets for capacity. Internalizing the value of reliability into the energy prices has resulted in Australian market participants willing to invest in reliability-driven generation and transmission projects. To date, a significant number of generation and transmission projects have been proposed in Australia, partly to capitalize on price differentials resulting from reliability signals being incorporated into energy prices.
Why State PUCs Mistrust Markets. Admittedly, many state regulators (and some personnel of independent system operators) have yet to accept this approach. They fear that without a capacity obligation, reliability would be compromised and, upon a failure of the system, they would be held accountable. There is a mistrust of the market, a feeling that even with the right price signals, market participants will not respond and necessary investments will not be made. Even in Australia, certain needed reliability-driven investments have not been proposed, leading to the issuance of RFPs for their construction by the independent system operator. But the Australian experience is indicative of what could happen in the United States.
To reassure regulators, ISOs can conduct a periodic reliability plan and identify upgrades and expansions needed to ensure reliability. This exercise would identify investments that, unless previously proposed by market participants, can be put out for bid by the ISO to ensure their completion. To encourage such investments, ISOs can offer the "carrot" of rolled-in rate treatment into regional transmission rates. This function of the ISO would serve as a "last resort" to ensure that projects that the ISO believes are necessary (and for whatever reason, are not being proposed by market participants) are built.
Why Not Market Prices for Congestion? The question then becomes, how do we implement a market-based system that would provide the necessary reliability signals to encourage such investment? The answer is by implementing a system of locational prices with tradable financial transmission rights. This is where, unfortunately, Boonin and Fernands miss the mark.
Their proposal for ending locational marginal pricing (LMP) would eliminate the necessary price signals and incentives for investment. Without locational prices, the cost of congestion remains hidden. If congestion costs are hidden, generation and transmission project developers will not have clear signals to locate and identify potential investments. The competition that Boonin and Fernands need to serve retail markets will simply not materialize. Contrary to their assertions, LMP is not "an effort to fine-tune the pricing of transmission service." Their assertion that "LMP was not used prior to retail competition" simply continues the assumption that congestion costs can continue to be hidden within a framework of vertically integrated monopoly electric utilities. To follow their logic, by eliminating LMP "the risk of serving particular customers is not increased unnecessarily." On the contrary, the implementation of LMP identifies and quantifies this risk, and the implementation of financial transmission rights provides the vehicle to manage and hedge against this risk.
Auction Off Those Congestion Rights. I suspect that most of the problems that Boonin and Fernands have with locational pricing stem from the structure and allocation of financial transmission rights. There has been a problem in the initial allocation of financial transmission rights to incumbents, as asserted in the article. Fortunately, there is an easy solution for this problem. The initial set of financial transmission rights should be subject to periodic, mandatory auctions. Market participants (whether incumbent or not) can thus have an opportunity to obtain those rights at their perceived value. This is an important detail that will hopefully be incorporated into the frameworks for financial transmission rights being developed in New York, New England and PJM.
José A. Rotger
Manager, Regulatory Strategy
TransÉnergie U.S. Ltd.
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