or Power Markets?
In their article, "Curbing Market Power: The Larger the Better" (Apr. 15, 1996, p. 10), Christopher D. Seiple and Douglas M. Logan show that market-share indices can be derived from commercially available databases. The authors reference their soon-to-be-released study, U.S. Electric Utility Industry Mergers and Acquisitions, as a source for further market-power assessments.
The topic is timely. The U.S. Justice Department has long been interested in measuring market power, in conjunction with antitrust considerations. The seemingly imminent deregulation of large portions of the electric utility industry has added the Federal Energy Regulatory Commission (FERC), state regulatory commissions, and customer groups to the ranks of those needing to understand market power. Electric companies themselves have a renewed interest, because although market power means greater profits, too much will draw the ire of the aforementioned parties.
Economists have long tried to summarize the distribution of market share among firms in a single index, such as the Herfindahl-Hirschman Index (HHI). Seiple and Logan have continued this tradition by applying the HHI to the California electric market to examine market power.
Several studies and publications have suggested that using HHI or any other traditional indices to measure the level of concentration and market power in the electric power market will likely overstate the extent of market power, discouraging reforms or requiring excessive divestiture of existing firms as a condition of reform (see, Lewis J. Perl, "Measuring Market Power," Antitrust Law Journal, Vol. 64, No. 2, Winter 1996, pp. 311-21). Seiple and Logan correctly recognize that transmission constraints (pricing, bottlenecks, time of day and year, and available supply) are an important source of market power. We have not seen the authors' study, nor the forthcoming FERC filings addressing market power for the Western Power Exchange and other ISOs. Our work1 in this area, however, leads us to the conclusion that the following issues must be addressed:
First, no one single concentration ratio can accurately characterize the complexity of power-market structure. For example, using the Power Market Decision Analysis Model (PMDAM) to simulate in detail2 several NERC (North American Electric Reliability Council) regions, we noticed that hydro-intensive utilities with significant capacity market share may face energy shortages at certain times of the year. We also observed that several utilities with strong market presence in capacity and energy markets may lack adequate transmission access to the right market at the right time.3
Second, concentration ratios are likely to vary from one time period to another. The locational diversity and the hourly and seasonal fluctuation of electricity demand create a mix of power systems with diversified production and transmission capabilities. Therefore, prices and market shares that must be measured fluctuate over time.
Finally, simple market-power indicators are recognized by the Justice Department and others as only screens. They can never adequately measure whether suppliers have market power. Our approach is to simulate post-deregulation markets dynamically and examine the strategic responses of competitors to gain market power. Such simulation considers transmission constraints, contractual arrangements, and realistic modeling of regional power systems.
Larry Brockman, V.P., Analytical Services
Dr. Youseff Hegazy, Corporate Planning Team
Utilities Division, EDS
Preserve the PMAs!
Clyde Wayne Crews, Jr., writing on the Power Marketing Administrations in your May 1 issue (p. 11), not only failed to do his homework, he hasn't even been paying attention in class. His "Perspectives" column rehashed a mix of wornout political bluster and faulty economics espoused by investor-owned utilities (IOUs), notably their front organization, the Alliance for Power Privatization, which tried last year to force an auction of the PMAs and create an imbalance in the electric utility market just as deregulation and competition are beginning to develop.
Crews laments that the IOUs do not enjoy preferential access to power generated at federal dams. And for good reason. A better definition of the term "preference" would be "anti-monopoly." The IOUs already own 32 percent of the nation's hydro capacity (em nearly 30 gigawatts (em located at facilities that they developed over 50 years ago on public water resources for private gain. The preference principle instead allows the broad use of public resources, giving first call on the power from the publicly owned, multipurpose hydro projects to consumer-owned utilities, Native American authorities, federal military installations, and other public bodies.
As for subsidies, no tax dollars prop up the PMAs. In fact, revenues from PMA power sales have paid for constructing, operating, and maintaining the hydro facilities. These revenues also have covered some of the costs of other critical, nonenergy functions
performed by the dams (em e.g., irrigation, fish and wildlife enhancement, and recreation. All this has been verified, at various times, by the General Accounting Office, the Congressional Research Service, and the Congressional Budget Office (CBO).
Since when does the sale of any item at a price that recovers production costs and brings in additional revenue amount to a subsidy? Approximately $1.6 billion over and above the appropriations that show up in the federal budget will be paid by the PMAs to the U.S. Treasury this year alone. Selling them would mean a one-time, near-term cash payment in exchange for a long-term loss of revenue to the federal government. Compensating for these losses would require more tax dollars. Both of these findings are contained in the most recent CBO report related to the PMAs, delivered October 1995 to the House Resources Committee, whose ill-advised proposal to auction off the Southeastern Power Administration was eventually stripped from the Budget Reconciliation bill.
Had Crews done thorough research, he also would have discovered that the IOUs, though taxable, receive real subsidies through that same tax code (em approximately $8 billion a year from tax deferment and other privileges.
Crews unfortunately restated the IOUs' false claims in regard to PMA debt-repayment practices. In fact, PMAs are required to retire all debt, with interest, within 50 years. That is the law, which authorizes a particular project to repay according to a schedule set by legislation. All PMAs have rigidly adhered to whatever schedule applies in their case. And audits by respected accounting firms such as Deloitte & Touche have determined that the PMAs have conformed with Generally Accepted Accounting Principles.
Crews claims that privatizing the PMAs would impose no rate impact on consumers. But he and others clearly acknowledge rate increases by proposing legislative or regulatory measures to stem them.
As for equating still-unknown benefits of electric utility deregulation with what has happened in the telephone industry, we hope Crews saw the front page of The Washington Post on May 7, where we read that phone companies nationwide are proposing to raise local phone rates to offset lower rates for long-distance and add-on services. Down the road, the net effect may just be what many have feared: The average consumer will be faced with higher bills just for basic service.
Consumer-owned utilities' long-term contracts for PMA power have built many decades of equity investment in those facilities, which would be lost if the PMAs were to fall into the hands of IOUs. The IOUs themselves, when renewing their own licenses to operate dams on federal waterways, have pointed out their heavy investment in facilities and the unfairness of taking away that investment. We agree with that argument, and believe both equity positions should be honored.
Crews himself is "out of his depth" and "treading water" with his specious philosophical and economic arguments. Readers of your serious and respected magazine deserve better.
Alan H. Richardson, Executive Director, American Public Power Association
Glenn English, CEO, National Rural Electric Cooperative Association
How ironic reading Peter Mehra, a representative of Ford Motor Co., whine about Ford's electric rates in Michigan versus what Japanese companies pay in Tennessee and Kentucky ("Senate Panel Continues Inquiry into Electricity's Futures," May 15, 1996, p. 37). Mr. Mehra pushes this same malarkey at a different conference every month. What he doesn't discuss are Japanese electric costs when producing cars in Japan. Industrial electric rates are 95 percent higher in Japan than they are in the United States. In fact, industrial rates in Japan are 65 percent higher than in Michigan.
If American automakers produced a product comparable to that of the Japanese, they would have been building additional plants in Tennessee and Kentucky. For years, the Japanese paid electric rates almost double those of U.S. car manufacturers and still beat their pants off.
Let's face it, if the automotive market were truly competitive, without import quotas on Japanese products, American automakers would be belly up.
New Haven, CT
1. We are currently working on a study measuring the sustainability of prices above regional competitive levels and the resulting profitability of such prices.
2. For example, a recent PMDAM study of the Southeastern region modeled more than 2,000 generators, 3000,000 megawatts of capacity, and all major tie-ins in the region.
3. Traditional tests (e.g., the HHI) measure capacity shares to assess market concentration. Lewis J. Perl suggests measuring output (gigawatt-hours) shares instead, noting that high capacity shares might be attached to higher energy costs. In our view, a combination of capacity, energy, and transmission shares should be used to assess market concentration levels.
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