even a two-handed economist can see that.The June 11 Power Broker decision from the D.C. Circuit, involving Florida Power and Light Co. (FP&L) and certain wholesale customers (see sidebar), reminds one that a dish of corned beef and cabbage tastes better when you don't leave out the cabbage.
On the surface, the case indicts the idea of average-cost pricing: "All hands recognize that the
problem originates in the use of average costs . . . If partial requirements customers paid for energy the same way [as] buyers in the economy energy market [on the margin], there would be no arbitrage to exploit." But the court's solution (em to ask the Federal Energy Regulatory Commission (FERC) to impose "economic efficiency" (em ignores the rationale for average-cost ratemaking.
The court acknowledged that when FP&L's partial requirements customers bought energy from the utility at average cost, they took service under a tariff in which both demand and energy were sold. Yet, the court fails to consider that the buyer would not be entitled to the energy at average cost if he had not first paid the full average cost of the capacity.
A competitive economy entrusts the direction of the most efficient use of a resource to the person entitled to direct the use of that resource, ordinarily the owner. But when the owner leases the resource or enters into a contract to provide up to the full output of a resource to others, the lessee or buyer is ordinarily in the best position to direct the most efficient use of the resource. If the buyer pays the full average capacity cost of the seller in a regulated sale, or takes the full output in a nonregulated sale, the buyer of the capacity clearly owns the resource and is entitled to direct its most efficient use. The FERC should say here that the buyer who pays the full capacity cost is entitled to all the energy it can produce.
President Truman used to prefer "one-handed economists" who would not, after stating what sounded like a definitive rule, always say, " but on the other hand." Nevertheless, even a two-handed economist would quibble with the court in this case.
Incremental pricing improves economic welfare only if all the prices in the economy are based on marginal cost. This has never been true in any real-world economy. If we are going to have a competitive electric power economy, let the decisions as to what is efficient be made at the periphery of the economy, by the "virtual owner" of the property, not at the center. t
Attorney Wallace Edward Brand is a sole practioner in Washington, DC, where he represents small electric systems.
FERC and the D.C. Circuit
In Florida Power & Light Co. v. FERC, 85 F.3d 684 (D.C.Cir., June 11, 1996), the court asked the FERC to reconsider a 1994 decision (66 FERC ¶ 61,227) that barred FP&L from restricting arbitrage in market-priced economy energy.
Otherwise, FP&L warned, municipal utilities and rural electric cooperatives could sell economy energy at market prices to FP&L customers, even though the munis and co-ops bought "partial requirements" service from FP&L, priced at FP&L's average cost of generation and transmission.
For example, assume that FP&L generates energy at a given hour at 12 mills per Kwh (incremental cost), but sells to partial requirements customers at 6 mills (average cost). Those customers can then offer the
6-mill power through a broker on FP&L's economy energy bulletin board to an FP&L customer with a 10-mill avoided cost, causing FP&L to incur a 12-mill cost to avoid a 10-mill resource.
The FERC saw no problem and weighed in against any market restriction.
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