One thing that adds some fun to my job (notice, I did not say that my job is fun) is the chance to compare similarities between the gas and electric markets. If you can be sure of anything, it's that any mistake committed first in the gas business is never so unique that it cannot be replicated later for the electric industry.

Rooting Out Market Power

These days, the Federal Energy Regulatory Commission (FERC) finds itself hard at work pulling on both ends of the same rope (em trying to create competition by prescribing conduct, instead of just letting go.

On the gas side, the FERC finds itself hard at work redesigning rules for a market in pipeline transportation that was considered a model for deregulation not so very long ago. It is now acting on applications filed by interstate gas pipelines (at the FERC's invitation) to participate in a pilot program to relax the price ceiling that applies to certain released pipeline capacity and pipeline sales of interruptible and short-term firm capacity.

The idea is to test whether pipelines can exert market power when competing with shippers that release capacity for short-term transactions, because the time it takes to process a capacity release places releasing shippers at a disadvantage when competing against short-term capacity offered initially by the pipeline (which serves as a product substitute for released capacity). Also, the FERC wants to test whether distributors enjoy market power in selling gas to buyers behind the city gate, because the buyers are limited in their choice of delivery points. See, Secondary Market Transactions on Interstate Natural Gas

Pipelines, FERC Dkt. Nos. RM96-14-000, RM96-14-001, July 31, 1996,

61 Fed.Reg. 41046 (Aug. 7, 1996) (Notice of Proposed Rulemaking and Proposed Experimental Pilot Program).

These two questions bear a remarkable similarity to questions about market power that have taken center stage on the electric side since the FERC issued Order 888, setting up a regime for open-access transmission markets in the electric industry.

There, the FERC (and others) wants to know whether and to what degree owners of generating plants can exert market power through their control over transmission pathways. Also: Do transmission constraints in certain geographic areas narrow the supply choices available to customers located in those areas, again because of a limited choice in delivery points?

Unfortunately these efforts will drag on forever (and maybe that's the point), unless the FERC can somehow develop the will to mandate authentic secondary markets for capacity on gas pipelines and the transmission grid.

Ignoring Secondary Concerns

From what I've heard in talking with people whose views I respect, the surest way to extinguish market power is to give it away. Create an authentic secondary market. Treat purchasers of transmission capacity (electric or gas) as owners of private property, allowed to sell to anyone they please, in any market, and at any price.

However, the FERC steadfastly refuses on the gas side to allow owners of pipeline capacity to freely sell their rights; instead, they must release capacity back to the pipeline (doesn't that just increase the pipeline's market power?) or venture into the gray market and bundle capacity with the commodity.

Without a viable secondary market, the war against market power becomes a war against the customer. In fact, the FERC appears ready to fault the customer as the cause of the problem and indict him for market abuses, as shown by the infamous footnote 44 in Docket RM96-14-000:

"If the Commission had information showing that a [gas] shipper making a sale for resale used a bundled sale to exceed the maximum rate for interstate transportation, the Commission has the statutory authority to take action against that shipper."

On September 20, the FERC held its first technical conference on its proposal to design a single, pro forma capacity reservation tariff (CRT) for electric transmission, which would assign network service on a reservations basis, rather than according to load. See, Capacity Reservation Open Access Transmission Tariffs, FERC Dkt. RM96-11-000, Apr. 24, 1996, 61 Fed.Reg. 21847 (May 10, 1996) (Notice of Proposed Rulemaking).

To its credit, the FERC proposed the CRT to help form a secondary market for tradable rights in electric transmission capacity. But critics allege that operational concerns make it impractical to allow owners of transmission capacity to resell their rights.

At the technical conference, the Edison Electric Institute released a final report of a study it procured from KEMA-ECC, Inc. The report points out the difficulties in taking capacity rights awarded on a real-time basis (available transfer capability), for a particular set of receipt and delivery points, and then reselling those rights in a different context: "This will constitute a major change in the current operating environment."

The KEMA-ECC report falls back on the old theory of command and control: "It is our assumption that the U.S. electric industry must effectively unbundle transmission and system dispatch from ... sales of generation and that codes of conduct will be established." (emphasis in original).

As someone once said, "There you go again."

Editor

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