A couple weeks ago, on a beautiful Sunday morning, I picked up my briefcase and wandered down to the Potomac river shoreline to catch up on my summer reading list. There, on the Virginia side, gazing across the river at the Lincoln Memorial, Washington Monument, and Capitol dome, I gathered strength to tackle a foot-high mound of paper. Buried inside were comments filed by a dozen-plus utilities and industry groups on the Notice of Proposed Rulemaking (NOPR) on electric transmission and stranded investment issued last March by the Federal Energy Regulatory Commission (FERC).

I started to plough through it: Commonwealth Edison (Edison), Pacific Gas & Electric (PG&E), San Diego Gas & Electric (SDG&E), Southern California Edison (SCE), Wisconsin Power & Light (WP&L), Edison Electric Institute (EEI), Electric Generation Association (EGA), National Independent Energy Producers (NIEP), American Public Power Association (APPA), National Rural Electric Co-op. Association (NRECA), Electric Consumers Resource Council (ELCON), Transmission Access Policy Study Group (TAPS), and the Louisiana Energy & Power Authority (LEPA).

I was still reading 12 hours later when the mosquitos and jet exhaust sent me home.

Wired

The FERC NOPR essentially creates a new "wires" business in electric transmission. Where do the boundaries lie?

Edison argues that "Most of the ancillary services identified in the NOPR are generation services," and thus should not play a role in comparability. Edison says competitors will "game" the system if transmission owners must devote a portion of generation to ancillary services: "For example, a transmission customer may obtain generation ancillary services at FERC-regulated rates, freeing its own generation for sale at market-based rates."

The California "PoolCo" (WEPEX (em The Western Electric Power Exchange) will not start up until 1997. Thus, SCE and SDG&E claim they face a conflict. They must file or accept the FERC's pro forma tariffs with contract-path pricing for the short term, even though they will later cede transmission to WEPEX and its "independent system operator." WEPEX would dispatch generating plants outside bid order to minimize transmission constraints, with marginal-cost transmission pricing. PG&E does not mention WEPEX, but also envisions control of the grid transferred to an independent operator. Outside California, WP&L also recommends a pool structure with marginal-cost transmission rates.

"Arguably, each of the major interconnections (em Western Systems Coordinating Council, Eastern, and ERCOT (Texas) (em could be consolidated into single transmission providers." That comment comes from APPA.

Good Intentions

As the FERC notes at NOPR page 235, "We will watch with interest" as the states address retail stranded costs. That passive policy did not deter comments.

Stranded-cost recovery collides head on with the 1994 Cajun Electric case. As ELCON puts it, "Generation-based stranded costs cannot be placed on the wires." But advocates for cost recovery answered with their own "good intentions" defense: Since the FERC's NOPR removes market power from transmission, regulators can charge transmission for stranded investment.

WP&L comes out against full, guaranteed recovery of all stranded investment, claiming it would favor high-cost utilities and slow down the competitive transition: "Full recovery of stranded costs comes at much too high a societal cost." ELCON suggests fair-value compensation for stranded costs, as proposed by Chief Justice Rehnquist in Duquesne v. Barasch. And APPA cleverly refutes the case for good intentions: "Stranded costs ¬ are the direct consequence of monopoly power ¬ over transmission."

Pro Antitrust

Will the NOPR eliminate market power in electric generation? Edison says yes, but EGA and NIEP argue that enough generation market power will persist to foil competition.

LEPA, a state-owned entity that provides generation and transmission to member municipalities in Louisiana, offers a novel antitrust analysis prepared by Massachusetts University Professor William Shepherd. LEPA divided bulk-power generation into two markets: 1) horizontal coordination or exchange services among bulk-power suppliers at the same stage of production, and 2) a distinct "RQ" market, representing vertical ("requirements") transactions between suppliers and distributors that incorporate a "complete assurance of supply."

Wallace Brand, attorney for LEPA, notes that the "RQ" market accounted for 85 percent of all energy sales in Louisiana. When I asked him about generation market power, he explained: "Even after FERC promulgates its open-access tariffs, Entergy would still enjoy monopoly power in Louisiana, based on its 71-percent share of the RQ generation market." Brand added: "Cost and reliability work at cross-purposes in electric generation. Cost-cutting demands scale, which undermines reliability and requires power pools. All that belies the FERC's presumption (Kansas City Power & Light Co., 67 FERC  61,183) that a competitive generation sector lies poised to step in after transmissions opens up."

Just Like Gas?

As part of its comments, PG&E submitted a paper by Michael Schnitzer of The NorthBridge Group, entitled Concerns with Applying the Gas Model to Electric Transmission. The paper claims that electric transmission markets lack two key features that made the FERC's gas deregulation successful in Order 636: 1) well-defined property rights, and 2) a broad distribution of such rights.

Schnitzer argues that parallel loop flows and dynamic capacity availability make it impossible to define or exercise transmission property rights. These failures, Schnitzer says, will frustrate a viable secondary market in electric transmission, especially since transmission rights in most geographic areas are concentrated among a small number of transmission owners. (Schnitzer cites the California-Oregon interface as a notable exception).

Schnitzer offers three solutions: 1) delay formation of a secondary market, 2) reallocate fixed transmission costs where necessary to make rates recover full costs, and 3) encourage marginal-cost transmission pricing with congestion costs thrown in for periods of peak constraints.

Edison also draws on the natural gas experience, citing a 1991 Seventh Circuit ruling (Illinois ex rel. Burris v. Panhandle Eastern Pipe Line Co., 935 F.2d 1469) to show that sometimes a utility can use a monopoly facility to limit losses in a competitive market. In that case, the pipeline denied transportation service to maintain gas sales and avoid take-or-pay liability. As Edison tells it, the court upheld the pipeline's "lawful refusal to cut its own throat."

Editor

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