[BETA] Fortnightly

You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.

But some economists take a different view. They see the real convergence occurring between electricity and telecommunications. I'm not talking about the "smart house" or fiber-to-the-whatever. Instead, how is the product is created?

Mark your calendars for April 29, 1996. That's the date of the "filing of the century," according to Donald Garber, group manager for strategic plans and projects at San Diego Gas & Electric Co.

Garber is talking about plans to file a draft operating agreement at the Federal Energy Regulatory Commission (FERC) for the proposed California Power Exchange. The April filing will mark an important step in executing the December 20 order by the California Public Utilities Commission (CPUC).

What are the essential characteristics of the system of governance that will be required for a new, North American electric industry with interconnected and interdependent transmission networks and trading areas?

Electric transmission networks are natural monopolies, as are the many independent network

control systems that coordinate the use of generators and loads and preserve system reliability.

There are essentially two kinds of reliability: sufficient generating capacity, and sufficient transmission capacity. Although it often receives the most attention, generation accounts for only about 10 percent of reliability concerns. Even when there is a problem, there is usually time to prepare; demand can be reduced through voltage reductions, interruptible customers, public appeals, and as a last resort, rotating blackouts.

The deregulated power market will feature large numbers of buyers and sellers. Buyers will worry that prices will rise unexpectedly above current levels; sellers will worry that prices will fall unexpectedly. Some will be interested in fixed-price forward deals that protect them from these risks.

In thinking about transmission pricing for a competitive electric industry, we should remember that the fundamental objective of competition is to increase economic efficiency. Improved economic efficiency, after all, leads to better use of resources, lower costs, and long-term benefits for consumers.

As the generation side of the electric industry becomes increasingly deregulated and transmission migrates toward common carrier status, an easily administered and fairly applied pricing system must be developed. The concepts of "postage stamp" tariffs and "contract paths" lose all logical viability. They possess no totally encompassing tie between the provider of the service and the revenues for that service.

As the debate over restructuring the U.S. electricity industry moves forward, there comes a host of new theoretical models. Two proposals in particular serve well to frame the debate.

More than a decade ago, at the 1981 Edison Electric Institute (EEI) Fall Financial Conference in Palm Beach, FL, I presented my vision of the future of the electric industry. I called my talk "Let's End the Monopoly." In it I urged, "Let's open electricity generation to competition (em with free entry, no franchises, and no obligation to serve." The response was underwhelming.

From the perspective of the last 14 years, how have my forecasts turned out?

The Florida Public Service Commission (PSC) has decided to expand interconnection for telecommunications switched-access service by requiring local exchange carriers (LECs) to offer virtual collocation services upon request. The PSC approved pricing flexibility in the form of zone density pricing for the new collocation tariffs.