Electricity Transmission and Emerging Competition

Fortnightly Magazine - July 1 1995
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Interesting times. Challenging times. Confusing times. The electricity industry and its regulators are now inextricably meshed in a tangle of interconnected reforms. With 50 states as laboratories, the process is accelerating. There is no going back. But which way is forward?

The old model of a closed system of vertically integrated electric utilities offering bundled service has been discarded in theory, and is being dismantled in practice. Consensus on a new model has not yet emerged. Parallel developments in FERC proceedings, state inquiries, and industry restructuring are lurching forward without recognizing fully how each part affects the others. There is a need for a greater sense of urgency here: Fundamental connections among several pieces of the overall puzzle must be recognized soon and incorporated in the reforms if the promise of open competition is to be realized, and the economic gains achieved.

The key lies in understanding the role of transmission and the requirements for efficient competition. The principal challenge today falls to the industry, and especially to the existing utilities. The FERC has broken through many barriers in its recent Notice of Inquiry (NOI) on alternative pooling institutions1 and its Notices of Proposed Rulemaking (NOPR) on stranded assets and transmission access.2 The various notices ask many questions and even suggest a few default answers. The FERC goes far (em perhaps as far as the FERC can go by itself (em but not far enough. The default proposals fall short of meeting the requirements for an open, efficient, competitive electricity market in a network.

Breakthrough or Breakdown?

Many utilities were so pleased with the FERC principles on stranded assets that they may have stopped reading the rest of the "Mega-NOPR" on transmission access. However, the industry would be wise to read the treatise with some care. There is a case to be made that the FERC process and the default proposals for transmission access have inadvertently headed down the wrong track. Having crafted an important breakthrough on the stranded asset principles, the FERC may have presented us with a work in progress on transmission access. If not stopped and redirected, this train may be headed toward a breakdown.

The key fault is not something that is there but something that is missing, something implicit that should be made explicit. The key implicit assumption underlying the proposal is that the nonprice terms and conditions for transmission access and service can be defined independently of the institutional structure and market pricing provisions. In other words, that transmission is like any other product or service. After all, we can define the characteristics of a bushel of wheat and its transport between locations without needing to define simultaneously the organization of the wheat market. We know a bushel of wheat when we see it, and just how many bushels are in a carload; so too with electricity and transmission (em at least that is the assumption.

This implicit assumption is found throughout the Mega-NOPR. Most striking is the companion inquiry into Real-time Information Networks (RIN),3 which imposes an accelerated schedule requiring comments to be filed 60