Regional Power Markets: Roadblock to Choice?

Fortnightly Magazine - October 1 1997
EES North America

Competition abounds at wholesale, but retail is another story.

Will geography, politics and regional economics stand in the way of real choice for electric consumers at the retail level? Consider this tale of two power players.

One competitor, the Indiana Municipal Power Agency, is proud of itself. In its annual report, IMPA says that open access and competition in the wholesale market allowed it to trim wholesale rates for power it delivered to member distribution companies in 1996. "The results were remarkable," the report reads. "Rates to members decreased by more than 5 percent for the second consecutive year."

But take a look at Duquesne Light Co., an investor-owned utility. Like the IMPA, Duquesne has made progress at wholesale, where its rates appear competitive. Yet its retail rates rank among the highest in the nation. Apparently, Duquesne's retail customers pay a heavy subsidy to its wholesale buyers. Will consumer choice put an end to such anomalies?

Overall, any correlation between wholesale and retail power markets appears tenuous at best. The ratio between wholesale and retail prices varies widely from utility to utility, even though both are supposedly based on cost. The rates are set by different regulators, state and federal, and so have never been reconciled.

So what did the National Energy Policy Act of 1992 do for wholesale competition? Not much, at least not yet. In fact, deregulation of wholesale power has not made a huge difference. Moreover, where it has wrought change, the market faces a reckoning with environmental concerns, capacity problems and legal issues. On the other hand, prices are down, competition is up, and the power brokerage business is booming. The glass, while filling slowly, is at least filling.

At retail, however, all the analysis one reads about opportunities for cost savings from electric competition must be taken for what it's worth. Wholesale competition is working, and probably has been for a long while, but retail competition is still a muddled pipe dream, at best, with many difficulties ahead.

You Can Get It Wholesale

The wholesale power market is large and complex. Roughly 2,000 cooperative and 1,000 municipal (em mostly small and rural (em systems exist in the U.S. More than 200 investor-owned systems serve 70 percent of demand, especially in large urban areas. In the contiguous U.S. (and Canada), these thousands of separate systems are divided among 10 regions that manage reliability and supply, each with its own way of running things. One region may have a single control center, another more than 30. Together, these regions fall under the administrative umbrella of the North American Electric Reliability Council, or NERC.

All these systems buy wholesale power; many generate and sell it as well. The number of possible buyer-seller combinations, not to mention possible transmission paths between them, is staggering. Thrown into the mix are hundreds of power brokerage firms and a growing derivatives market, plus a handful of federal generating and marketing agencies.

That's the wholesale market. But the wonderful strangeness of electricity makes the grid a commodity market like no other. Consider the term "loop