The debate over restructuring the electric industry has encompassed a revisiting of the traditional rate-of-return (ROR) pricing model. Parties of widely divergent interests increasingly advocate alternatives. Under the label "performance-based regulation," these new pricing models share the objective of strengthening incentives for electric utilities incentives to pursue some specified "socially desirable" outcome.
Two power pools (em one existing, the other inchoate (em have announced that they will file tariffs to price electric transmission as the difference in spot prices in the generation and consuming markets.
On May 31, 1995, the Federal Energy Regulatory Commission (FERC) issued its Statement of Policy in Docket No. PL94-4-000, Pricing Policy for New and Existing Facilities Constructed by Interstate Natural Gas Pipelines.1 In that decision, the FERC sought to provide upfront rate certainty, thereby giving pipelines and shippers a firm basis for making decisions on large-scale investments.
But is that objective realistic?
New England Electric System (NEES) and the majority leaders of both houses of the Rhode Island Legislature have proposed legislation that would restructure the state's electric utility industry. The legislation provides for full recovery of all stranded costs, and phases in open access for all retail customers by January 2001. Although customer choice would come about relatively quickly, rates would not decline much in the near term because a transition charge shields NEES from most of the restructuring risk.
With a CTC likely to cover stranded costs,
aggregators must somehow find power cheap
enough to offer real savings.
Retail aggregation: Wherever you stand, it appears 1998 could be the year of reckoning.
By then (em say those watching the future of aggregation in the "leader" states of California, New York, Massachusetts, and New Hampshire (em rulemakings will have sorted out the issues of stranded costs, distribution, and reliability.
The Federal Energy Regulatory Commission (FERC) has approved a policy statement, Alternatives to Traditional Cost of Service Ratemaking for Natural Gas Pipelines, giving pipelines greater flexibility to use market-based, negotiated/ recourse, incentive, and other alternative rates (Docket Nos. RM95-6-000 and RM96-7-000). Pipelines may negotiate new rates with customers, but may not negotiate services that might degrade open-access service under Order 636. The FERC is still considering what type of service flexibility it should allow.
Competition from Order 636 has gas customers rethinking their firm capacity options.
Just when everyone thought we had put Order 636 behind us, up pops perhaps our greatest challenge yet: the turnback (or "decontracting") of firm capacity on interstate natural gas pipelines. This phenomenon, now emerging on a few major pipelines, such as Transwestern, El Paso, and Natural Gas Pipeline Co. of America, inspires different reactions.
LDC Robustus? Which Would You Rather Be?
Post-Order 636 evolution depends on aggressive regulatory and legislative reform.
"Get out of the gas business. Drop the merchant function. We can't make any money selling gas and we are constantly at risk to having gas costs disallowed. It's a no-win situation.
PBR's Changing Face
William D. Steinmeier ("Price-Based Regulation: The Elegance of Simplicity," Jan. 15, 1996, p. 35) presents an unconvincing and misleading case for performance-based regulation (PBR). He is right that PBR is potentially simpler to implement than cost-of-service regulation and provides a strong incentive for companies to cut costs. However, one of his main points (em that profits don't matter, only prices do (em applies only to competitive markets.
Economists often seem enamored of economic efficiency, honoring its merits while decrying the lost benefits of inefficient outcomes. But really ... what's the harm in a little inefficiency? Well, the harm may be more real than we recognize.