EDITORIAL
Electricity Reform at the Conceptual Level
L
et’s review how this is sup-
posed to work: As the states
belly up to the bar at the restruc-
turing saloon (the “Golden Tur-
bine”) they’re agreeing that utility
customers should pay incumbent
utilities pretty much all their sunk
costs related to above-market-
price generation. In return for this
benison, utilities agree to cooper-
ate in setting up a regime under
which customers will be able to
choose their electricity suppliers.
Doesn’t sound too bad, does it?
Most of us can accept that inno-
cent utility investors should be
able to recover and earn a return
on investments they funded, at
least those that were prudently
carried out. And experience
we’ve seen from just about every
other industry indicates that com-
petition can improve service op-
tions and cut prices. Call us starry-
eyed, but we believe that. How
can this thing go wrong then?
All this sounds fine at the Con-
ceptual Level. (That’s where the
Golden Turbine is located, by the
way, atop the Heart o’ America
Mall.) And the Conceptual Level
is where most policy makers have
remained. (You keep drinking
these really tasty Ruby Margaritas
they make at the Turbine and you
figure, “Relax. It’ll all work out.
Competition will break the backs
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of the monopolists and give the
free market room to work its
magic.“)
There are two problems with
this:
(1) It’s not at all clear to what ex-
tent small customers can benefit
from competition at the retail
level, and
(2) The market power many
large suppliers will continue to ex-
ercise may chill the expected com-
petition substantially, at least
enough to keep prices above
where they would otherwise be.
First, the small customer prob-
lem. Large customers will have
lots of options. Even if marketers,
brokers and low-cost utilities
can’t get to them, they have pretty
decent self-generation options.
With combined-cycle plant effi-
ciencies soaring and gas cheap,
power plants in even the 10 MW
and below range are looking
pretty good these days, especially
where there’s a cogeneration fea-
ture. Note Cinergy’s joint venture
with Trigen to develop small, low-
cost plants in the territories of
high-cost utilities.
B
ut for choice to pay off for
small customers, a fair
number of suppliers-five or six,
or more-must have access to
customers on reasonable terms.
Will this happen? Or will the
transaction costs of aggregating
small users, coupled with the as-
sorted baggage hung on the
wires-transition charges, ancil-
lary service charges, social costs
and assorted taxes-slow the
competition derby to a crawl?
(Sure, some of this baggage may
attach to all sales from the grid,
but it will still do what baggage
always does: encumber move-
ment.)
Unfortunately, telecom and
natural gas have little to teach us
about how competition might
work for small customers. Large
gas and telecom users have seen
strong competition and big sav-
The Electricity Journal
ings, but small local phone users
s
have barely had a taste.
A
to the second problem,
the market power articles
in this issue illustrate that we still
know very little indeed about
how to define and evaluate geo-
graphic and product markets in
electricity. It will be vital to do so,
because, in effect, every hour is a
different market and it’s not possi-
ble to know in advance what
games suppliers will play to
squeeze something extra out of
the market. State legislators and
regulators aren’t equipped to deal
with these matters-even if they
are inclined and able-because
the markets involved exceed their
jurisdictional grasp. The markets
are regional and multi-state.
Fine, you say. Let the Federal
Energy Regulatory Commission
Apr ‘! 1997
monitor market power. But noth-
ing in the Federal Power Act
gives FERC the authority to do
this, assuming that it would be a
good thing to do. So no one truly
has the know-how and the author-
ity to oversee the new power in-
dustry structure that’s being cre-
ated, even if we understood what
that is.
Understanding is thin, and
concerns are wide-ranging, but
in spite of these truly frightening
gaps the legislative sausage-mak-
ing exercise is beginning. It ap-
pears that we will once again set
sail on a sea of buzzwords and
catch-phrases. Bandages or pret-
zels will be handed out to sym-
bolize one thing or the other.
Money and muscles from the big
dogs--both large customer and
supplier interests-will talk
A typical scene in the Golden Turbine.
loudly. But, remembering that it’s
the little dogs who vote, working
out these interests will be a diffi-
cult task for the states and for
Congress. How will it go? Will it
be, in the words of Jerry Maguire,
a case of “Show me the money!”
(By the way, Mr. President, how
much did you say for the Lin-
coln Bedroom?)
Or can we somehow muster the
strength to admit that this can of
worms is just too big and
squirmy-that we must have a far
more precise idea of what an opti-
mum electricity market would
look like, how it should be organ-
ized and operate, how it should
be overseen and by whom, and
how it would serve the various in-
terests, small and large? Mean-
while, see you all at the Golden
Turbine for another ‘Rita.
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