Transmission access pricing and "non-bypassable" competitive transition charges

Natural Resources Journal

Volumn 37, Issue 1, 1997, Pages 9-25

  Doane, Michael J ^a   Macavoy, Paul W ^b  

^a PM Industrial Economics Inc   (United States)

^b YALE SCHOOL OF MANAGEMENT   (United States)

Author keywords

[No Author keywords available]

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EID: 26444578478     PISSN: 00280739     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (47)

1. Notice of Proposed Rulemaking and Supplemental Notice of Proposed Rulemaking, Recover Stranded: Costs by Public Utilities and Transmitting Utilities, 60 Fed. Reg. 17, 662 (1995) (FERC) (hereinafter "Mega-NOPR"). While the Mega-NOPR dealt only with stranded costs caused by wholesale wheeling, the FERC noted the 85% of stranded costs would likely be due to retail wheeling.
2. Id. at 17,701.
3. The FERC's definition is in essential agreement with that offered by Professors Baumol, Joskow, and Kahn, who defined stranded costs as: past investments, contractual commitments, and deferred recoveries of expenses, previously reviewed and approved (and, in some cases, mandated) by regulators, that have not yet been fully recovered by the utility companies, and that could not be recovered in a fully competitive market because competitors would bear no such burdens. See William J. Baumol, et al., The Challenge for Federal and State Regulators: Transition from Regulation to Efficient Competition in Electric Power, Appendix A of the Comments of the Edison Electric Institute in Response to Mega-NOPR, Docket No. RM94-7-000 (June 1994). Seen in this way, the transition of regulated industries to more competitive structures parallels the efforts of Eastern European countries to introduce competition into their previously command-oriented economies. Not surprisingly, massive capital investments undertaken by prior regimes are now essentially worthless, the stranded costs having been paid for by wage earners.
4. See OLIVIER BLANCHARD, KENNETH FROOT & JEFFREY SACHS, EDS., THE TRANSITION IN EASTERN EUROPE, VOL. 1, COUNTRY STUDIES; VOL. 2, RESTRUCTURING (1994).
5. Order Instituting Rulemaking on the Commission's Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation, Decision 95-12-063 (Cal. P.U.C., Dec. 20, 1995) as Modified by D. 96-01-009 (Jan. 10, 1996).
6. Such proposals have been advanced by municipalities in New Jersey (Aberdeen and Salem), Virginia (Falls Church), and New Hampshire. See e.g. SCC Clarifies its Jurisdiction in Falls church "Muni Lite" Effort, in ELECTRIC UTILITY WEEK: 1995 at 19;
7. and Suppliers are "Champing at the Bit" as Second N.J. Town Eyes "Muni Lite," POWER MARKETS WEEK: 1995 at 2.
8. See FEDERAL ENERGY REGULATORY COMMISSION, POWER POOLING IN THE UNITED STATES 5 (1981).
9. For a discussion of the regulatory contract, see J. GREGORY SIDAK & DANIEL F. SPULBER, DEREGULATORY TAKINGS AND THE BREACH OF REGULATORY CONTRACT, (1996), New York University Law Rev., Vol. 71, No. 4, at 851-999.
10. See Hope Natural Gas Co. v. Federal Power Comm'n, 320 U.S. 591 (1944).
11. Under rate-of-return regulation, the revenue earned by a utility in each period equals the sum of its operating cost, depreciation, and a market (fair) rate of return applied to the value of the rate base at the beginning of the period.
12. We define stranded cost as the value of the firm's present discounted earnings under regulation less the value of the firm's present discounted earnings under competition.
13. Theresa Flaim, Stranded Investment-$300 Billion Anchor or "Tonya Harding" Issue?, 6 ELEC. J. 17 (1994).
14. M. Kahal, An Economic Perspective on Competition and the Electric Utility Industry (Nov. 1994), prepared for the Electric Consumers' Alliance's Comments in Response to Mega-NOPR, Docket No. RM94-7-000 (June 1994).
15. Mega-NOPR, supra note 1, at 17,695.
16. Mega-NOPR, supra note 1, at 17,697. For an economic analysis of FERC's recovery mechanism, see Michael J. Doane & Michael A. Williams, Competitive Entry into Regulated Monopoly Services and the Resulting Problem of Stranded Costs, 3 HUMES PAPERS ON PUBLIC POLICY: Edinburgh 32-53.
17. FERC Order No. 636, 57 Fed. Reg. 13,267 (1992) and Subsequent FERC Order No. 636-A, 57 Fed. Reg. 36,128 (1992), and FERC Order No. 636-B, 57 Fed. Reg. 57,911.
18. See Michael J. Doane & Daniel F. Spulber, Open Access and the Evolution of the U.S. Spot Market for Natural Gas, 37 J.L. & ECON. 477-517 (1994).
19. Mega-NOPR, supra note 1, at 17,697.
20. Id. at 17,708.
21. Id. at 17,704.
22. Cal. P.U.C. Policy Decision, supra note 4, at 154.
23. Id. at 120.
24. WALTER NICHOLSON, MICROECONOMIC THEORY: BASIC PRINCIPLES AND EXTENSIONS 610 (1985).
25. The Modesto Irrigation District was organized in 1887 to provide water to farmers. It began selling electricity in the 1920s using a hydroelectric power plant. Today it generates electricity using hydro, gas, and coal plants, and purchases power from San Francisco's Hetch Hetchy hydro-electric facility and other utilities. Modesto serves approximately 90,000 retail customers in contrast to PG&E which serves 4.4 million customers. As a municipal, Modesto qualifies for tax-exempt financing and is not obligated to purchase power from "qualifying facilities" under PURPA legislation. In 1995, Modesto's system average electric rate was 7.7 cents per kWh. PG&E's system average electric rate was 11.6 cents per kWh.
26. Modesto's connection to PG&E is governed by a 1988 interconnection agreement that specifies only one point of interconnection which is located adjacent to Modesto's retail service territory. See Interconnection Agreement Between Pacific Gas and Electric Company and Modesto Irrigation District (1988) (on file with author).
27. Under California state law, the CPUC does not regulate the retail rates of irrigation districts.
28. Presentation of Christopher Mayer, Assistant General Manager of the Modesto Irrigation District, at the Oakdale City Council Meeting (Dec. 4, 1995), at 16 (excerpt on file with author).
29. In addition to certain municipal facilities, the PSES provides retail service to the County of Riverside, an airline service provider at the municipal airport, the Federal Aviation Administration, and various airlines which utilize the municipal airport.
30. Application of City of Palm Springs, California for an Order Requiring Transmission Service Under Section 211 of the Federal Power Act (1996) (FERC) (hereinafter "Application"), Docket No. TX96-7-000, at 18. Notice of Palm Springs' Application was published at 61 Fed. Reg. 10,338 (1996).
31. Id., Executive Summary at 2.
32. Application, supra note 28, at 6.
33. Id.
34. Application, supra note 28, at 7.
35. Id. at 93-94.
36. Application, supra note 28, at 94.
37. Economic rent is a payment to a factor in excess of what is necessary to keep it in its present employment. For example, if a woman is earning $40,000 in her current job and her next best alternative pays $35,000, the economic rent which she enjoys is $5,000.
38. 138 Cong. Rec. S17566-01 at 323 (daily ed. October 8, 1992) (Statement of Senator J. Bennett Johnston).
39. Application, supra note 28, at 94.
40. See William J. Baumol & J. Gregory Sidak, The Pricing of Inputs Sold to Competitors, 11 YALE J. ON REG. 171, 202 (1994);
41. see also William J. Baumol & J. Gregory Sidak, TRANSMISSION PRICING AND STRANDED COSTS IN THE ELECTRIC POWER INDUSTRY (1995).
42. The sequencing of the transmission path does not alter the pricing rule. That is, if Utility X and Utility Y both provided transmission service over path A-B, and Utility Y sought access over path B-C, the same pricing rule would apply.
43. 0 or the per-unit recovery of common costs.
44. We refer to this calculation as the "tops down" method. The "bottoms up" and "tops down" produce equivalent access prices.
45. See, e.g., ICC railroad rates cases known as Compensation I through IV, St. Louis S.W. Ry.-Trackage Rights over Miss. Pac. R.R. - Kansas City to St. Louis, 1 I.C.C.2d 561 (1984), 4 I.C.C.2d 668 (1987), 5 I.C.C.2d 525 (1989), 8 I.C.C.2d 80 (1991).
46. See Testimony of Paul W. MacAvoy Before the FERC in Docket No. CP85-437, Exhibit SG-3 (1985); see also Paul W. MacAvoy, Supplemental Report of Dr. Paul W. MacAvoy on Stranded Cost Issues, Before the FERC, Docket No. CP93-258-000 (1994).
47. The Act states "a State Commission shall determine wholesale rates on the basis of retail rates charges to subscribers for the telecommunication services requested, excluding that portion thereof attributable to any marketing, collection, and other costs that will be avoided by the local exchange carrier." Telecommunications Act of 1996, Pub. L. No. 104-104, § 252(d)(d), 110 Stat. 56.