Fortnightly Magazine - September 1 1997

Your editorial in the June 1, 1997 issue ("PJM's Brave New World," p. 4) provided a perceptive analysis of the Pennsylvania transmission pricing debate. As you point out, standard economics defines the value of a transmission constraint as the difference between the price of electricity on one side of the constraint and price on the other side. There can be no dispute over this statement; however, this straightforward theory is not always correctly applied.

In the case of electricity, the marginal running cost (or energy price) cannot be used to determine the value of a constraint.

Open-access tariffs hold the key to capturing the gains promised by electric restructuring.

In a restructured electric industry, unbundling the cost of the wires from power generation may well prove more important than dealing with stranded costs. In fact, stranded costs eventually will take care of themselves, whether by direct recovery, indirect recovery or no recovery. Without proper unbundling, however, a restructured industry could force competitors to pay inflated access fees to the distribution utility.

The matter has drawn a lot of attention.

The California Public Utilities Commission has valued sunk costs for the Diablo Canyon nuclear generating plant at $3.287 billion. The ruling forms the basis for future ratemaking treatment for the plant assets by its owner, Pacific Gas and Electric Co., according to industry restructuring under way in the state.

The approved rate plan includes an overall rate freeze and a bond-financed 10-percent rate reduction for residential and small commercial customers. Both are called for under the state's new electric industry restructuring law (Assembly Bill 1890).

Bruce Radford's May 15 "Frontlines" (p. 4) commentary on the Sears Tower/QST cogeneration project misses the point. I would like to correct his misconceptions and clarify the issues by looking at them from a marketplace viewpoint rather than a utility-based viewpoint.

First of all, the Sears Tower's savings are more than an "allegation." QST's proposed cogeneration facility for the Sears Tower will reduce the cost of electric power supply to the tower by about $2 million per year compared to what it costs under ComEd's current rates.