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Fortnightly Magazine - April 2004

Letter to the Editor

The authors respond:</h1> <p>Jim Johnston's letter gives us an opportunity to clarify our discussion of electricity pricing. In our article we argued that there were two important defects of traditional electricity regulation from the perspective of economists: excess incentive for capital-intensive generation techniques and the use of prices as revenue-recovery rather than resource-allocation devices. Regulated retail prices for electricity consumption are weighted-average rather than marginal cost and thus incorrectly signal consumers about the true costs of electricity production: too high off-peak and too low on-peak.</p> <p>In a true deregulated market, Johnston is correct that consumers would be offered choices about how much of the continuous wholesale price variation they would face, ranging from all to none-just like mortgage products range from continuously adjustable to 30-year fixed-rate, even though the spot price of capital varies continuously.</p> <p>If genuine deregulated electricity markets are not possible, we argued that regulation could "mandate" real-time pricing. Our use of the term mandate was unfortunate because it implies that we would oppose the use of the risk-hedging and long-term contracts that Johnston describes. In addition, our use of the term allowed Johnston to infer that we favor mandating particular market institutions such as the California spot market. We neither oppose the use of the contracts Johnston describes, nor do we favor mandating any particular type of market institutions. What we do not favor is the suppression of prices as resource allocation signals through regulation. <i>-Jerry Taylor and Peter Van Doren</i></p> </p>&nbsp;</p> <p><b>Articles found on this page are available to subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.</b></p>

Letter to the Editor

To the Editor:

Cato's Peter Van Doren and Jerry Taylor analyzed the electricity crisis in the February 2004 issue of the ("Rethinking Restructuring," p. 12) and concluded that the solution to a bad situation is vertical integration and mandatory real-time pricing. In my opinion they have got it half right.

Byline: 
Public Utilities Fortnightly
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Benchmarks

New England's experience may redefine the term.

Benchmarks

New England's experience may redefine the term.

During the 1990s, capacity margins in the United States declined almost one third, falling from 21 percent in 1991 to less than 15 percent in 2001. In some regions, margins shrunk to less than 10 percent. Concerns grew over electricity reliability and possible upward pressures on electricity prices. However, as new gas-fired power plants began to come on line in the late 1990s, the developing electricity generation capacity surplus began to raise concerns.

Byline: 
Tom Wood, Ph.D.
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Perspective

A face-to-face interview with FERC Chairman Pat Wood III.

Perspective

A face-to-face interview with FERC Chairman Pat Wood III.

Bold. Fearless. Relentless. These are the words now being used by both critics and supporters to describe Federal Energy Regulatory Commission Chairman Pat Wood III.

FERC's recent policy initiatives and directives mark a strong shift from what was last year regarded as a more reluctant commission.

Byline: 
Richard Stavros
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Commission Watch

Solving the dilemma.

Commission Watch

Solving the dilemma.

The rationale from the Federal Energy Regulatory Commission (FERC) for eliminating through-and-out (T&O) rates while simultaneously imposing a Seams Elimination Charge/Cost Adjustment/Assignment (SECA) is an acknowledgement that FERC is conflicted on a fundamental economic principle: regional transmission organization (RTO) loads use the transmission systems of exporting RTOs; therefore, it is correct for importing customers to compensate exporting RTOs for the use of their transmission syste

Byline: 
John Seelke
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Business & Money

Some independent power producers failed to contain capital and O&M costs, adding to financial pressures.

Business & Money

Some independent power producers failed to contain capital and O&M costs, adding to financial pressures.

Merchant generators can substantially increase cash flow by revamping their capital allocation processes. Based on several recent client engagements, a PA Consulting study found that merchant generators often follow a flawed allocation process that misappropriates cash toward wasteful maintenance and capital expenditures, resulting in reduced asset values and erosion of precious cash reserves.

Byline: 
Holt Bradshaw
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Technology Corridor

Smaller systems aren't cost-effective.

Technology Corridor

Smaller systems aren't cost-effective.

It's time for a reality check on the commercial viability of wind farms. Are large wind systems more economical than small wind systems?

Byline: 
Gary C. Young, Ph.D., P.E.
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LNG Rising

Despite development challenges, LNG capacity is destined to play a bigger role in the U.S. energy mix.

Despite development challenges, LNG capacity is destined to play a bigger role in the U.S. energy mix.

When MidAmerican Energy announced its plans to build a pipeline to bring stranded Alaskan natural gas into the lower-48 states, the U.S. energy industry stood up and took notice. If successful, the project will bring the largest infusion of gas that this country has seen in many years-and not a moment too soon.

Byline: 
Michael T. Burr
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The Case Against Gas Dependence

Greater reliance on gas-fired power implies serious economic, technological, and national security risks.

Greater reliance on gas-fired power implies serious economic, technological, and national security risks.

Over the past two decades, the United States has, by default, come to rely on an "In Gas We Trust" energy policy. Natural gas increasingly has been seen as the preferred fuel for all applications, nowhere more than in the electric generation sector. However, the greatly increased use of natural gas forecast for the electricity sector may not be economically or technically feasible, and it does not represent optimal or desired energy policy.

Byline: 
Roger H. Bezdek and Robert M. Wendling
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The Generation Glut: When Will It End?

An analysis of the timing, location, and mix of new capacity additions that may be needed in the future.

An analysis of the timing, location, and mix of new capacity additions that may be needed in the future.

It is universally accepted that there is excess generating capacity in most, if not all, regions in the country. Looking forward, several obvious, and interesting, questions arise: (1) When will new capacity be needed? (2) Where will it be needed? and (3) What types of plants will be needed? As any good economist would say, it all depends.

Byline: 
Stephen T. Marron &amp; John H. Wile
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Banking on Predictability

A renewed capital investment structure is required for long-term investment in power infrastructure.

A renewed capital investment structure is required for long-term investment in power infrastructure.

The bank markets and the long-term fixed income markets, or institutional investors, have long memories, and their pain is still fresh. Over the last few years, they have had to watch their investments in power infrastructure become distressed, bankrupted, or reorganized.

Byline: 
Frank A. Napolitano
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