Over the river and (around) the woods to grandma's house we go: long-term firm transmission rights, transmission market power, & gaming strategies in a deregulated energy market - an international comparison.

• Author: Bradley, Richard R.

1. INTRODUCTION II. A HISTORICAL PERSPECTIVE OF ELECTRICAL TRANSMISSION REGULATION A. The Infancy of Electricity Deregulation B. The Deregulatory Era: 2000 to Present III. THE CURRENT STATUS OF THE TRANSMISSION SYSTEM IN THE UNITED STATES A. The New, Semi-Independent Status of the Power Grid Destabilizes Coordination Between Interconnections B. Underinvestment in the Infrastructure Exacerbates the Problems Associated With the Power Grid C. Poor Separation Between Generation and Transmission Facilities Undermines the Goal of Competition in Wholesale Electricity Markets IV. ANTITRUST IMPLICATIONS OF LONG-TERM FIRM TRANSMISSION RIGHTS AND OTHER HEDGING STRATEGIES A. The Essential Facilities Doctrine B. First Generation Antitrust Cases C. Second Generation Cases D. The Horizontal Merger Guidelines & The Inability of Antitrust Law to Remedy Transmission Market Power E. Transmission Market Power 1. The Process of Transmitting Electricity 2. Gaming Behaviors that Undermine Competition V. INTERNATIONAL COMMUNITY DEREGULATION EFFORTS AND NEW MARKET STRUCTURES A. Deregulation of Electricity in the European Union (Community) 1. The Scandinavian Countries (Nord Pool) 2. England B. Transmission Market Power in the European Union C. Argentina Market Structure and Gaming Behaviors VI. REMEDIES MITIGATING THE ACCUMULATION AND EXERCISE OF MARKET POWER IN TRANSMISSION MARKETS A. Nationalization of the Transmission Grid Under the Supervision of a Monopoly Transmission Company B. Functional Separation of Generation and Transmission VII. CONCLUSION I. INTRODUCTION

   At 4:10 p.m., on August 14, 2003, dozens of patrons at the Cedar Point Amusement Park in Sandusky, Ohio sat suspended in the air within the confined spaces of the Magnum XL200 roller coaster, which had come to a sudden halt three-quarters of the way up the steepest drop. (1) At this time, New York; Cleveland, Ohio; Detroit, Michigan; and Toronto and Ottawa, Canada; endured a complete electrical blackout that lasted until 1 a.m. the following day for many customers. (2) Authorities attributed the blackout to multiple failures in the electricity grid. (3) In the last forty years, various portions of the United States endured a complete, albeit temporary, loss of electricity due to grid failure. (4) These instances highlight the need for a more secure, reliable, and competitive transmission grid.

   Recently, the Federal Energy Regulatory Commission (FERC) promulgated Order No. 681, which extended the duration of long-term firm electrical transmission rights for current holders of such rights to ensure reliable electrical flows without harming competition. (5) Previously, FERC failed to delineate clearly any specifications as to the duration of long-term firm transmission rights, but FERC had a marked preference for longer terms of transmission service. (6) For example, FERC has, on occasion, allowed terms of transmission service up to twenty years in duration. (7) Order No. 681, however, will further exacerbate many of the market power issues experienced in U.S. electricity markets. (8) Because electrical transmission capacity should be an essential facility within the context of antitrust enforcement, FERC's decision to extend the duration of long-term firm transmission rights will serve to limit competition as holders of long-term firm transmission have incentives to congest transmission lines and engage in other gaming behaviors to prevent entry into deregulated electricity markets. (9)

   This Article will provide: (1) a brief history of electricity deregulation and the current structure of the transmission grid; (2) a discussion of the antitrust implications of firm transmission rights and gaming behaviors; (3) examples of how the international community addresses the noncompetitive aspects of transmission capacity; and (4) a cost/benefit analysis of possible remedies, including a complete separation of generation from transmission facilities and a complete nationalization of the transmission market.

2. A HISTORICAL PERSPECTIVE OF ELECTRICAL TRANSMISSION REGULATION

   1. The Infancy of Electricity Deregulation

      The deregulation of the U.S. electricity market has undergone significant restructuring since the advent of the modern electricity distribution grid. (10) The passage of the Public Utility Regulatory Policies Act of 1978 (PURPA) (11) marked the commencement of deregulation in electricity markets in the United States. (12) Although not initially intended to spur the creation of deregulated wholesale electricity markets, the unintended consequence of the regulation was the creation of incentives for state legislators to deregulate wholesale power markets. (13)

      The main thrust of PURPA was to create a more diversified U.S. energy market and to promote the usage of efficient alternative energy resources. (14) Among the many requirements of PURPA, investor-owned utilities (previously referred to as utility holding companies) were to purchase energy from nonutility qualifying facilities at "avoided cost" (15) rates that were determined by state regulators and were subject to federal guidelines. (16) In addition, the investor-owned utilities were required to "make such interconnections with any qualifying facility as may be necessary to accomplish purchases or sales." (17) Basically, PURPA required utilities to buy power from qualifying facilities and to connect those qualifying facilities to the electricity grid, thus expanding the highly segmented electricity grid. (18) Traditionally, utilities were geographically isolated and disconnected from other control areas, which forced the utilities to supply their own generation needs. (19) Many problems arose when an intrastate transmission line or a major generation station within a control area was forced off-line, causing prolonged blackouts that undermined the reliability objectives of Public Utility Holding Company Act of 1932 (PUHCA). (20) Among the major blackouts during this regulatory period of time was the "Great Northeast Blackout of 1965," which affected twenty-five million customers from Buffalo, New York to New Hampshire, and from New York City to Ontario. (21)

      To combat the rampant unreliability of the electricity grid, the utilities began to increase interconnectivity and formed the North American Electric Reliability Council (NERC) in 1968. (22) The various utilities around the country joined NERC and organized themselves into ten regional reliability councils under the regulatory control of NERC. (23) The interconnection of the utilities was of great importance to this movement, given that if a utility should endure the loss of a transmission line or the loss of a generator within its control area, the interconnectivity of the utilities would allow the suffering utility to import power from another utility within the reliability council. (24) NERC guidelines required that participating utilities maintained surplus capacity to ensure reliability should another utility lose a transmission line or generator. (25) The surplus capacity requirement and the interconnectivity of the utilities created the foundation for the trading of wholesale electricity. (26)

      The passage of the Energy Policy Act of 1992 (EPAct) (27) was the culmination of Congress' effort to facilitate competition in wholesale energy markets to drive down prices, increase innovation, and force the utilities to sell electricity at marginal cost. (28) EPAct introduced two major changes to the structure of wholesale energy markets that Congress envisioned would spur competition. (29) EPAct created a new class of generators called exempt wholesale generators (EWGs) and required wholesale wheeling of electricity across the grid. (30) The relaxation of the entry barriers erected by PUHCA for generation by EPAct allowed for increased generation by the EWGs without the onerous costs imposed by PUHCA regulation. (31) In addition, the wholesale wheeling provision of EPAct opened the electricity grid to all market participants by requiring transmission facility owners to accept requests for wholesale wheeling that were reasonable. (32) Independent power producers were now allowed to enter the electricity market and, thus, increase the supply of power to all markets. (33) The increased supply of power would serve to lower prices given that generators were not taken offline in an attempt to manipulate the market. The opening of the grid to independent power producers also served to increase the ability of generators to sell their wholesale electricity to utilities that were not directly interconnected. (34) Therefore, generators that could produce power at or close to marginal cost were rewarded, while those that produced electricity in excess of marginal cost were penalized in that there was limited or no demand for their high priced power. (35) The combined impact of the two provisions of EPAct proved to create a more robust wholesale electricity market while opening up the electricity grid to competition through the deconstruction of entry barriers created by previous regulatory efforts. (36)

      In an effort to further encourage competition in wholesale electricity markets, FERC promulgated Order No. 888 on April 24, 1996. (37) Order No. 888 marked the beginning of FERC's open access policy. (38) "Order No. 888 required vertically integrated utilities to provide transmission service on an unbundled basis pursuant to a Pro Forma Open Access Transmission Tariff (OATT)." (39) This action by FERC sought to rid the electricity market of '"undue discrimination in transmission services in interstate commerce and provid[e] an orderly and fair transition to competitive bulk power markets.'" (40) The main purpose of Order No. 888 was to allow competitors to compete vigorously with the powerful vertically-integrated utilities through open access to the transmission grid. (41) Utilities were required to file separate tariffs with separate rates, terms, and...