Competing Partners Not good for Competition

Gary Harmon in The Daily Sentinel, Colorado, USA writes: “Power producers want to construct a high-elevation power plant”. Trouble is that several smaller electricity producers want a piece of the action too.

“House Bill 1281 would provide $3 million per year for three years to study construction of an integrated gasification combined cycle generating station. The idea is to break coal down into natural gas, which then would be burned to heat water to spin a turbine to generate electricity. Waste carbon dioxide would be locked away underground so as not to escape into the atmosphere, making the facility virtually pollution free.

The only problem, said Nick Muller, executive director of the Colorado Independent Energy Association, is the legislation seems geared for one bidder, Xcel Energy.
“We’re going to fight 1281 in the Senate,” Muller said, in hopes of inserting some requirements for competition.

Eric Jacobsen, a Grand Valley native who sells electricity he generates from a waterfall in Telluride and wants to build a small hydropower plant in the Colorado River near De Beque Canyon, said ‘The state and utility are too closely tied together.’

“I can’t sell electricity because of this Stalinist market control, and that’s an absolute perversion of Adam Smith and his whole Wealth of Nations argument,” Jacobsen said.

Xcel, however, has a significant advantage in the case, as Xcel spokesman Mark Stutz said,

“Obviously we’d be the leading candidate. We do have the wherewithal to do it.”
Even if an independent built the new plant, it would end up selling electricity to Xcel, which makes for the unusual situation of Xcel Energy being both competitors and partners at the same time, he said.”

Comment:
The problem here appears to be one of state regulation of electricity supply and the existence of Xcell Energy as the major player in the State. The project for a high-elevation power plant requires 3 years and 3 million dollars for the ‘proof of concept and design stage’ before construction commences, which may be beyond small local-scale competitors like Eric Jacobsen, whose next project is a small hydropower plant, presumably using existing hydro-technology and not something at the expensive technology frontier. The smaller, independent producers want to sell their electricity direct to customers but seem to have to sell it in a regulated market to Xcell. This undermines whatever competitive threat there may be to Xcell from their small market share.

Adam Smith was always suspicious about monopolies, to which extent Jacobsen is correct about Smith’s stance in these situations. However, I would need more detail to make a final comment on it. Local-area sales of electricity direct to industrial or domestic consumers is possible, even when carried over a monopolist’s power lines, as the UK electricity market shows. This is good for competition and, most importantly, for consumers. Smaller firms only get bigger by growing their markets for their products. Where a market is rigged in favour of the big firm, it may not be so good for consumers.

Read it all at: (http://www.gjsentinel.com/news/content/news/stories/2006/03/11/3_12_power_generationbill.html