ML19317F759
| ML19317F759 | |
| Person / Time | |
|---|---|
| Site: | Davis Besse, Perry  |
| Issue date: | 04/22/1977 |
| From: | Hughes W CHARLES RIVER ASSOCIATES, INC., Atomic Safety and Licensing Board Panel |
| To: | |
| References | |
| NUDOCS 8001280689 | |
| Download: ML19317F759 (46) | |
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UNITED, STATES OF AMERICA NUCLEAR REGULATORY COMMISSION BEFORE THE ATOMIC SAFETY AND LICENSING BOARD a
In the Matter of The Toledo Edison Company and The Cleveland Electric Illuminating Docket Nos. 50-346A, 50-440A, Company 50-441A, 50-500A, and 50-501A Davis-Besse Nuclear Power Station, Units 1, 2, and 3 and The Cleveland Electric Illuminating Company, et al Perry Nuclear Power Plant, Units 1 and 2 PREPARED DIRECT TESTIMONY OF DR. WILLIAM R. HUGHES Vice President i
Charles River Associates 1050 Massachusetts Avenue Cambridge, Massachusetts 8001280 (
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e UNITED. STATES OF AMERICA NUCLEAR REGULATORY COMMISSION BT ORE THE ATOMIC SAFET AND LICENSING BOARD In the Matter of The Toledo Edison Company and The Cleveland Electric Illuminating Docket Nos. 50-346A, 50-440A, Company 50-441A, 50-500A, and 50-501A Davis-Besse Nuclear Power Station, Units 1, 2,
and 3 and The Cleveland Electric Illuminating Coupany, et al Perry Nuclear Power Plant, Units 1 and 2 PREPARED DIRECT TESTIMONY OF DR. WILLIAM R. HUGHES Vice President Charles River Associates 1050 Massachusetts Avenue Cambridge, Massachusetts 9
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1.
Q.
Please state your name and position.
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A.
My name is William R. Hughes.
I am Vice President of 4
Charles River Associates Incorporated, an economic 5
research and consulting firm in Cambridge, Massachusetts.
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Q.
Please summarize your professional history and qualifi-2 cations.
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A.
My experience as a professional economist for over fifteen 5
years includes consulting, research, university teaching 6
and government service in relevant fields of regulation, 7
antitrust and industrial economics.
The economics of the P
electric power industry and its regulation have.been a 9
major professional concern throughout my career.
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11 I received a B.S. in Business Administration from the 12 University of Maryland in 1953 and a Ph.D. in economics 13 from Harvard University in 1960.
During my last several 14 years at Harvard (1957 to 1960), I was an active partici-15
- p. ant in a seminar in antitrust and regulation problems 16
..- conducted at the Harvard Law School.
While I was at 17 Harvard (in 1957), I assisted Professor Carl Kaysen'in 18 research for the book Antitrust Policy:
pm Economic and l
19 Legal Analysis, co-authored with Donald Turner, published l
20 in 1959.
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22 My interest in electric power and public utility prob-l l
lems began during my undergraduate years and became 23 24 focused in my doctoral dissertation, accepted in 1960, antitled "The Efficient Organization of the Privately 25 2
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1 Owned Electric Utility Industry in the United States."
2 My dissertation is concerned with coordination and 3
integration of bulk power networks in the context of 4
regulation and other public policies.
I continued to 5
pursue this interest in subsequent research and writing 6
including the following articles:
7 "Short Run Efficiency and the Organization of the 8
Electric Power Industry" (Quarterly Journal of Economics, 9
1962);
10
" Regulation and Technological Destiny:
The National lli Power Survey" (American Economic Review, 1966);
12
" Market Structure, Regulation, and Dynamic Changes:
13 A Comment" (in Performance Under Regulation, 1968);
14
" Scale Frontiers in Electric Power" (in a Brookings 15 Institution volume on regulation and technology, 1971);
16
" Regulation and the Energy Crisis" with Frances E.
17 Francis (in a volume on regulation published by Michigan 18 State' University Press, 1972).
19 A complete list of my publications appears in an Appendix 20 to my testimony.
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22 Before joining Charles River Associates, I was a 1
.23 univers'ity professor.
My teaching, research and
. 24 consulting emphasized the fields of economics most 25 relevant to regulatory and ant ': rust problems.
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l was Assistant Professor,of Economics at Wesleyan 2
University from 1960 to 1966, and prior to.that I 3
was Instructor of Economics at Hm.rvard University.
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4 At both institutions I taught the courses most perti-5 nent to the economics of antitrust and regulation.
I 6
was Associate Protessor of Economics at Boston College 7
from 1966 to 1969, where I taught graduate and under-8 graduate courses in the economics of regulated indus-9 tries, industrial organization, and price theory.
I 10 also participated in a seminar'in antitrust law and 11 economics at the Boston College Law School.
12 13 From 1962 to 1964, while on leave from Wesleyan Univer-14 sity, I served as a staff economist at the Federal Power 15 Commission.
My primary assignment was as a principal 16 staff member with the 1964 National Power Survey; in 17 addition, I worked on a variety of regulatory problems
'18 involving the electric utility industry.
19 20 My consulting practice prior to 1969 included work 21 with the Federal Power Commission,'the Antitrust 22 Division of the U.S. Department of Ju'stice, the 23 Federal Reserve Bank of Boscon, other government 24 agencies, and a law firm.
I also worked for a cor-25 Porate client in conjunction with the FCC Telephone 4
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Investigation in 1966.
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t I have been with Charles River A.sociates since 1969.
I had overall management I
During much of that period, a
4 responsibility for the company's antitrust and regu-f 5
latory work, in which I have also participated actively 6
In that connection, I have as a working economist.
7 assisted counsel for corporations involved in major 8
antitrust litigation in the federal courts and have j
9 directed research and consultini projects for govern-J, t
L0 ment agencies, corporate clients, the Navajo Nation, I'
11 and for the Electric Power Research Institute.
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13 Regulatory agencies for whom I have worked include the 14 F.ederal Trade Commission, through a subcontract to per-15 form the economic analysis in connection with legis-p 16 lative oversight of federal petroleum allocation policy 17 in 1974, and the New York Public Service Commission,'
18 for which I worked in 1972.
4 19 20 I also served as electric power advisor to Governor
.2i Deane Davis of Vermont in 1971 and 1972 and, through 22 his office, to the Public Service' Board of that 23 state.
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I was a member of the Task Force on Energy and Economic 2
Growth.of the National Academy Engineering Committee on
- 3 Power Plant Siting, and presently I am a member of the
., 4 Fuel and Energy Committee of the New England Council.
5 6
I have testified-as an expert witness in an antitrust
7 case before t'he Federal Court of the Southern District 8
of New York '(Docket Civil 112-387), the Federal Power 9
Commission in the Perm an Basin area rat e case (Docket 10 CP61-101) and before the Postal Rate Commission'in two 11 rate cases and a classification case (Dockets R71-1, 12 R74-1, and MC73-1).
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1 3.
Q.
What are the principal economic issues in this case?
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'A.
The principal economic issues'in this case center around 4
three basic questions.
First, do the applicants enjoy 5
substantial market power in 'their relations with other 6
Power entities within relevant market areas.
This ques-7 tion must be addressed at two levels:
for each applicant individually and for the CAPCO systems taken as a group.
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9 10 Second, what are the economic r'elationships between 11 the nuclear units and the exercise of mdrket power by
- J 12 the applicants.
That is, how do the economics of the 13 units relate to the market activities of the applicants.
14 15 T,hird, how does the exercise of such market power by 16 the applicants relate to the economic objectives of anti-17 trust policy in the special contexts of the electric 18 Power industry and of this case.
In particular, what is 19 the significance of a failure by.the applicants to pro-20 vide certain bulk power services to other power entities 21 in the relevant market areas.
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4.
Q.
What is market power?
.2 3
A.
Market power is the ability of a firm to influence the 4
market to achieve results other than those th'at would l
5 occur in a perfectly competitive market.
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Market power can be exercised in various directions:
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for example, charging excessive prices and excluding 9
competitors, refusal to engage in economically efficient transactions, restricting outpu't below the ecjapetitive 10 l
ll level, or engaging in discriminatory market practices.
i 12 In the electric power industry, utilities are commonly 13 subject to rate regulation, which limits the exercise 14 of market power over prices.
But such regulation has 15 npt extended to all uses of market power.
In this 16 case, the aspect of market power that is at issue is 17 the.use of such power by the applicants so that other 18 electric power systems in the relevant market lack 19 access to certain bulk power services.
20 21 The point of departure from which the actual degree of 22 market power of a firm is evaluated is the result'that 23 would obtain under a hypothetical regime of perfect 24 competition.
In a perfectly competitive market, no one 25
.has market power.
Competition enforces a discipline on 8
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. 2 fruitless for any of them to attempt to exrvcise market 3
power.
For example, if a seller in a perfectly competi-4 tive market failed to engage in efficient transactions, 5
it would find itself at a cost disadvantage relative to 6
other firms and woul'd ultimately be driven from the 7
market.
8 9
To have market power a firm must enjoy an advantage over 10 actual or potential competitors'; such as control over 11 the supply of an essential resource or facility.
Where 12 a firm has no such advantage, market power is prevented 13 by competitive alternatives.
14 15 Market power is always exercised with respect to some 16 identifiable group of participants in the market:
for 17 example, the customers or potential customers of the 18 firm in question.
To say that a seller has substantial 19 market power implies that the relevant customers lack 20 comp 2titive alternatives to the actual or potential 21 off. rings of that seller.
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l 5.
Q.
What approach have you used to determine whether the 2
applicants have substantial market power vis-a-vis other 3
power entities in relevant markets?
4 5
A.
I have used a direct approach that emphasizes the under-6 lying factors that determine whether substantial market 7
power is present.
8 9
The first step is to identify the relevant product or 10 services for which market power \\is to be appraised.
This
.11 defines the scope of the re'ctant produc't market.
12 13 The second step is to identify the relevant geographic 14 areas for which market power is to be appraised.
In 15 this case, because there is more than.one applicant, 16 more than one area must be considered.
17 18 The third step is to examine the position of the appli-19 cants in the relevant product and geographic markets in 20 relation to ' actual and potential competitive alternatives 21 to the offerings of the applicants.
In making this exam-22 ination, I have emphasized.uw Jundamental factors under-lying that market position.
I also have measured market 23 24 shares, which are useful summary indicators of market 25 Power as long as they are interpreted in the context of 10' l
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1 the more basic factors that underly market power.
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1 6.
Q.
What are the underlying factors that determine market
. 2 power in relevant bulk power markets?
3 4
A.
In the electric power industry, the economics of bulk 5
power generation and transmission give rise to substan-6 tial market power for large, strategically located sys-7 tems.
In bulk power markets, the basic factors affecting 8
the market power of a system are (1) the size of the 9
system relative to other systems in the market area, 10 (2) the system's coordination ahrangements wi,th 11 other neighboring systems, (3) the system's control 12 over transmission, and (4) the system's location in 13 relation to other systems.
14 15 A system's size affects the extent to which it 16 achieves the economies of scale and integration or 17 coordination of bulk power networks.
As can be 18 seen from the testimony of witness Mozer, large inte-19 grated or coordinated bulk power systems and networks 20 have very subst ntial economies of scale that give 21 such large systems (or groups thereof) very great advan- - -
22 tages in relation to small, systems.*
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- Direct testimony of Harold M. Mozer, filed October 18, 1975 (hereinafter Mozer) pp. 11, 14, 49-50.
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o A system's' coordination arrangements extena its ability 1
' 2 to achieve economies of scale and integration or coor-
.3 dination beyond what it would achieve alone.
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. Control over transmission is important because trans-6
. - ' mission is an essential resource that can constitute a s
. bottleneck limiting the ability of af5ected power sys-
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tems to ach'ieve the. potential economies of scale, 9
integration, and coordination of bulk power networks.
10 11 The location of a system's facilities in relation to 12 the location of other systems is important because it 13 affects the cost and feasibility of access to the 14 system's bulk power services in compa ir son with the 15 cost and feasibility'of competitive alternatives.
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1 7.
Q.
How should relevant product and geographic markets 2
be defined for the purpose of assessing market 3
power?
4 5
A.
The first consideration in defining markets is rele-6 vance to the context in which market power is to be 7
assessed.
A firm's market power can exist and be 8
exercised in different fields:
for instance, market o
power can exist at the retail level, in the purchasing 10 activities of the firm, at the ' bulk power level, or 11 in some other area.
The relevant field or area of 12 activity in this case is the one in which a potential 13 antitrust problem situation has been identified and is 14 at issue.
As it happens, the issues in this case focus 15 0.n the bulk power field.
If the issues principally 16 concerned the retail distribution of electricity, we 17 would look at retail services of the applicants as 18 the starting point for defining the product market.
19 20 Having identified the relevant field of activity, we 21 must then identify the boundaries of the market, which 22 is the basic arena of competition.
These boundaries
, 23 are defined both in terms of products (or services) l 24 and in terms of geographic areas.
The market must 25 contain all the relevant competitive alternatives that 14 e
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1 limit in: prevent the exercise of market power by the 2
firm in question.
The product must also be complete; 3
that is, the scopo of the product market must include 4
all of the necessary elements of the product that 5
make it of value to users.
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For the market to include all relevant competitive 8
alternatives, goods and services which are viewed by 9
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demanders as interchangeable in use should be grouped 10 into the same product market.
S.imilarly, the geogra-11 phic market also includes the alternatives that are 12 interchangeable with the offerings of the firm whose 13 market power is to be assessed.
But the market should 14 not be so broad as to iInclude alternatives that are 15 npt reasonably interchangeable with the offerings of 16 the firm in question, because only interchangeable 17 alternatives can constrain that firm's market power.
18 19 A complete and well-defined product or service should 20 have an application or purpose that distinguishes it 21 from other products, and'all of the elements of the
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'. 2 2 product necessary.to serve that purpose should be 23 included in the product market.
For example, the 24 batteries, transmission, engine and body of an auto-25 mobile are all necessary for the automobile to be of 15 0
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1 value to its users, and they are logically grouped 2
together as parts of a single product, the automobile.
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1 8.
Q.
What services constitute the relevant product market?
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A.
Bulk power services.
These may be defined generally 4
as any portion of the economic output of the bulk 5
power supply system.
The final out'put of a bulk power 6
system is power and energy at the bulk delivery points.
7 To make this final output possible, lower its cost, or 8
improve its quality, various intermediate outputs are 9
produced:
for example, transmission services and reserve 10 capacity are examples.
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11 12 The following is a list of basic types of bulk power 13 services which constitute the relevant product market.
14 1.
coordinated planning and development, 15 2,.
interconnections, 16 3.
coordination of reserve capacity levels, 17 4.
coordinated operation, including economy inter-18 change, coordination of operating reserves, coor-19 dinated maintenance, emergency energy exchanges, 20 and generation dispatch, 21 5.
other' power and energy, including firm power 22 and energy at, wholesale for resale and other
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. capacity or energy for coordinating expansion 24 of bulk power supply, either by contract or by l
25 common or joint ownership, i
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" wheeling" or other use of the transmission 2
services of one power entity by other power 3
. entities.
4 The ultimate function of'these services is to act as 5
inputs in producing a reliable and economical bulk 6
power supply.
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1 9.
Q.
Why have you selected " bulk power services" as the 2
relevant product market?
Can you illustrate how 3
electric power systems would choose among different 4
kinds of bulk power services in determining the best 5
mix of inputs for their bulk power supply?
6 7
A.
" Bulk power services" is the relevant' product market 8
from the standpoint of the three considerations of 9
relevance, inclusion of interchangeable competitive 10 alternatives, and inclusion of 4 1 elements o,f a 1
11 product with a unique purpose or application.
12 13 First, it is relevant.
This proceeding is concerned 14 with the licensing of a bulk power facility, and the 15 activities of the applicant that are in question 16 involve access to types of service that all fall 17 within the product market as I have defined it.
18 19 Second, it includes the competitive alternatives in 20 bulk power supply that are reasonably interchangeable.
21 In providing for their overall requirements for bulk l
22 Power and energy,, power entities choose the best mix
. 23 of the optionc available to them to obtain the most 24 efficient and reliable overall result.
These options 25 consist of different mixtures of the six elements of 19 9
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or types of service identified in my descriptions of
.2 the content of bulk power services.
For example, a 3
power entity may chcose to purchase its entire bulk 4
power requirements from a single supplier under a firm 5
contract, it may generate a portion of its requirements, 6
or it'nmy find it advantageous to participate with
'7 others in coordinated development of power supply sources 8
and to purchase or sell various. forms of bulk power ser-9 vice (such as wheeling, or power and energy under unit 10 contracts) from whatever different sources of,fer the 11 best mixture of options.
12 13 Finally, all of the elements of bulk power services 14 have the common function of acting as inputs to producing 15
,A reliable and economical bulk power supply.
The 16 product is complete in that it includes all the neces-17
.sary elements for that purpose.
Thus, the elements of 18 bulk power service have a distinct and common applica-19 tion which justifies their grouping, and it would be 20 artificial to separate them in defining a relevant 21 Product market.
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1 10.
Q.
What are the reitevant geographic markets?
,2 3
A'.
It is necessary to answer this question at two levels.
4 There is a relevant market area for considering the 5
market power of each applicant in its individual market 6
activities, and there is also a relevant market area 7
for considering the market power of the applicants in 8
their bulk power activities as a coordinating group of 9
systems in the CAPCO pool.
10 i
11 Control over transmission is the key to determining 12 geographic market boundaries, because economical trans-13 mission is essential to the supply of bulk power services.
14 15 F,or any non-CAPCO system within the overall CAPCO area, 16 the immediate points of access to economical bulk power 17 services must be the transmission facilities of the 18 CAPCO system or systems immediately adjacent to the 19 non-CAPCO power entity in question.
For example, 20 Cleveland's Municipal Electric Light Plant must use 21 the' transmission facilities of Cleveland Electric
-22 Illuminating Company to obtain access to bulk power 23 services from other sources in the CAPCO area or from 24 sources outside the CAPCO area.
Thus, the area 25 reached by a CAPCO system's transmission facilities is 21 e
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1 the relevant market area for assessing the market
.2 power of that CAPCO system acting individually.
3 4
For access to the bulk power services of CAPCO, a non-5 CAPCO system within the relevant area must obtain the 6
cooperation of the applicant in its local area and also 7
the cooperation of CAPCO acting as a group.
For access 8
to bulk power sources outside the CAPCO area, the coop-9 eration of one or more.CAPCO systems is required to pro-10 vide for the necessary transmishion, and the, cooperation 11 of.the CAPCO systems as a group may also be required.
12 13 As witness Mozer* has described, bulk power supply facil-14 ities of the applicants are planned, added, and operated 15 i.n a coordinated fashion through the activities of the 16 applicants in the CAPCO pool and in other bulk power 17 transactions among the applicants.
The geographic 18
. reach of coordination aa.ong the CAPCO members is coexten-19 sive with the area reached by the applicants' combined 20 transmission facilities.
In considering the market power 21 of the applicants acting through CAPCO, this coordinating 22 area is the relevant geographic market.
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- Mozer, p. 10, Q23, (one-system concept) and throughout pp. 14-43.
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1 The phrase " area reached by the transmission facilities 2
of the CAPCO systems" should be construed to mean those 3
locations for which a CAPCO system is the economically 4
nearest power source.
5 6
In summary, the relevant geographic' market for the 7
coordinated bulk power services of CAPCO contains all 8
utility systems that supply or demand bulk power ser-9 vi'ces in the area reached by the transmission facilities 10 of the CAPCO systems.
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.yy 12 The relevant geographic market for bulk power services 13 transacted directly with an individual CAPCO system is 14 the area reached by that system's trensmission facilities.
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1. 11.
Q.
Why is it necessary to consider a geographic market for.
.2 the applicants as a group?
3 4
A.
There is ample evidence in the record that access to 5
the benefits of efficient large scale bulk power supply 6
by systems in the CAPCO area generally requires coor-7 dinated action by CAPCO as a group.
As the record 8
shows, CAPCO plans generation and transmission addi-9 tions on a "one-system", basis.
Mozer has also pointed 10 out that CAPCO has been the vehicle for achieving the 11 benefits of large scale, coordinated bulk power develop-12 ment in its area.*
13 Coordination through CAPCO is so importaht to achieving 14 15 e,conomies of scale and integration by the applicants 16 that the question naturally arises as to whether-CAPCO has the market power to 'eny access to these benefits 17 d
18 to non-CAPCO systems.
19 20
- See particular1'y Mozer, p. 15, 041, and also the deposi-tion of William D. Masters of July 1, 1975, pp. 27 21 through 28.
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1 12.
Q.
In your analysis of market power,"did'you measure market
. 2 shares?
.3
,4' A.
Although my analysis of market power has emphasized 5
fundamental factors -(see my answer to Question 6),
I have.'
6 also. measured market shares for CAPCO in the ~overall s
'7 CCCT area and for individual applicant systems in their 8
respective market areas.
For this purpose, I have used
.9 three basic measures:
pole miles of transmission of 66 0
KV or above, megawatt hours generated, and megawatts of 11 generating capacity.
Taken together, these provide a
'12 reasonable measure of bu' lk power services as a whole.
13 14 For' convenience in measuring shares, I have used tihe 15 CCCT area as an acceptable approximation to the. market
.16 area concept that I have outlined in my answer to
~
i7 Question 10.
Since the relevant market share would not 'be significantly affected by individudl study of 18
-19 every borderline case and since the share measure's are 20 merely reflections of the more basic factors that under-21 lie the applicants' market power, applicant service areas 22 and the CCCT area are reasonable market boundarie.s for 23 share measurement' purposes.
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25 The shares for 1973 are on~the following page.
The 25
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1 choice of this particular year does not affect the
.3 applicants' shares significantly.
These large shares 3
are indicative of the subtantial market power enjoyed 4
by the applicant systems with respect to bulk power 5
services in the relevant market areas.
In particular, 6
the market share figures indicate that the CAPCO group 7
and the individual applicants are the source of most 8
of the bulk power and energy supplied within their 9
respective market areas.
10 i
11 12 13 14 15 16 17 18 19 9
20 21 22
-23 24 25 26
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t Transmission Generating
[66 KV and above]
flet Generation Capacity
- iPole filles Share mwh Share mw Share CAPCO 4,753 99.3 56,797,504 98.4 11,735 97.1 Total COCT area 4,785 100.0 57,730,336 100.0 12,086 100.0 i
CEI 652 96.8 17,326,640 96.6 3,896 94.4' Total CEI area i
653 100.0 17,937,268 100.0 4,128 100.0 0
Duquesne 380 100.0,
12,978,538 100.0 2,528 100.0 l
Total Duquesne area 380 100.0 12,978,538 100.0 2,528 100.0 Ohio Eaison-Pennsylvania Power 3,248 99.8 21,116,00:
99.0 4,266 98.2 Total OE-PP 3,255 100.0 21,338,236 100.0 4,343 100.0 Toledo Edison 493 99.2 5,376,325 98.2 1,045 96.1 Total Toledo area.
497 100.0 5,476,294 100.0 1,087 100.0 TOTAL
" Net Dependable Capacity
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1 13.
-Q.
Do the applicants have substantial market pcwer in the 2
relevant markets?
3 J
4 A.'
Yes.
Individually, each applicant has substantial 5
market power within its area, and the CAPCO group has 6
substantial market power in the CCCT area.
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1 14.
Q.
What is the substantive basis for this conclusion?
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2 3
A.
The applicants' size, location, coordination arrangements, 4
and in particular their control of transmission in the 5
relevant market areas give them an advantage over other 6
sources from which other power entities in the area 7
might obtain bulk power services.
8 9
Witness Mozer has described the very large scale economy 10 advantages enjoyed by the applicants in relation to the 11
. other, much smaller power entities in tNe a ea.
These 12 small entities can obtain the bulk power benefits that 13 the applicants enjoy only if the. applicants are willing 14 to provide them access'to a fuil range of bulk power 15 s,ervice options.
16 17 To most non-CAPCO systems in the relevant market areas, 18 the nearest applicant system controls the gateway to 19 large scale, efficient power supply, because it is 20 generally only through interconnection with the trans-21 mission system of an applicant that another power sys-
'22 tem in its area can gain access to the large coordi-nated bulk power network of which the CAPCO systems 23
'4 are a part.*
In effect, the applicants' control over 25
- Mozer, p. 70, Q186.
28 1
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3
.1 transmission is a bottleneck that can limit access by i
.2 other systems to bulk power services from the~CAPCO 3
systems and other sources in this larger network.
Most 4
of the non-CAPCO systems in the relevant market areas 5
have been relying on the applicants' wholesale supplies 6
or on their own small. scale generating facilities.
It 7
is obvious, and can readily be inferred from witness 8
Mozer's testimony, that small scale generating facilities 9
such'as those of Painesville and Cleveland, lack the economies of scale enjoyed by the applicants,*
10 w.itness 11 Mozer has pointed out that bringing in bulk power and 12 energy to Painesville or Cleveland without using appli-13 cants' transmission systems would require the construction 14
.of a redundant transmission system that would.be impracti-15 c,a1 and inconsistent with good plann'ing and engineering.**
16 17
- See, for instance, Mozer, p.
67, Q190.
- Mozer, on pp. 65-66, 0179, Q180.
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9 21 22
.23 24 25 29
- N eum. =>me e e hm ee n be
)
i 1
- 15. Q.
What are the important economic relationships between 2
the applicants' nuclear units and their possession and 3
use of market power?
4 5
A.
The ability of the applicants to add nuclear plants 6
such as the Perry and Davis-Besse units confers an added
~
7 economic advantage over systems that are unable to add 8
nuclear capacit.y because of their small size.
9 10 Nuclear power has different ec nomic characteristics 11 from other generating sources, characteristics which give 12 nuclear units an advantage in particular situations.
For 13 instance, nuclear units have particularly low operating 14 costs making them highly suitable for base load operation.
15 N,uclear units also differ from other generating modes 16 with respect to their environmental effects, safety
+
17 features, the reliability of fuel supply and other factors.
18 19 The fact that applicants are adding these units rather 20 than alternative generating sources is an indication that 21 the nuclear units were viewed by the applicants as superior 22 to the'alternat'ives available at the time of decision.
-23 Otherwise, the alternatives would have be.en chosen.
In-24 25 30 h
e l
l 1
deed, applicants' own documents
- indicate they have believed 2
nuclear generation to be a distinctly superior choice c
3 for expanding base load capacity over the fossil-fueled
,4 alternatives.
To the extent that this belief is correct, 5
the nuclear units will' contribute to the effectiveness 6
of the applicants' bulk power-supply systems and enhance
'7
.the Aconoma.c advantage these systems enjoy over alter-8
' native sources, thus enhancing their market power.
9 10 Where nuclear generation is the supbrior base load choice, 11 the cumulative effect on market power of a sequence of Il2 nuclear plants will be greater than the impact of any 13 one plant alone, because each successive nuclear addition 1
' will confer an incremental advantage.
If.it should turn 15 out over a period of years that nuclear power persists as the supdrior base load choice in the CAPCO area, access 16 i7 td the benefits of nuclear power by non-CAPCO systems will 18 become increasingly important.
Under a scenario of the 19 economic superio.rity of nuclear base load power, the 20 absence of.a license condition requiring access on reason-able terms to the benefits of each new unit would leave 21
~
the appl'icdnts free to exercise progressively greater 22 23 24
. *CEI. Annual Report for.1972, p.
11, and "CAPCO Base Load
~
Generating Capacity Requirements Following Perry #2, 1981-1984," Planning Committee Report #5, June 14,~1973.
25 31 g
9 9
e e
1
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=
1 market power as nuclear generation increased its 2
share of,the total generation in this area.
3 C
4 The economic feasibility and benefits of access to bulk
'5
. power services provided by the nuclear units themselves 6
. depend on access to-other bulk power services from the s
7
. applicant s.
Not only transmission services, but other 8
services'such as reserve backing or access to peaking 9
sources will often be important, as witness Mozer has
,10 testified.*
~
11
=
12
- See Mozer pp. 69-71, Q184-Q189.
13 14 15 16 17 18 19 20 21 22 s
-23 24 b
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1
- 16. Q.
How do the economics of electric power supply relate
~
2 to the respective roles of regulation, competition, and
.3 coordination in the retail distribution of electricity?
., 4 5
A.
In the retail distribution of electricity, there are 6
. widely recognized economies of having each customer served
'7
- 'by a single supplier and of having a single retail supplier
,8 in each lochl' area.. Because of these economies, local
~
9
' monopoly is the general rule in electric power distribution.
10 In the' absence of public controls., retail electria systems 11 would be able to exercise very great market pcwer.
Public
~12 controls, in the form of public utility re ul tion and g
a 13 public or cooperative ownership,'have arisen to constrain 14 the exercise of this market power.
Coord1. nation among 15 distribution systems is not a major factor, because each
~
16 distribution system is a relatively self-contained economic h.7 unit.
18 e
19 20 21 22
\\
i 23 24 25 33 m
l
1
- 17. Q..
Are the roles of competition, regulation, and coordi-2 nation the same in hulk power supply as in the retail 3
distribution of electricity?
,4 5
A'.
No. In contrast to retail service, the organizational 6
and:: competitive implications of power supply economics
'7
.are much.more complex at the bulk power level.
There are well'-known advantages of coordinated bulk power 8
9 development over large geographic areas to achieve
" 16
. economies of scale in generating units.as wel1 as trans<
11 mission equipment and right of way, to economize in
~12 reserve capacity levels, to take advantage of load diver-13 sity, to achieve economies in the location and design' 14 of facilities, and to obtain day-to-day economies in 15 the operation of the network..
The size of the network 16 over which interconnection and~ coordination economies 17 can be achieved is very large.
The interconnected network 18
.of which CAPCO systems are a part covers much of the 19 capacity of the United States, including most capacity 20 east of the Rockies, and scne of the capacity of Canada.
21 Even the largest bulk power systems, such as the American 22 Electric Power Company and the Tennessee Valley Authority, 23 find it advantageous to be heavily interconnected with
~
'other systems and must' exchange bulk power services with 24 themifthey'aretoprovide$eliablepowersupplyat 25 l
34 t
t l
~
s 1
, minimum costs.
Fer somewhat smaller systen.s, such as 2
the applicants, coordination is even more important; 3
several doc 9ments in this proceeding illustrate the
., 4 many economic advantages the CAPCO systems have 5
achieved through coordination.
For quite small sl u--
6 tems, sugh as the small power entities in the CCCT
'7
. area, an.eflicient supply of bulk power and energy 8
is dependen't on bulk power transactions with the 9
larger systems that control th'e local points of inter-10 connection to tha main coordinated network in their 11 areas.
12 13 The complex organization of bulk power supply and the 14 need for coordination by bulk. power systems opens up a ' wide variety of potent' al transactions and coordinated 15 i
16 activities.
Individual power systems choose among dif-i7
- ferent bulk power services or options such as those pre-18 viously discussed in my testimony (Question 9).
These 19 Options include firm power and energy purchases at whole-
~
sale, generat'on of some or all of their own retail re-20 i
21
. quirements, common or joint ownership arrangements, 'mait 22 power c'ntracts,'and others.
As I have discussed in o
~
23 my testimony, the availability of options in bulk power 24 markets makes fer.ible~more competition than is feasible 25 in retail distribution.
35 6
I j
4 1
l'8. Q.
Nhat are the respective roles of competition and regu-
.2 lation in-the distribution of electricity and in bulk
.3 power supply?
., 4 a
5 A.
At the retail level, electric companies in Ohio, Pennsyl-6
.. vania and other states have public utility status.
Regu-
'7
.lation at t'he retail level' assumes the main burden of 8
assu' ring'th'at markat power is not unreasonably exerc'ised.
9 For instance, just as a competitive market prevents monopoly 10 profits and encourages non-discriminatory' prices and 11 service, prevention of monopoly profits and prohibition
,'12 of undue or unjust discrimination in rates or service 13
.are established criteria of publ'ic utility rate regulation.
Just as a competitive market encourages an adequate supply 14 l'5 of its product for all customers willing to pay the cost 16 of that product, regulation imposes a public utility i7 obligation to provide reliable service to all retail 18 customers of the utility w'ho are willing to pay the 19 regulated rate..
20 21 The fact that rates and conditions of service are regu-22 lated sets the ground. rules'for the competition that does 23 exist.. There is some competition for customers in border-24
'line' areas, and utilities also engage'in rate and service 25
'. competition to attract industrial customers into their 36
~
w
e 1
territory.
There is also competition between elect:-ic se'vice'and fossil fuels for some loads, and some industrial 2
r 3
custoiners can economically generate a portion of their
., 4 electric loads.
The'se forms of competition provide some 5
incentive to keep costs low and maintain acceptable 6
service. quality.
7
.8
'At the bulk' power level, the Federal Power Commission 9'
has rate' jurisdiction over interstate sales of power.and 10 energy for resale.
But Federal Power Commission regu-11 lation at the bulk power level is not identical to regu-
~12 lation at the retail level.
In particular, it is my 13 understandin'g.that there is no Federal Power Commission 14 regulatory requirement for utilities to engage in bulk 15
- power transactions corresponding to the obligation of-16 public utilities in most states to serve all' retail custo-1'7 mers who meet the regulated conditions of service.
18 19 The difference in comprehensiveness of regulation between 20 the retail and bulk power levels complements a related 21 difference in the potential role of competition.
Whereas 22 othe typical retail customer has only one available 23 supplier'and relies on regulation for protection from the use 'of' market power by'that supplier,'a much wider range 24 25 of choice is feasible in bulk power supply.
This range 37 e
e A
e 9
4 g
-. ~. -. -...
1 of. choice applies not only to th'e different options that 2
witness Mozer and I have discussed in our testimony;
.. s.
3 power systems may also have some choice of suppliers,
., 4 customers, and co-owners.
The-range of choice that'will 5
actually be available, especially to smaller entities,'
6 depends.on.the extent.to which the electric systems who
'7 have market.' power make-their bulk power services available.
8 9
10 11
~12 13 i
14 15 16 e
i7 18 19 20 21 22 23 24 25 i
l l
38 l
1 O
. -.. ~.........
t s
1 19.-Q.
How do coordination and competition relate to the issue 2
.of access to bulk power services posed in this case?
3
,4 A.
Coordination is in itself cooperative in nature, yet 5
access to coordination also make feasible some of the 6
potential competition in bulk power markets.
7
~
-8 Access to b'ulk power services increases the coordination 9
options available to the power systems involved.
In many 4
ld instances, the cptions actually chosen will primarily 11 consist of cooperative action with the systems providing 12 access.
For example,'this would be the case if systems 13 in the area not now associated with CAPCO were to asso 14 ciate with the CAPCO pool.
The freedom to exercise such' 15 options for cooperative action. encourages economic effi-16 ciency, which is an important' goal of antitrust policy.
17 18 In other instances, power systems may choose options
~
.19
'that'have a competitive element.
For example, it can 20 bb seen from Mozer's testimony (Exhibit HMM-4) that all 21 of the applicants have entered into bulk power supply 1
22 agreements with power entities outside the CCCT area.
23 i
24 For some non-CAPCO sysEems in the CCCT area who wish
~
25 to acquire bulk power and energy from non-CAPCO sources 39
\\
1
.that would compete with supplies from CAPCO systems, 2
cooperation of one or more applicants is a prerequisite 3
to such competition.
., 4
~
5 In practice, coordination does not rule out a useful 6
.. role for., competition.
Power. systems can-and do choose
'7
.between different alternatives in putting together the 8
cverall power supply package on which they rely.
For 9
a large area, there are often many ways'of. developing 10 an efficient overall bulk power supply plan or pattern 11 of development.
The existence of a diversity of-approaches
'12 and the freedom to shop f'r options provide a degree of o
13 competitive stimulus to search for new.and better power 14 supply alternatives.
This point is reflected in the 15 fact that applicant systems have at times found it 16 advantageous ~to transact with other systems outside the
-i7 CAPCO' area in Michigan, Ohio, and Pennsylvania.
18 19 20 21 22 23 24
~
25 40 i
l l
I
-s e
1
- 20. Q.
From your viewpoint as an economist familiar.with the 2
electric utility industry and with antitrust policy, what
~
.3 is the significance of the exercise of market power
., 4
.by an applicant so that other power entities have not 5
had' access to bulk power services?
6
7 A.'
. Antitrust policy seeks to encourage the competitive Process and' promote.the market results ordinarily achieved 8
9 in. competitive markets..
One way in which antitrust policy 10
. seeks these results is to limit the exercise.of market power 11 in. situations where it may not be feasible or appropriate
'12 to eliminate the underlyir.g source of that market power.
13 For instance, refusals,to deal by a powerful firm are 14 frequently prohibited to force the powerful firm to behave mor'e'nearly like a firm in a truly competitive 15 16 market.
17 18 One of the features of competitive markets is the rich 19 array of options that they provide.
?reedom of choice 20 and the encouragement of variety are of the essence of 21 competition and are an integral part of the rationale of 22 pro-competitive-policy.
If other power systems in the 23 CCCT area are able to transact with the applicants for
'.the' full array of available bulk power options, each 24 25 can ch'oose whatever'it considers to be the best available 41 g
1 mixture of bulk power sources to serve its customers
~
2 economically and reliably.
~
3 4
. 5 6
y e
8 s-9 10 l
11 i
12 13 14 15 g
16
- 17
'18
+
19 20 U
+
21 22 23 24 l
l 25 42
""'******ww 4
m*<
m.
1
- 21. Q.
Would a requirement that eac'h applicant make available 2
firm wholesale requirements to all other power entities
. 3 in this area be economically equivalent to access to the
., 4 full range of bulk power services?
5 6
A..
No..- Though firm requirements contracts are intportant,
- 7
.they are not the only option.
Power entitites may find 8
it more economical.to buy services from more than one
~
9 source.or to provide some bulk power services on their
'10 own.
The essence of a competitive market is a free 11
' choice among su h options.
c
'12 13 14 15
~
16 e
17 18 19
~
20
.r 21
~
e 22 23 24 25 43 g
9 b
4 4e same w ~ e,
-i e M
e
.gp
. m. e6 _
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1
- 22. Q.
From you viewpoint as an economist familiar with anti-2 trust policy in the electric power industry,-how does
.3
'the implementation of Section 105c relate to the factors
., 4 you have just discussed?
That is, how does Section 105c 5
' relate to the roles of regulation, competition; and coor-I 6
., dination in bulk power supply?
,s
.7 8
A.
In my vi6w, Section.'105c fills a gap in the regulation 9
of bulk power markets.
As I have testified, the Federal Power Commission'r'gulates bulk power r les but does not 10 e
11
' prevent the exercise of market power to deny access to 12 bulk power services.
In effect, public control over 13 this form of exercise of market power rests with'the 14 antitrust enforcement agencies under the antitrust"
~
15 statutes and with the Nuclear Regulatory Commission in 16 its implementation of Section 105c.
By opening up the
~
1'7 market for bulk power services to'all systems, Section 18 105c can promote a.more open, inclusive and efficient 19 Pattern of bulk power coordination in the CAPCO market 20 area, and it can also ope _n up new power supply alternatives.
21
~
22 e
23 24
.I
~~
25 j
t
)
44 s
l L
L
APPENDIX Publications of William R. Hughes Articles
" Regulation and the Energy Crisis," in Warren Samuels and Harry Trebing, editors, A Critique of Administrative Regulation of Public Utilities, Michigan State University Press, 1972, with Frances E.
Francis.
" Scale Frontiers in Electric Power," in Technological Change in the Regulated IndusRies, William Capron, editor.'
The Brookings Institution, Washington, D.C.,
1971.
"Would Increasing Residential Electric Rates Help Preserve Environmental Quality?"
William R.
Hughes and Franklin M.
Fisher, Public Utilities Fortnightly, Washington,' D.C.,
1971.
" Fair Rate of Return and Incentives" and " Market Structure, Regulation, and Dynamic Change."
Comments in Harry M.
- Trebing, editor, Performance under Regulation, Michigan State University Press, 1968.
~
"Regulhtion and Technological Destiny:
The National Power Survey," American Economic Reviev, May 1966.
"Ratemaking Principles and Power Pooling," Proceedings of Fifth Iowa Conference on Public Utility Valuation and the Ratemaking Process, April 1966.
- Power and Fuel," Task Force Report F., Revieu of Regional Economic Research and Planning on New England, U.S. Department of Commerce, Economic Development Administration, 1966.
"Short Run Efficiency and the Organization of the Electric Power Industry," Quarterly Journal of Economics, November 1962.
Reviews Alfred Kahn, "The Economics of Regulation " Journal of Economic Literature, 1972.
Herman G. Van Der Tak, "The Economic Choice Between Hydro-electric and Thermal Power Developments," Engineering Economist, 1967.
i
=-
..w..
j Reviews (contd. )
James Nelson, " Marginal Cost Pricing in Practice," Operations Researche 1967.
Carl Fulda, " Competition in the Regulated Industries:
Trans-portation," 17 Rutgers Lau Revieu 241, 1962.
P O
S 9
5 a**
O h
to 0
- 4 i
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W
-w a. -
.. -