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Yale Economist Trashes Auctions; Would Disband FERC

Yale Economist Trashes Auctions; Would Disband FERC

There is zero probability the Federal Energy Regulatory Commission can design a pipeline capacity auction that would efficiently operate in the marketplace, according to an eminent economist who suggested the best strategy would be to get rid of FERC.

Citing the example of the Civil Aeronautics Board that was disbanded at the start of airline deregulation, Paul W. MacAvoy, formerly dean of Yale University School of Management, told Washington energy attorneys regulatory agencies should be "closed down before the market becomes competitive, not after....You have to cut them off now or they will never go away."

MacAvoy advised members of the Federal Energy Bar Assoc. yesterday that what he called the "Moler phenomenon" of "managed competition," named after the former FERC chairperson who was among the speakers on the platform beside him, would not work. That doctrine promotes "managing competition until there is enough," and prompts the prayer "oh Lord, oh Lord, will there ever be enough?" Natural gas prices would be fifty cents lower if FERC were not still "managing the competition," MacAvoy said,

As for auctions, there are thousands of possible variations in the way they can be structured and there is virtually no way FERC could choose the "right auction" that would work and function to efficiently allocate resources.

Commissioner Curt Hebert responded in a luncheon address, saying that although industry has been sniping at FERC's proposal of an auction, "they have offered no alternatives....and the issue of market power must be addressed." For emphasis, Hebert repeated "market power must be addressed."

Meanwhile, the industry was seeking a consensus at a Denver meeting of the Natural Gas Council Friday on requesting another extension beyond the current Jan. 22 deadline for comments on the Commission's NOI and NOPR regarding proposed auctions and other industry changes. While some industry segments were suggesting a six-month extension, others were in favor of a shorter period. (A report on their decision was not available at press time Friday.) Sources said, however, that while an extension granted earlier had been requested in order to give industry time to figure out how to make an auction work, this one may be devoted to coming up with other alternatives.

MacAvoy's arguments against regulation also were rebutted in part by Richard Meyer, senior regulatory counsel for the National Rural Electric Cooperative Assoc., who questioned whether we can "trust the marketplace to do the right thing" without some regulatory oversight. He pointed to the consolidation among industry players that tends to short-circuit competition. Also, he said, most major marketers are staying out of the retail market because it is a low-margin business, which means residential customers will not reap the benefits of competition unless marketers are forced to serve them. And he noted the unpredictability of markets without caps as evidenced by last summer's Midwest price spike.

Ellen Beswick

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