Introduction To Electric And Gas Industries

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CHAPTER I

INTRODUCTION TO

ELECTRIC AND GAS INDUSTRIES

This chapter provides a brief, nontechnical introduction to the

electric power and natural gas industries. It also defines some of the

basic terms used in the chapters that follow. The characteristics of an

industry often play a significant role in antitrust cases, and this is

particularly true in the electric power and natural gas industries.

A. Electric Power Industry

1. Unique Features of Electricity

Electricity is an unusual product. It cannot be efficiently stored or

inventoried. It must be produced by electric generators and

instantaneously delivered over transmission and distribution wires in

response to customer demand. Nor can the flow of electricity be readily

channeled. Once produced by a generator, electricity does not flow

directly from seller to buyer. Rather, it literally flows over the path of

least resistance (least impedance) according to the laws of physics.

For example, when a downtown office building air-conditioning

compressor starts up on a hot August afternoon, electric power

generators that serve this load must instantaneously produce more

electricity to drive the compressor machinery. However, in all

probability this electricity will not flow directly from the generator to the

city. Instead, it will flow in several different directions depending on the

configuration of the transmission network.

For these reasons, the Antitrust Division of the U.S. Department of

Justice (DOJ) has observed to the Federal Energy Regulatory

Commission (FERC), that in analyzing competitive electricity markets, it

can be difficult to determine whether a generator located at one point can

serve customer load located elsewhere.1 The amount of competitively-

priced electricity that can reach buyers in a particular area depends on the

generators that are in operation and the capacity available in the

1. See Comments of U.S. Dep’t of Justice, Inquiry Concerning the

Commission’s Policy on the Use of Competitive Models in Merger

Analysis, FERC Docket No. 98-6-000, p. 2 (June 15, 1998).