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Regulating the Electricity Markets: Time to Reconsider?
Wednesday, April 6, 2005

Peter VanDoren
Editor of Regulation magazine
An RFF First Wednesday Seminar

Over the past decade, the electric utility industry has been the focus of a major restructuring aimed at changing the way power is delivered and priced. However, the results of this overhaul have been mixed, and the process has not necessarily brought the benefits that many experts predicted. Peter VanDoren, editor of Regulation magazine, discusses his findings on electricity market reform and offer a range of recommendations for future action -- including abandoning restructuring or returning electrical utilities in some states to a regulated environment.

Rob Gramlich, Economic Advisor to Federal Energy Regulatory Commission Chairman Pat Wood III, joins VanDoren in offering additional insights. Karen Palmer, a senior fellow at Resources for the Future, moderates the discussion.

Video of this First Wednesday Seminar and commentary on the speakers' remarks follow below.

 

Event Video

Molly Macauley
Senior Fellow, Resources for the Future

 

Karen K. Palmer
Senior Fellow, Resources for the Future

 

Peter Van Doren
(Download Presentation)
 
Editor of Regulation magazine

 

Rob Gramlich
Economic Advisor to Federal Energy Regulatory Commission Chairman Pat Wood III

 

 Question and Answer Session

 

 



Revisiting Regulation in the Electricity Sector

Challenges posed by introducing competition in the electricity market are unlike those in any other sector, and efforts to deregulate it raise issues that have been discussed by economists for nearly thirty years, began Peter Van Doren, editor of Regulation magazine, at his presentation at a Resources for the Future First Wednesday seminar on April 6.

The seminar, titled "Regulating the Electricity Sector: Time to Reconsider?" also featured Rod Gramlich of the Federal Energy Regulatory Commission and was moderated by Karen Palmer, a senior fellow at RFF whose interests include electricity policy.

Van Doren argued that the restructuring process put into place in the 1970s has not worked the way it was supposed to: electricity prices are still wrong all the time, being too low on-peak and too high off-peak, and while the performance of wholesale electricity markets has improved, retail pricing has not. Additionally, the California market collapse in 2000-2001 created concern in other states that restructuring might cause them similar problems.

Prices range greatly between regulated and deregulated states, from 4.3 cents per kilowatt-hour (kWh) in Kentucky (a regulated state) to 11.3 cents per kWh in New York (a deregulated state). Van Doren wondered why policymakers should listen to deregulation suggestions from people in places where things have gotten worse.

 

 

Link to RFF Web Feature
Wholesale Electricity Markets and Policy: An Overview: Senior Fellow Tim Brennan outlines twists, turns, and bumps on the road to competition in electricity in this RFF web feature.

The difference in pricing, he explained, does not come from marginal cost differences, but rather from variations in the mixture of electricity sources, regulations established by the Clean Air Act, and other factors that vary by location. Eliminating this price discrepancy, he continued, would result in a one-time increase in wealth for producers in places like Kentucky and in continued higher costs to consumers. Lawyers and politicians have not yet addressed the political problems such a situation would cause, while states and utilities continue to focus only on their corner of the picture. However, he admitted, any gains in efficiency might not be large enough to cover the costs of the transfer payments that would be necessary to make all parties agree to the change.

Gramlich argued that states are seeing the benefits of competitive regional markets. He advocated regional transmission organizations as a way to insure nondiscriminatory access to transmission lines that is necessary for competition to work. Gramlich disagreed that the system is no better off now than it was three decades ago, citing that companies are trading power in wholesale markets, sometimes across large distances; that generators perform better than they used to; and that consumers have more choices. He noted the approach taken in the gas and telecommunications industries, where segments with monopolies were regulated functions where competition was possible were deregulated, has worked and should be a model for electricity.

The two presentations, and questions that followed, often highlighted the starkly different views and possibilities facing the electricity sector. However, both speakers agreed this industry is the most challenging candidate for deregulation, with the most complicated issues, with questions on the magnitude of the potential gains to society and, especially, who pays for it and who ultimately benefits at the center of it all.

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