Regulating the Electricity Markets:
Time to Reconsider?

Peter VanDoren
Editor of Regulation magazine
An RFF First Wednesday Seminar
Wednesday, April 06, 2005

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.

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.

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.