Generation And Transmission Adequacy In A Restructuring Us Electricity Industry

Author : Rick Mattoon
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (137 download)

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Download or read book The Electricity System at the Crossroads - Policy Choices and Pitfalls written by Rick Mattoon and published by . This book was released on 2003 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the mid-1980s, electricity policy in the United States began a new chapter when wholesale electricity markets were opened to competition. While the immediate goal was to increase the diversity of supply for electricity generation, proponents of restructuring also cited success in restructuring other network industries such as telecommunications, airlines, and natural gas as justification for introducing competition to the electric utility industry. Wholesale competition for producing electricity would improve generation efficiency, diversify supply, promote innovation, and even lower prices. Success in opening the wholesale market, proponents argued, would eventually be extended to the retail market, and all consumers would have the opportunity to choose their supplier and pick an electricity service that best fit their individual needs. The initial enthusiasm for restructuring was particularly noticeable in states with high electricity prices. In theory, splitting the traditionally integrated functions of a utility - power generation, transmission, and distribution - into separate functions would expose cross subsidies and inefficiencies and allow prices to consumers to fall. Restructuring was designed to introduce open market competition only in electricity generation. Transmission and distribution would still be subject to varying levels of regulation. By 2000, almost half of the states were pursuing some form of restructuring. However, several recent events have cooled the enthusiasm for abandoning the traditional heavily regulated and integrated utility system. Foremost among these was the California electricity crisis. The state garnered daily headlines as a series of events, including a flawed restructuring plan, left California facing skyrocketing prices, potential blackouts, and bankrupt utilities. California's high-profile bad experience clearly demonstrated that the costs of a flawed electricity restructuring policy could be very high. In addition, states that had demonstrated early success in restructuring, such as Pennsylvania, Connecticut, and Massachusetts, were beginning to find that sustaining competition and promoting new market entrants was harder than they had anticipated. These developments have left restructuring at a crossroads. States are examining what elements and structures need to be in place to realize the promise of opening electricity markets to competition. The questions policymakers need to answer include the following: - Is the physical infrastructure (particularly, adequate supplies of generation and transmission) in place to support new market entrants? - Are the incentives for investing in new electricity facilities adequate? What can be done to improve these incentives if they are lacking? - Do new institutions need to be developed to facilitate this new structure for delivering electricity? Should these be federal, regional, or state institutions? What is the role for existing regulatory institutions? - Should restructuring expose consumers to changes in electricity prices, even when those prices can be volatile? - What is the relationship between meeting environmental goals and generating greater power supply? Can the two successfully coexist? In this article, I examine what restructuring means in the electricity field. I discuss the legacy of the existing electricity system, which favored local electricity provision by integrated and highly regulated monopoly utilities, and describe the issues involved in moving to a more market based system. Then, I use the five states of the Seventh Federal Reserve District as a case study for examining how restructuring issues are being addressed at the state level. The states of the Seventh District provide a particularly useful example, given that restructuring programs in Illinois and Michigan are well underway with consumers to be provided with retail choice in 2002. In contrast, Indiana, Iowa, and Wisconsin have adopted a cautious approach to restructuring, as relatively low prices for electricity have led them to question the immediate benefits of abandoning their existing structure for delivering electricity. Based on this analysis, I identify some lessons that can be applied as electricity policy continues to evolve. Evidence suggests that defining the role of existing and new institutions in managing the transition to market competition is one of the keys to promoting electricity restructuring. This may include insulating these institutions from political interference. Similarly, we need to examine how markets are structured to provide access to competitive electricity supply sources, as well as recognizing how the unique attributes of electricity create challenges for trading power as a commodity. Finally, policymakers need to consider the role of the electricity consumer in restructuring. For restructuring to succeed, consumers need to respond to legitimate market-based changes in electricity prices. Price signals that reflect fundamental changes in the cost of generation need to be passed through to consumers. While consumers may be provided with tools to deal with volatile electricity prices, creating barriers to prevent price changes from being reflected in utility bills will not create incentives for consumers to conserve electricity or provide incentives for firms to invest in expanded generation.