Document Type

Article

Publication Date

2005

Status

Accepted

Abstract

In this contribution to a symposium on restructuring the U.S. electricity market, I summarize the peaks and valleys that have characterized the restructuring process over the past two decades. I begin by describing the reasons why I joined with a group of other academics twenty years ago in an effort to restructure the U.S electricity market. The market was characterized by large, well-documented structural and operational maladies; it had performed poorly for over a decade; its basic characteristics were consistent with increased reliance on market forces as an effective governance mechanism; and, our recent success in restructuring analogous markets provided cause for optimism that we could implement a socially-beneficial restructuring of the U.S electricity market. I then describe what we expected to happen in the restructuring process. We were aware of many of the serious obstacles we would have to overcome, but we believed that we could borrow enough of the elements of the recent U.S. effort to restructure its natural gas market and the recent British effort to restructure its electricity market to design and implement a socially-beneficial restructuring of the U.S. electricity market. By unbundling the natural monopoly functions from the functions that are susceptible to effective competition and forcing participants in the structurally-competitive functions to compete with each other, we believed that we could replace the inefficient, ineffectively-regulated local service providers with large, robustly competitive regional markets in which competition forced service providers to reduce their bloated costs and to abandon their inefficient methods of operation. I then describe where we are in the restructuring process today. We have achieved a high degree of success in one region. In the mid-Atlantic states, restructuring has produced a competitive wholesale market in which consumers save over three billion dollars a year, and in which generators have been forced to improve their operating efficiency by five to twenty per cent. We have also made considerable progress in the northeast and in Texas, but the national restructuring process has now been stalled. I then describe the combination of economic, legal, and political problems that have created an environment in which it is impossible to complete the national restructuring process at present. I argue that the economic and legal problems are susceptible to effective and well-known solutions, but that those solutions cannot be implemented in the present political environment. I also argue that the major political impediment to completion of the restructuring process consists of a group of politically powerful electric utilities in the southeast and northwest who have consistently opposed restructuring because they prefer the comfortable and profitable life of an ineffectively-regulated monopolist to participation in a competitive market. Those utilities were in the process of losing their battle to block the restructuring process until the California price spike of 2000-2001 and the closely related Enron scandal provided them with the fresh ammunition they needed to reinvigorate their strategic blocking action. Finally, I recommend a course of action for the future. I argue that, with patience and persistence, we can complete the national restructuring process over the next decade. Over time, the continued success of the markets that have already been restructured, coupled with the fading public memory of the California and Enron debacles, will recreate the political conditions of the late 1990s in which we can complete the restructuring process. I note, however, that we do not have the luxury of being patient in our efforts to solve one critical problem. We must amend the Federal Power Act to confer on FERC preemptive power to approve proposed transmission expansion projects in order to avoid the devastating consequences of our severe and growing shortage of transmission capacity.

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