Turning On The Lights: Deregulating The Market for Electricity

Studies | Regulations

No. 228
Friday, October 01, 1999
by Vernon L. Smith and Stephen Rassenti


Notes

  1. Michael T. Maloney, Robert E. McCormick and Raymond D. Sauer, Customer Choice, Consumer Value: An Analysis of Retail Competition in America's Electricity Industry (Washington, D.C.: Citizens for A Sound Economy Foundation, 1996).
  2. Doug Bandow, "Competition in Electric Power: Strategies for Reform," John Locke Foundation, Policy Report No. 14, July 1996, p. 13.
  3. U.S. Department of Energy, Energy Information Administration, "Electricity Prices in a Competitive Environment: Marginal Cost Pricing of Generation Services and Financial Status of Electric Utilities: A Preliminary Analysis Through 2015," Washington, D.C., August 1997, available at http://www. eia.doe.gov/oiaf/elepri97/comp.html.
  4. Ronald L. McMahan and Richard F. O'Donnell, "Freeing Electricity Markets: Who Wins; Who Loses; How Free?" Center for the New West, Denver, Colo., Points West Special Report, May 1997.
  5. Robert Crandall and Jerry Ellig, Economic Deregulation and Customer Choice: Lessons for the Electric Industry (Fairfax, Va.: Center for Market Processes, 1997).
  6. Michael T. Maloney, Robert E. McCormick and Raymond D. Sauer, Customer Choice, Consumer Value: An Analysis of Retail Competition in America's Electricity Industry (Washington, D.C.: Citizens for A Sound Economy Foundation, 1996), p. xxiv.
  7. See Adam D. Thierer, "Energizing America: A Blueprint for Deregulating the Electricity Market," Heritage Foundation, Heritage Backgrounder No. 1100, January 23, 1997, p .4.
  8. Robert L. Bradley Jr., "The Increasing Sustainability of Conventional Energy," Policy Analysis No. 341, April 22, 1999, Cato Institute, Washington, D.C., p. 13.
  9. Ibid., p. 14.
  10. This section, unless otherwise noted, is based on Edwin G. Dolan and John C. Goodman, Economics of Public Policy, Fourth Edition (St. Paul, Minn.: West Publishing Co., 1989).
  11. Office of Technology Assessment, 1983, cited in Michael T. Maloney & Wayne Brough, "Promise for the Future, Penalities from the Past: The Nature and Causes of Stranded Costs in the Electric Industry," Citizens for a Sound Economy Foundation and the International Mass Retail Association, 1999.
  12. The English-born Insull is a fascinating figure in U.S. business history. Beginning as Edison's private secretary, he rose by 1892 to head all Edison activities in Chicago. He assiduously promoted the combination of smaller companies into larger ones. Through holding companies he piled up interests in 21 states. It was said in the 1920s that to be seen talking with him outside the Continental Bank was worth a million dollars. However, in 1932, under the impact of the Depression, Insull's mighty empire collapsed and he fled the country, charged with embezzlement. Investors lost a billion dollars. John D. Hicks, Republican Ascendancy (New York: Harper & Bros., 1960), p.123; and Frederick Lewis Allen, Since Yesterday (New York: Bantam Books, 1961), p. 58.
  13. See James A. Damask, "A Power(ful) Myth," Perspective on Current Issues, February 1999, Buckeye Institute for Public Policy Solutions, available at http://www.buckeyeinstitute.org/perspect/1999_2.htm.
  14. Greg A. Jarrell, "The Demand for State Regulation of the Electric Utility Industry," Journal of Law and Economics, October 1978, pp. 269-95.
  15. John D. Hicks, Republican Ascendancy, p. 122.
  16. Harvey Averch and Leland Johnson, "Behavior of the Firm under Regulatory Constraint," American Economic Review, December 1962, pp. 1052-69.
  17. See Peter Navarro, The Dimming of America (Cambridge, Mass.: Ballinger, 1984).
  18. Dolan and Goodman, Economics of Public Policy: Fourth Edition, p. 108.
  19. Paul R. Carpenter and Frank C. Graves, "Estimating the Social Costs of PUHCA Regulation," Exhibit 2, comments of Central and South West Corporation on Modernization of the Regulation of Public Utility Holding Companies, Docket No. 52-32-94, Securities and Exchange Commission, 1995.
  20. For example, FERC approval of the consolidation of First Energy, an electric-electric merger, took approximately two years; but when Tampa Energy Company purchased West Florida Gas, the transaction was completed in about six weeks; FERC was not involved. See Paula Felps, "The Road Ahead for the American Utility Industry: Mergers and Deregulation," Outlook, Afiniti Communications, February 1999.
  21. A fifth, the Alaska PMA, has been privatized.
  22. Adam D. Thierer, "(271) Power Marketing Administrations," in Scott A. Hodge, ed., Balancing America's Budget: Ending the Era of Big Government (Washington, D.C.: Heritage Foundation, 1997).
  23. FERC Order 888 requires utilities under FERC's jurisdiction to file nondiscriminatory open access transmission tariffs and offer comparable transmission services to eligible third parties. Order 889 requires utilities to develop same-time information systems to make simultaneous transmission information available to those entities that are selling power.
  24. Office of Technology Assessment, 1983, cited in Maloney & Brough, "Promise for the Future, Penalities from the Past."
  25. David Dismules and Michael T. Maloney, "Stranded Costs in Non-Utility Generation," cited in Maloney & Brough, "Promise for the Future, Penalities from the Past."
  26. Felps, "The Road Ahead for the American Utility Industry: Mergers and Deregulation."
  27. John J. Fialka, "New Deal Undone: Using Savvy Tactics, Bristol, Va., Unplugs from a Federal Utility," Wall Street Journal, May 27, 1999, cited in Maloney & Brough, "Promise for the Future, Penalities from the Past."
  28. See Doug Bandow, "Competition in Electric Power: Strategies for Reform," John Locke Foundation, Policy Report No. 14, July 1996, pp. 21-25. Also see Michael Block and Thomas Lenard, "Creating Competitive Markets in Electric Energy," Progress and Freedom Foundation, at http://www.pff.org/energy/toc.html, which proposes repeal of PURPA and the Public Utility Holding Company Act. It also proposes privatization of all federally owned public power facilities.
  29. Jeff Bailey, "Carter-Era Law Keeps Price of Electricity Up in Spite of a Surplus," Wall Street Journal, May 17, 1995, p. A1.
  30. Also, combination makes it difficult for state regulatory commissions and FERC to separate assets subject to their jurisdiction from assets subject to market discipline.
  31. Bandow, "Competition in Electric Power: Strategies for Reform," p. 35.
  32. For a comprehensive discussion of stranded assets, see Bandow, "Competition in Electric Power: Strategies for Reform," pp. 34-42.
  33. See E. Blank, R. Gilliam and J. Wellinghoff, "Breaking Up Is Not So Hard To Do: A Disaggregation Proposal," The Electricity Journal, May 1996, pp. 46-55, for a proposal for disaggregation of generation and a discussion of tax and financing benefits that would accrue if Nevada Power sold its generation assets. However, we caution against disaggregation proposals that decrease private ownership of electric system assets and increase price differences based on tax differentials or regulatory treatments.
  34. For example, U.S. Generating, a unit of Pacific Gas & Electric, outbid competitors to buy 18 power plants from New England Electric System for $1.59 billion, a significant premium over their $1.1 billion book value. See Benjamin A. Holden and Ross Kerber, "PG & E to Acquire 18 Generating Plants From New England Electric System," Wall Street Journal, August 6, 1997, p. A3.
  35. Serving a single locality with more than one set of wires is feasible, as the previously mentioned experience in Lubbock, Texas, demonstrates.
  36. Some amendment of the Federal Power Act may be necessary to deregulate generation and reaffirm the traditional regulatory line between state and federal authority.
  37. Systems with hydroelectric sources of power can store to a limited extent. Power is generated in the higher-demand daytime periods by depleting water reservoirs. At night, lower-cost power is purchased from the network; generators are run as motors to pump water from downstream to upstream impoundments in preparation for the next day's high-value generation cycle. Recent dramatic improvements in toroid (electromagnetic) and flywheel (mechanical) technology promise substantial storage potential where price differentials permit.
  38. For a more detailed discussion see "Ancillary Services" in the Technical Appendix.
  39. A wires company operating a spot scheduling market would not restrict its operations to one territory - it would schedule power flows from anywhere or to any region. For a fuller discussion see "Transferring Power Between Regions" in the Technical Appendix.
  40. See California Public Utility Commission Policy Decision D.9-12-063 (December 20, 1995), as modified by D.96-01-009 (January 10, 1996). Also see Donald F. Santa, "In Search of Comparable Open Access," address to the Power Marketing Association, December 14,1995; and William W. Hogan, "A Wholesale Pool Spot Market Must Be Administered by the Independent System Operator: Avoiding the Separation Fallacy," Electricity Journal, December 1995, p. 26.
  41. Steve Johnson, "Deregulation Has Been a Big Yawn," Fort Worth Star-Telegram, April 4, 1999, p. E1.
  42. Ibid.
  43. Arthur S. De Vany, "Electricity Contenders: Coordination and Pricing on an Open Transmission Network," Regulation, Vol. 20, No. 2, 1998.
  44. Thomas M. Lenard, ""Electricity Legislation: Ease by Inaction," Perspectives, Regulation, Vol. 21, No. 3, 1998.
  45. Thomas M. Lenard, "Innovation and Competition in the Electric Power Industry," Progress on Point, February 1997, Progress & Freedom Foundation.

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