Electricity

Power Generation can never seem to get it quite right. Economists and Public policy entered into 'restructuring' for transference issues, problems of over-generation capacity, and reducing Costs to Consumers resident in heavy Consumption states. A new Study studies the effect:

POLICY ANALYSIS
Routing
Rethinking Electricity Restructuring
by Peter Van Doren and Jerry Taylor
No. 530 November 30, 2004
Executive Summary

Electric utility restructuring was initiated in
the 1990s to remedy the problem of relatively
high electricity costs in the Northeast and
California. While politicians hoped that reform
would allow low-cost electricity to flow to highcost
states and that competition would reduce
prices, economists wanted reform to eliminate
regulatory incentives to overbuild generating
capacity and spur the introduction of real-time
prices for electricity.

Unfortunately, high-cost states have seen little
price relief, and competition has had a negligible
impact on prices. Meanwhile, the California
crisis of 2000–2001 has led many states to adopt
policies that would once again encourage excess
capacity.

Most arresting, however, is the fact that restructuring
contributed to the severity of the 2000–2001
California electricity crisis and (some scholars also
argue) the August 2003 blackout in the Northeast,
without delivering many efficiency gains.
The poor track record of restructuring stems
from systemic problems inherent in the reforms
themselves

The Study comments that 'restructuring' should be abandoned, with a return to balkanized regional integration (the old system). This would appear highly unlikely, what with the necessary requirement of introducing a integrated National Power Grid, to prevent such as the August 2003 Blackout. The real value of the Work comes in their specific conclusions:

• focused on generation competition and
ignored the pricing and incentive issues
involved managing the transmission
system and its public commons characteristics;
• grafted a relatively free wholesale market
onto a still heavily regulated retail market;
and
• established artificial market institutions
that invited manipulation and abuse.
The end result has proven far from satisfactory.

The real telling Point resides in the middle issue; it is not practical to try utilization of a free Wholesale market on top of a regulated Retail market. Why? The highest regulatory Cost Retail supplier will always set the Wholesale market price. Consumers will always pay the Price which a free Wholesale market supplier perceives as their expected Percentage return on the highest Consumer Retail price. A strict Traditional Economist would suggest final Retail price does not set Wholesale prices, but honest Economists admit continuous Retail price increase will always generate higher Wholesale prices. lgl