Electricity Restructuring

Restructuring of the electricity industry has been approached with a top-down approach that has failed to result in benefits to consumers. Economic theory states guidance on conditions that are essential for well-functioning markets to exist in which the consumer benefits and the firms utilize innovation to control costs. There is currently a debate surrounding the importance of each ‘condition’ as well as the resulting harm when conditions are unmet. It has been learned that without the essential pieces in place that restructuring of the electricity industry may result in results that are highly negative in nature. These essential pieces include new transmission capacity, real-timing pricing, the absence of excessive market power in generation, fair competition between utility incumbents and other market players, effective regulatory oversight, a level playing field between private entities on the one hand and electric cooperatives and public power suppliers on the other, well0infomed small retail consumers and the opportunities and the correct incentives for risk-management activities by regulated utilities. Questions that are addressed in this research initiative include the question of why the difficulties of restructuring were so greatly underestimated. Secondly, the research in this work intends to examine why restructuring has been successful in some jurisdictions but has not been successful in other jurisdictions. This work also intends to address the question of since governmental agencies would play an important role in any restructuring can we be assured that they will do their job? Experiential knowledge informs this study that greater pressure exists at the local and state levels than at the federal level insofar as accountability and toward exploitation of regulation as a means of distribution. Finally, the primary and most fundamental question addressed in this study is whether the electric utility industry should proceed with restructuring without all of the essential pieces in place? It just may be that constraints that are political in nature will be far too binding to attain the necessary conditions vital for successful restructuring of the electric utility industry. It is clear from the material reviewed in this study that at this point there is no feasibility to turning back from restructuring but instead it is critical that the electricity industry move forward because the underlying premise for restructuring is just as if not more valid that it was when first conceived. Restructuring that has been successful has been characterized by a bottom-up rather than top-down approach and has concerned itself with the benefits that consumers receive for the services for which they pay. The forces which move in the electricity industry against a more competitive market are strong indeed however, historically deregulation has been effective and efficient as well as beneficial for the consumers and society at-large. This study concludes that deregulation and industry restructuring should continue although at a slower pace and in a bottom-up approach.

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ELECTRICITY RESTRUCTURING

STATEMENT OF PROBLEM

Restructuring of the electricity industry has been approached with a top-down approach that has failed to result in benefits to consumers. Economic theory states guidance on conditions that are essential for well-functioning markets to exist in which the consumer benefits and the firms utilize innovation to control costs. There is currently a debate surrounding the importance of each ‘condition’ as well as the resulting harm when conditions are unmet. It has been learned that without the essential pieces in place that restructuring of the electricity industry may result in results that are highly negative in nature. These essential pieces include new transmission capacity, real-timing pricing, the absence of excessive market power in generation, fair competition between utility incumbents and other market players, effective regulatory oversight, a level playing field between private entities on the one hand and electric cooperatives and public power suppliers on the other, well0infomed small retail consumers and the opportunities and the correct incentives for risk-management activities by regulated utilities.

INTRODUCTION

This thesis will conduct a review of the major federal initiatives that have driven the restructuring of the Electric Utility industry and will evaluate the success or failure as well as considering the roles the states have played in supporting or preventing Federal action in this area. The seminal events that will be reviewed in this study include: (1) FERC Order 888 which opened access to transmission systems to any market participant. This was a revolutionary idea that radically transformed the traditional utility industry. It was a necessary component of any further restructuring of the traditional vertically integrated utilities; (2) FERC followed this successful initiative with the Single Market Design (SMD) Order 2000.

FERC proposed to require all utilities to join a Regional Transmission Organization, turn over assets to a third party transmission operator and participates in regional power markets. While this model was embraced in the North East, many Midwestern and southern companies rejected it and the SMD failed to be adopted as a model for regional transmission operation or markets; and Title XII, Electricity, Section 1211-Electricity Reliability Standards, called for the creation of a national Electric Reliability Organization to oversee the development of and enforcement to standards of operation and design for all Bulk Power System users, owners and operators. Bulk Power Systems typically are defined as 100kV and above and are used for transmission, including interstate commerce. They are regulated by FERC, not the states.

RESEARCH QUESTIONS

Questions that are addressed in this research initiative include the question of why the difficulties of restructuring were so greatly underestimated. Secondly, the research in this work intends to examine why restructuring has been successful in some jurisdictions but has not been successful in other jurisdictions. This work also intends to address the question of since governmental agencies would play an important role in any restructuring can we be assured that they will do their job? Experiential knowledge informs this study that greater pressure exists at the local and state levels than at the federal level insofar as accountability and toward exploitation of regulation as a means of distribution. Finally, the primary and most fundamental question addressed in this study is whether the electric utility industry should proceed with restructuring without all of the essential pieces in place? It just may be that constraints that are political in nature will be far too binding to attain the necessary conditions vital for successful restructuring of the electric utility industry.

IMPORTANCE OF STUDY

The importance of this study is the information that it will add to the knowledge already existing in this area of study, discussion and debate. Additionally, this work conducts a synthesis review of recent literature on electricity industry restructuring and the status of this restructuring which is ongoing in the electricity industry.

BACKGROUND

Regulation of the electricity industry began “with the use of franchise licenses by municipalities to control rates and right-of-way as early as 1885.” (King, 1912; in Knittle, 2006) There was little done by the local regulatory authorities to control rates but instead the focus of the municipalities was on “controlling the number of franchises offered, and thus the level of competition.” (Knittle, 2006) State regulation migration began in 1907 according to Knittel (2006) who states that once Wisconsin, New York and Georgia had passed legislation that expanded the “scope of their railroad commissions to include gas and electric companies…[that] more state quickly followed suit.” (Knittle, 2006) Prior to 1920 there was very little electricity transmission across state boundaries thereby little need for federal regulation existed. However, in 1920, the Federal Power Commission was created and began to regulate a part of the electricity industry. Knittle (2006) states that Peltzman’s (1976) interest group theory of the capture group theory holds that “as economic agents, regulators will respond to the lobbying efforts of both the firms they regulate and other interested parties, such as consumer groups. Thus, just as electric utilities may gain if they are able to capture state regulators, specific consumer groups may gain from state regulation at the expense of the regulated firm, other consumer groups, or, in this case, municipal regulators.” (Knittle, 2006) The work of Priest (1993) is stated by Knittel to advocate “a theory of regulation based on contracting costs; changes in regulation occur when the existing regulatory framework has contracting inefficiencies. There were two primary sources of contracting inefficiencies in municipal regulation and the first of these is the introduction of alternating current (AC) by George Westinghouse in 1893 allowed electricity to travel long distances more efficiently…increasing the minimum efficient scale of the industry. The result was it being easier to service a number of municipalities by a single firm. Knittel notably states that the increase in the “…geographical breadth of electricity firms and the ability for ex-post opportunism by corrupt municipal regulators likely led electricity firms to curb large sunk cost investments, resulting in inefficient levels of generation. If state regulators were less corrupt, or potentially less corrupt, then state regulators and interested parties would have seen state regulation as a means of relieving the contracting inefficiencies, thereby spurring investment in generation capacity. Furthermore, even absent corruption, an efficiency gain could be realized by allowing firms to serve multiple cities more efficiently.” (Knittle, 2006) Toward this end the National Electric Light Association (NELA) Subcommittee on Public Regulation and Control is stated to have reached three main conclusions as follows:

That the NELA should favor properly constituted general supervision and regulation of the electric light industry;

That if state commissions be constituted, they should be appointed in that manner which will give them the greatest freedom from local and political influences, to the end that their rulings shall be without bias; and That state commissions be clothed with ample powers to control the granting of franchises, to protect users of service against unreasonable charges or improper discriminations, to enforce a uniform system of accounting, and to provide for publicity. If the state provides for publicity on the one hand, on the other hand it should safeguard investments. Regulation and publicity would be a grievous wrong unless accompanied by protection. (Anderson [1981] (Knittle, 2006) From all appearances the electricity industry was seeking regulation that was not as corrupt and that safeguarded investments.” (Knittle, 2006) According to Knittel (2006) “The contracting and interest group theories may also coexist. In fact, the greater the contracting inefficiencies inherent in municipal regulation, the greater the potential gains of many of the interested parties.

Historically, the electric utility business and its policies made the assumption that utility companies were “natural monopoly providers of a regulated and essential public service.” (Mattoon, 2001) Consumers did not choose but instead were informed which company would provide their electricity services and how much those services would cost which was based on the service area of their location. Decisions relating to the generation of energy and whether new plants were needed as well as the charges for the electricity were “discussed inside utility companies and in hearing rooms at state public utility commissions.” (Mattoon, 2001) As noted in the work of Mattoon (2002) the reasons for these structure being maintained were good reasons in that “the electric utility business is a very capital intensive industry. Investments in power plants, transmission and distribution systems are expensive and long-lived, and it would be inefficient to build overlapping systems within the same service territories.” (Mattoon, 2001)

Public policy response was predictably the recognition of the “monopoly status of utility companies, provide the companies with defined geographic services territories, and then subject them to rigorous regulation to as to prevent the exercise of pricing power.” (Mattoon, 2001) This same rationale was then implemented with other ‘network’ industries including telecommunications which held the policy goal of what is termed as ‘universal service’ or providing services to everyone and doing so with pricing of a moderate nature. “The focus on local monopoly provision of electricity services resulted in fragmentation in local policymaking and an electricity system in the United States that was fragmented as well. Variations are great from region to region on electricity charges as well as fuel used for generation of electricity. The following illustration labeled Figure 1 in this study shows the great variation in electricity rates across the United States.

Source: Mattoon (2002)

Fuel choice varies and is a significant factor in the price variation between electric utility providers. Price variability is also due to the “class of customer served. Industrial customers are often charged lower tariff rates because they are easier to serve. As bulk users of electricity, they often draw a highly predictable and steady level of power and, as a result, their costs of service are often lower than for residential customers.” (Mattoon, 2001) The provision of residential service makes a requirement of the management of a more variable load and can only be accomplished through a large distribution system.” (Mattoon, 2001)

Since industries use electricity in bulk they represent a “…highly predictable and steady level of power and, as a result, their costs of service are often lower than for residential customers.” (Mattoon, 20010 Mattoon relates that the only manner in which the utilities companies can provide residential services is through management of ” a more variable load” and this states Mattoon can only be accomplished “through a large distributions system supported by higher maintenance and billing costs.” (2001) Fragmentation is also existing in the utilities ‘governance’ and largely these companies are “vertically integrated, investor-owned…[and] responsible for generating, transmitting and distributing power to customs.” (Mattoon, 2001) Other utility ownership formations are preferred including:

1) Municipal ownership;

2) Cooperative ownership and 3) Federal power utilities such as the Tennessee Valley Authority and the Bonneville Power Authority.” (Mattoon, 2001)

The variations in governance account are stated by Mattoon to have “important ramifications for regulatory outcomes.” (Mattoon, 2001) The larger investor-owned utilities (IOUs) are regulated through review of the state public utility commissions although “many public power authorities are exempt from these requirements.” This structure which is highly fragmented results in the electricity being a policy area “with many participants and little central planning or review authority except within the balkanized areas served and regulated by a public authority.” (Mattoon, 2001)

The Public Utility Regulatory Policies Act (PURPA) passed in 1978 opened “the wholesales power market to certain non-utility generating companies.” (Mattoon, 2001) The reason for passing the PURPA was to bring about a reduction in the dependence of the United States on foreign oil and for expansion of the diversity of supply for U.S. electricity generation.” (Mattoon, 2001) In 1992 the Energy Policy Act was passed known as ‘EPACT’ and EPACT exceeded the PURPA in its pushing of wholesale deregulation through enabling transmission access to non-utilities resulting in utilities that were regulated to receive permits to build new “merchant plants outside their service territories.” (Mattoon, 2001) Stated as other landmark legislation are those as follows with the accompanying descriptions and importance of each of these:

Orders 888 and 889 – Issued by Federal Energy Regulatory Commission (FERC) in 1996 for the purpose of providing a way for participants to be increased in by non-utilities and promotion of wholesale competition through the elimination of the monopoly of the local utility over transmission. These orders combined made a requirement of public utilities controlling transmission in developing “open access, non-discriminatory transmission tariffs and to provide existing and potential users with equal access to transmission information.” (Mattoon, 2001) The utility functions were unbundled by these two orders through transmission separate of electricity as a “stand-alone service form generation and distribution.” (Mattoon, 2001) Significant was the access to transmission lines opening up and it was hoped by states having electricity that was priced high that developing an active and open “wholesale electric market would serve as a base for moving into retail deregulation.” (Mattoon, 2001) Local distribution companies would have more options over meeting load obligations through the increase of wholesale competition and in the long run “individual consumers would be able to choose their electricity generator.” (Mattoon, 2001);

Order 2000 – The issue pushed by FERC in 1999 was that of opening the transmission grid further through the adoption of this order which encourages states in the formation of ‘Regional Transmission Organizations’ (RTOs) to improve the multistate operations of the transmission grid.” (Mattoon, 2001) The Regional Transmission Organization was formed for the express purpose of serving as a multi-state, independent organization to manage the operation of the transmission grid for particular regions.” (Mattoon, 2001)

There are eight specific functions that the RTO must be capable of the performance of including those as follows:

Responsibility for tariff administration and design;

Congestion management;

Parallel path flow;

Ancillary services;

Total transmission capability and available transmission capability;

Market monitoring;

Planning and expansion; and Inter-regional coordination. (Mattoon, 2001)

FERC’s goals were clarified in 2001 and the argument was stated supporting “formation of as few as four very large RTOs to cover the entire national grid.” (Mattoon, 2001) Restructuring means making the provision of electricity to consumers through what is a “very complex mechanism” both on the technological as well as the regulatory levels. Technologically complex in that providers are required to “match energy supply and highly variable demand by managing different sources of generation that operate at differing levels of efficiency.” (Mattoon, 2001) This includes generation shutdowns and allowing for the scheduled and unscheduled shutdowns. Also considerations are:

changes in fuel prices; seasonal variation; shifting customer base; and daily weather.

Electricity policy is regulated through federal, state and local policymakers and policy is characterizes through a lack in clearly drawn regulator boundaries of jurisdictions resulting in a failure to precisely define or form a standardized definition of electricity restructuring although primarily restructuring has as its focus the “once integrated functions of a traditional regulated utility” or the electricity generating, transmitting and distributing as well as the separation or unbundling of these into “stand-alone services.” Restructuring goals are different depending on whether the consideration is generation, transmission or distributions and Mattoon states as follows:

Transmission goal of restructuring – modernization of the transmission infrastructure to support open access to the grid and the most efficient delivery of bulk electricity on both an intra — and inter-state basis.

Generation – goal of unbundling is to introduce competition; and Distribution – the hope is that unbundling will make it easier to identify the true cost of distributing electricity thereby eliminating hidden costs and cross-subsidies among end-users of electricity. (Mattoon, 2001)

As transmission becomes more efficient the “cheapest power” can be utilized first resulting in a reduction in the overall peak power or back-up capacity needed in the system.” (Mattoon, 2001) The debate over restructure has as its focus the creation of competition for generation through deregulation of the market. Mattoon states that at the “core of the restructuring argument” is “vibrant supply competition.” (2001) Provision of choices which are competitive for generation would enable the system peak load demands to be better managed through optional provision of distribution systems in the event of shortages of electricity. In the case where there is a failure for development of generation competition, the elimination of the regulatory safeguards that are traditions in nature has the potential to result in the exposure of consumers to provision of services by a monopolist and one that is also unregulated.

LITERATURE REVIEW

The work of Doren and Taylor (2004) entitled: “Rethinking Electricity Restructuring” published in the journal of Policy Analysis states that electricity utility restructuring begin in the 1990s and was focused on correcting the problem of “relatively high electricity costs in the Northeast and California.” It was the hope of politicians that “reform would allow low-cost electricity to flow to high cost 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.” (Doren and Taylor, 2004)

However, there has been little relief in high-costs state prices for electricity and restructuring is stated to have “contributed to the severity of the 2000-2001 California electricity crisis…without delivery many efficiency gains.” (Doren and Taylor, 2004) The restructuring has “systemic problems inherent in the reforms themselves” according to Doren and Taylor (2004) who recommend a “total abandonment of restructuring and a more thoroughgoing embrace of markets than contemplated in current restructuring initiatives.” (Doren and Taylor, 2004) Restructuring has created problems that were previously non-existent in the electricity sector. The electricity restructuring resulted in those problems because it:

1) Focused on generation competition and ignored the pricing and incentive issues involved managing the transmission system and its public commons characteristics;

2) Grafted a relatively free wholesale market onto a still heavily regulated retail market; and 3) Established artificial market institutions that invited manipulation and abuse. The end result has proven far from satisfactory.” (Doren and Taylor, 2004)

The work of Gorte, Kaarsberg, and Laitner (2001) entitled: “Electricity Restructuring, Innovation and Efficiency” relates that some sectors “were considered natural monopolies because the economic scale of production is so large that having more than a single supplier would raise costs. Average costs of production fell as size increased over the entire relevant range of production, all the way up to complete market dominance and saturation. Besides strong scale economies, other characteristics of natural monopolies included large initial costs for capital investment, limited ability to store the product, and limited ability to transport the product, generally requiring a transmission network. Yet, recognizing the ability and tendency of monopolies to manipulate prices in order to extract excessive profits from their customers, government agencies created a category of regulated monopolies in several industry sectors. In theory this regulatory approach allowed customers to benefit from the lower-cost technologies available only to the monopolist but to not pay monopoly prices.” (Gorte, Kaarsberg, and Laitner, 2001)

However, it is stated that regardless of the theory “regulated monopolies turned out to be inefficient.” Some industries, such as the airlines and freight companies “were never really a good fit as natural monopolies.” (Gorte, Kaarsberg, and Laitner, 2001) These were held to be “too important to be left to the vicissitudes of competition, which might mean that some customers receive no or inadequate service, or that companies delivering important services could force society to make unpleasant choices in order to keep receiving the service.” (Gorte, Kaarsberg, and Laitner, 2001) The restructuring schemes of electricity have generally resulted in leaving “transmission and distribution substantially untouched…” (Gorte, Kaarsberg, and Laitner, 2001) Deregulation “does reduce costs and prices and increases many measures of productivity’ and these savings are shown in the following table labeled figure 1 in this study.

Table 1. Deregulation Impact on Consumer Prices

Industry Magnitude of Productivity Effect (estimates)

Airlines

15-22% drop in fares overall

Rail and Trucking

20 billion in annual benefits to shippers (lower rates); rail profits increased $2.9 billion annually [1988 dollars]

British Electric Utilities percent drop in prices between 1991 and 1995; profits increased 6 percentage points (30%) in one year (1994 to 1995)

Source: Gorte, Kaarsberg, and Laitner (2001)

The work of Richard Mattoon entitled: “The Electricity System at the Crossroads: Policy Choices and Pitfalls” relates the bad experience of California and how it “clearly demonstrated that the costs of a flawed electricity restructuring policy could be very high.” (2001) Additionally Mattoon relates that the experience of California “had demonstrated early success in restructuring in the states of “…such as Pennsylvania, Connecticut and Massachusetts…” had resulted in those states learning that “sustaining competition and promoting new market entrants was harder than they had anticipated.” (Mattoon, 2001) The conflict that exists, in the words of Mattoon, “…between theory and outcome has left restructuring at a crossroads.” (Mattoon, 2001)

Stated as questions that policymakers must ask are the questions as follows:

1) Is the physical infrastructure in place to support new market entrants and a competitive market?;

2) Are the incentives for investing in new electricity facilities adequate? What can be done to improve these incentives if they are lacking?;

3) Do new institutions need to be developed to facilitate this structure for delivering electricity? Should these be federal, regional, state, or quasi-public institutions? What is the role for existing regulatory institutions?;

4) Should restructuring expose consumers to changes in electricity prices, even when those prices can be volatile?; and 5) What is the relationship between meeting environmental goals and generating greater power supply? Can the two successfully exist? (Mattoon, 2001)

The work of Timothy J. Brennan (2003) entitled: ‘State and Federal Roles in Facilitating Electricity Competition: Legal and Economic Perspectives’ relates the fact that jurisdictions overlap in terms of authority relating to restructuring of electricity and the example stated is for instance “when a national authority and subnational regional government…both have a say.” (Brennan, 2003) Brennan additionally states that the opening up of the electricity markets for competition results in questions needing to be asked that are both ‘familiar and complex’ and include:

Whether to deregulate;

If choosing to deregulate – then which sectors should be deregulated?

When to initiative competition;

How the process should be implemented. (Brennan, 2003)

Further related by Brennan is that the as well as the “…’whether’, ‘what’, ‘when’ and ‘how’ to deregulate is the “less familiar but equally complex issues of ‘who’ gets to answer those questions and for which sectors of the electricity industry.” (2003) The ‘who’ is stated to arise as an issue when overlapping authority exists in jurisdictions and especially when this issue of overlapping authority exists between a national and state government in which both have a say in the restructuring of electricity. This is demonstrated in the manifestation of disputes in relation to the extent to which the state legislatures and regulators overseeing the price and practices of selling electricity is overseen by the federal government and its imposition of priorities.

The primary responsibility for regulation of electricity at the federal level is the FERC’s responsibility and it is related that the “most consequential efforts in electricity restructuring have sprung from its [FERC] authority over interstate transmission facilities.” (Brennan, 2003) FERC followed the mandates of the 1992 Energy Policy Act and “issued ‘open access’ Order 888 which “promoted the wholesale competition by requiring that utilities that own interstate transmission grids make those facilities available on reasonable and nondiscriminatory terms so unaffiliated generators can ship electricity to their customers.” (Brennan, 2003)

The authority of FERC is while “extensive” is limited in that it “cannot design and institute retail competition” because this is to be carried out by the states under U.S. law and specifically the “regulation of the retail rates paid by households, businesses, and industry for power.” (Brennan, 2003) Agencies responsible for this are called ‘public service commissions’ or public utility commissions. The public utility commissions are the agencies which are in charge of regulation of retail rates and policies relating to local telephone service, delivery of natural gas and other various services within the state. In twenty-five states and the District of Columbia there are no active efforts. Brennan states of California that it was “most notoriously, was the first state to institute retail competition and the first to pull the plug on it. Since the California electricity crisis, six states that had been actively restructuring retail markets have delayed their efforts.” (Brennan, 2003)

Brennan states that the relationships between the federal government and states in matters regarding electricity are quite difficult with each level of government generally wanting to “cede authority to the other.” (Brennan, 2003) Stated as a manifestation of this dispute was the recent “subject of litigation that ended up before the Supreme Court…” (Brennan, 2003) The case New York v. Federal Energy Regulatory Commission was a dispute in which the FERC had misused its authority in the issuance of Order 888. FERC made a requirement in Order 888 for utilities to “offer open access to retail electricity transmissions under a nondiscriminatory tariff if the utility bills retail customers separately for transmission. However, if transmission is not unbundled in retail rates, FERC decided that states would retain implicit authority over rates charged at retail for transmission, when they set the overall retail prices for electricity.” (Brennan, 2003)

It was argued by the states that FERC did not have the authority to regulate transmissions rates and require open access at retail under any circumstances.” (Brennan, 2003) It was argued by ENRON that FERC had to regulate the rates “under all circumstances” (FERC chose to regulate only when the transmission rates were unbundled on consumers’ bills.” (Brennan, 2003) The U.S. Supreme Court sided with FERC, holding that “Congress gave FERC the authority to regulate the terms and conditions of transmission without restriction to the wholesale market.” The Court held that “FERC did not deny that it had authority over transmission rates even if bundled, but that it had the authority to defer to the states.” (Brennan,

FERC’s initiatives relating to the RTOs are also being resisted by the states based upon the argument that “joining should not be necessary if a state does not open retail markets. State governments are also concerned about transmission pricing and possible energy price increases if the RTOs wholesale market does not work well. Last and not least, they want to know what roles state PUCs will have in governing these multi-state organizations.” (Brennan, 2003)

Brennan (2003) addresses the context of efficiency in relation to decentralized markets and central planning stating “In many respects, the standard textbook microeconomic descriptions of consumers, producers, supply and demand, and markets do not explain why decentralized markets outperform central planning. Some economists argued in the 1930s that the advantages of marginal cost pricing could inform the task of a socialist economic manager as well as justify relying on a market system.” (Brennan, 2003)

Those who support markets do not do so from the analysis of the theoretical optimal nature of a “competitive equilibrium” but instead from the practical implementation of the systems used for goods production and distribution of services in an economy that is characterized by complexity. Brennan identifies three practices that “stand out” as 1) Information;

2) Incentives; and 3) Agency. (Brennan, 2003)

These are not only helpful in stating the case in support of markets as superior to planning but as well are “instructive in assessing when regulatory authority should be national and when it should be at the state or provincial level.” (Brennan, 2003) Economically speaking the goal of decisions relating to allocation and production are those toward maximization of the differentials between costs and benefits which are “…ultimately…borne by those who consume goods and services and by those who supply the labor and resources used to produce them.” (Brennan, significant “virtue or markets over central planning” is the ability to coordinate decisions which are made by those in the best position to judge the benefits and costs or “those who reap the former and bear the latter.” (Brennan, 2003)

The market is of the nature that allows buyers to make comparison of private information relating to market price benefit and under the condition of a competitive environment the ensuing competition will “correspond to marginal production cost.” (Brennan, 2003) As such private information of the seller can be compared to cost-to-market price information which will enable the equalization of the marginal willingness to pay of consumers for the product.” (Brennan, 2003) This is stated to be true since transactions are mediated by markets enabling all actors to “make choices based on the information they have about costs and benefits.” (Brennan, 2003)

Centralized planning requires that all markets processed information is accurately transmitted for it to receive in order to accomplish the aforesaid task and next required is that the planner must make use of that information in gaining information of supply and demand curves and in the determination of prices and distribution of goods and services “across the economy according to what they would have chosen at those prices.” (Brennan, 2003) Finally, all of these actions must be taken in a timely manner in order that the “goods the central planner delivers at the end of the process correspond to the desires and costs reported at the beginning.” (Brennan, 2003)

Secondly stated by Brennan following information is having the right incentives for benefits to be maximized and for costs to be minimized. One advantage to the market that is decentralized is that the buyers reap the benefits of their purchases and bear the costs insofar as the prices they pay reflect on the marginal cost of supplying the good they purchase.” In this manner the suppliers then in turn, while bearing the production cost also “reap the marginal benefits of what they produce when they sell the products at a price, generally equal to marginal benefit.” (Brennan, 2003) The result “each agent in a market, the buyers and sellers, has not only the information but also the incentive to make efficient decisions, that is, produce and consume up to the point where marginal benefit just equals marginal cost.” (Brennan, 2003)

Brennan writes that in this, the disadvantage to government is relative to that of markets. The example stated is: “Suppose that we could accomplish the staggering task of providing information on tastes and technology to a central planner in a reasonable time. That would not guarantee that the central planner would be inclined to use that information to produce efficient outcomes. The gains from those outcomes go to the individuals in the economy, not the government officials. The reliability of central allocations thus depends on how well the government reflects the preferences of the entire public. Unfortunately, as political scientists and economists have pointed out for decades, the proclivity of government to act on behalf of organized special interests or to benefit the bureaucracy itself suggests that the entire public’s interests will be poorly reflected at best. The case for markets is weaker when sellers or buyers do not bear the full costs of the goods and services they produce or purchase. If markets are not competitive, buyers or sellers will not take market prices as given and thus will not equate them with their private marginal benefits or costs, to produce the efficient outputs…” (Brennan, 2003)

Agency is also stated to be an aspect relating to efficiency insofar as the issue of incentives in whether the institutions “set up on a market economy to make decisions that reflect the preferences of those who instituted them? The presumption is that left to themselves, individuals will create organizations to minimize the effect of market failures relating to potential vulnerability to market power and exploitation, spillover “externality” effects, and asymmetric information, particularly relating to the costs of search. Firms are in many respects substitute mechanisms for allocating goods and services when markets may be too costly to use.” (Brennan, 2003)

Brennan states while government, could from many views be held to be the ‘big’ solution to this agency problem and specifically “when problems of market power, externalities, and asymmetric information justify economy-wide solutions.” (2003) While centralization of the control may well be justified, the government’s sizes means “that the separation of decision making from those who reap the benefits and bear the costs of those decisions is maximized, with predictable consequences for inefficient decisions. Such divergence can also be found in large private institutions, for example, the corporation with a large number of stockholders.55 However, the organization of these firms presumably reflects an efficient balance between the benefits and costs of substituting institutional control for market forces. Ownership and participation in the organization are voluntary, and individuals are free to design, implement, and join institutions that better serve their interests.” (Brennan, 2003)

Brennan also addresses the context of efficiency as it relates to state governance vs. federal authority stating: “The division of public responsibility between states and the national government has received considerable attention by economists. However, much of the attention has been on the effects of different levels of authority on the design of revenue-sharing programs between jurisdictions, as incentive mechanisms to foster more efficient decisions.” (Brennan, 2003)

The assumption stated by Brennan is that the smaller forms of government are “closer to the governed. They are more likely to know better than the national government how their actions affect their constituents.” (2003) When regulatory policies are inclusive of complex economic and technical impacts having local governments reinventing the wheel is likely a wasteful pursuit. As well information is a public good with each state having little in the way of an incentive to develop policies that are good if other states are to benefit from their excellence. The acquisition and use of information that is required in development of policy responses are often not within the realm of the constraints of the budget and central government is actually a more cost-effective way for the analysis to be undertaken and policy design for all when the solution that is best would be applicable nationwide. The analogy in the context of federalism to market failure is “…whether a decision by a state has efficiency effects that cross its boundary.” (Brennan, 2003)

Two primary factors are stated by Brennan as:

1) The first is if the state is able to exercise market power against buyers outside its borders. If so, a national government’s authority may be necessary to protect its constituents at large from those effects. By this criterion, the foremost state action case in U.S. antitrust, Parker v. Brown was decided incorrectly — “national antitrust laws should apply to protect the rest of the country from one state’s monopoly, in this case over raisins.61 This leaves a state free to decide to create monopolies that affect only its constituents; presumably that should be a matter for the states themselves to decide; and 2) A second spillover involves externalities. A typical example would be air pollution generated by factories in one state that wind or river currents deliver into another, with deleterious effects. The upwind or upriver jurisdiction may not consider the interests of others without policies set at the national level. However, although this may justify national regulation, it need not require it. (Brennan, 2003)

Brennan states that the agency is a criterion that plays a “greater role comparing local authority to that of the federal government. Not just one stage but both stages involve inherent limitations on the quality of the connection between consumers and the public entities making decisions on their behalf.” (2003) Stated as the test for ‘whether federal authority should preempt local decisions is: “Did local authorities failed to act in ways reflecting the views of their constituents, and would the national government be likely to do better? This test covers procedural integrity, not substantive outcomes. Federal authority ought not restrict local decision-making, however inefficient the outcome, absent significant effects outside the jurisdiction or impediment to providing the locality with appropriate information, regardless of what the local decision is. The analogy to “markets vs. government” is useful here. The efficiency argument for deferring to individuals is not that they make decisions that are substantively “rational,” for example, eat nutritious meals instead of fast food or read great books rather than watch television. Rather, it is that the criterion speaks only to allowing people to get what they most want, whatever that happens to be, regardless of the reasons (or lack thereof).” (Brennan, 2003)

The following table shows the status of electricity restructuring in the U.S. states in 2003.

Figure 4 Part B

Figure 4 Part C

Figure 4 Part D

Source: Energy Information Administration

Supplemental Direct Access Implementation Activities Report (2002)

Source: Energy Information Administration

The Consumer Federation of American states in the work entitled: “Reconsidering Electricity Restructuring: Do Market Problems Indicate a Short Circuit to a Total Blackout?” states that systematic causes of the failure of restructure electricity markets include the following:

Short-term supply responses are constrained because of the difficulty of storing electricity;

Significant additions to supply still require substantial lead times.

The coordination of an integrated, real-time network has broken down because competition reduces the incentive for market participants to cooperate and makes it difficult for system operators to manage the electricity grid.

Provision of reserve margins is uncertain in a competitive market, since no one has an interest in building excess capacity, suggesting that these markets may remain tight.

Behaviors in the economic and political marketplace make it clear that powerful interests helped to create and are exploiting this vulnerable market structure.

Recent mergers that have increased horizontal concentration of generation and vertical integration between generation and transmission make the industry less competitive.

Utilities cut back on investment in generation and transmission, blaming an uncertain regulatory environment, and simultaneously refused to open their networks to competitors, inhibiting the construction of competitive capacity.

Inadequate transmission capacity and self-interested manipulation of access to the transmission system limits the ability of power to flow.

Utilities resisted allowing consumers to aggregate their demand effectively and undermined the ability of consumers to self-supply by blocking or slowing the deployment of distributed generation capacity.

Pricing behavior indicates the existence of market power.

Bidding behavior indicates an insufficient number of electricity producers to prevent gaming that drives prices to extremely high levels.

Contracting behavior in the face of a lack of information and rigid rules distort price signals. (Cooper, 2000)

There are great difficulties and complications intermingled in the attempt to transform the United States electricity industry from a market that is highly regulated to one that is a market-driven sector. One of the barriers to this transformation is the influence of various interest groups and their view concerning the electricity industry future direction. The work of Christopher R. Knittel entitled: “The Adoption of State Electricity Regulation: The Role of Interest Groups” published in the Journal of Industrial Economics (2006) states that municipal regulation of electric utilities were being replaced by states as early as 1907. Knittel relates the argument of Priest (1993) that “contracting problems inherent with municipal regulation may have been an impetus for state regulation.” (Knittel, 2006)

Contracting problems were exist in municipal regulation and this is evidenced by the technological advances during that time period increasing the transmission capabilities of electricity networks effectively increasing the “minimum efficient scale of the industry, as fewer generators were needed to serve a given jurisdiction and a single plant could service multiple cities.” (Knittel, 2006) The second source of contracting inefficiency is stated to have been corruption in the municipal regulator resulting in the curtailing of investments in generation assets “out of fear that regulators would not allow the firms to recuperate the investment costs and the uncertainty associated with generation investments.” (Knittel, 2006) Additionally altering the incentives of some interest groups were the inefficient levels of generation.

Knittel states: “The probability of adopting state regulation is greater in states with capacity shortages combined with high levels of value added, a measure correlated with industrial presence; this result suggests that when capacity shortages were present, industrial consumers lobbied for state regulation. ” (Knittel, 2006) Another interest group that had potentially much to gain from the reduction of contracting inefficiencies was the input providers.

The study reported by Knittel (2006) states the following testable implications:

Testable Implication One – If the interest group theory is correct and industrial consumers stood to gain (lose) from state regulation, state regulation adoption is more (less) likely in states with a strong manufacturing presence;

Testable Implication 2: If the interest group theory is correct and residential consumers stood to gain (lose) from state regulation, state regulation adoption is more (less) likely in states with greater wealth;

Testable Implication 3: If the contracting theory drove state regulation, state regulation adoption is more likely in states with large capacity shortages, representing regulatory inefficiencies;

Testable Implication 4: If both the interest group and contracting theories of regulation are correct, then in states with inefficient levels of capacity, a strong coal mining and industrial consumer presence will increase the likelihood of state regulation adoption;

Testable Implication 5: If the ‘pure’ public interest theory is correct, state regulation adoption is more likely when we observe high prices and profit levels.

Testable Implication 6: If the capture theory is correct, when we observe low prices and profit levels the adoption of state regulation is more likely. (Knittel, 2006)

Knittle (2006) states that his analysis implies “that stronger residential interests are associated with an increase in the probability of adopting state regulation. Furthermore, stronger industrial and coal mining interests coupled with capacity shortages are correlated the adoption of state regulation. These results suggest that residents expected to gain from state regulation, while industrial consumers and coal mining interests expected to gain when capacity levels were inefficiently low, that is, municipal regulation was sufficiently inefficient.”

The work of Ardoin and Grady entitled: “The Politics of Electricity Restructuring Across the American States: Power Failure and Policy Failure” states that How a state handles its electricity policy is inextricably linked with its economic development prospects and environmental quality.” (Ardoin and Grady, 2006) Identified as factors that affect deregulation include price disparities leading to a demand for change led to action “from numerous political drivers, specifically interest groups and other institutional forces.” (Ardoin and Grady, 2006) In fact, disparity in the pricing of electricity and the implications for consumers are noted in many scholarly works as being the “driving forces behind deregulation.” (Ardoin and Grady, 2006)

Kilowatt hour prices are also stated to have been a driver of deregulation of the electricity industry. Electricity rates vary considerably across the states; therefore, as the actual overall rates increase, the likelihood of a state deregulating increases.” (Ardoin and Grady

Additionally stated is that the public utility commissions (PUCs) play a critical role in the decision of a state to adopt electricity deregulation.” (Ardoin and Grady, 2006) According to Ardoin and Grady state legislatures are pressured “by a range of interest groups to adopt or reject electricity deregulation.” It is very difficult to make a determination of the specific pressures placed by interest groups on the issue of energy deregulation in a particular state there are two “proxies for measuring this concept’ proposed in the study reported by Ardoin and Grady (2006) and the first of which is a measure that replicates the analyses conducted in the work of Ka and Teske (2002) in using as a proxy for industrial interest group influence the workforce employed in the manufacturing divided by the total state workforce.” (Ardoin and Grady, 2006)

The second proxy described as unique for the influence and interest of the electric industry on deregulation in each state is the ‘actual number of major electric power companies is measured.” (Ardoin and Grady,

The theory stated by Ardoin and Grady is that “the greater the number of major power companies there are in a state, the more potential competition there is within that state. Thus, there is a greater likelihood that deregulation of the electric industry will be favored.” (Ardoin and Grady, 2006) Findings in the study of Ardoin and Grady include the ‘cumulative electricity deregulation between 1996 and 2001 as shown in the following chart.

Cumulative Electricity Deregulation (1996-2001)

Source: Ardoin and Grady (2006)

Stated in the findings of Ardoin and Grady is the fact that among the four factors that are statistically significant in the model of electricity restructuring, price per kilowatt-hour is most significant.” (2006) In fact, the hypothesis of Ardoin and Grady stated states pay higher prices per kilowatt-hour are more likely to restructure than those with relatively low prices.” (Ardoin and Grady, 2006) The following table is a list of events historically in the model of electricity Deregulation (1996-2001)

Event History Model of Electricity Deregulation (1996-2001)

Source: Ardoin and Grady (2006)

Ardoin and Grady (2006) conclude by stating as follows: “The statistically significant findings regarding energy prices were not unexpected. States in which constituents pay the highest energy prices are the states that are most likely to examine and ultimately adopt policy innovations. Legislatures in states in which consumers enjoy relatively low energy prices have fewer incentives to look for alternatives to their current energy policies, whereas states with high energy costs have greater reason to search for alternatives. The analysis also revealed that states that have professionalized legislatures and that are under Republican control were most likely to adopt electricity restructuring. This finding supports the hypothesis that Republican-controlled governments are more likely to adopt policies that lead to deregulation and smaller government and also support key business constituencies.” (Ardoin and Grady, 2006)

The work of Robert J. Michaels entitled: “National Renewable Portfolio Standard” states the fact that concerns relating to “emissions and climate change has led over half of the states to enact “renewable portfolio standard” (RPS) legislation requiring regulated electric utilities to obtain some fraction of their power requirements from sources defined as “renewable.” Legislation to institute a federal RPS may follow. In reality, RPS is a policy in search of a rationale, at odds with principles of efficient environmental regulation and poorly suited to promote other policies favored by its supporters. The actual record of state implementations has been largely symbolic. Very few states with binding RPS requirements are currently in compliance with their own programs, and a federal RPS will be subject to the same forces that have led to state-level failure. The recent history of renewables leads to a conclusion that existing and proposed mandates are better viewed as special interest legislation than as rational responses to climate change and fossil-fuel power plant emissions.” (2008) A national RPS is stated to be “ill-suited for the tasks related to renewable sources” which are “fast becoming a multipurpose remedy that will alleviate energy scarcities, abate air pollution and mitigate climate change.” (Michaels, 2008) Renewables include:

1) Burning Biomass – creates high-pressure steam that turns a turbogenerator. Biomass includes waste from crops (stalks) and forests (bark and chips), and some states allow incinerated solid waste to qualify for RPS compliance. Advocates argue that it leaves no carbon “footprint” because replanted crops absorb roughly the amount of carbon produced by burning them.

2) Wind Turbines face oncoming winds and contain transmission assemblies that allow them to turn turbines.

3) Geothermal power uses underground heat sources, generally volcanic, to produce steam that turns a turbine.

4) Solar Power includes Photovoltaic energy created when sunlight strikes a chemically active surface, and Thermal energy from heat. The latter can be “active,” with mirrors that concentrate sunlight to boil water, or “passive,” in which direct sunlight heats water. (Michaels, 2008)

Michaels (2008) relates the report of Barry Rabe for the Pew Center on Global Climate Change who views the experiences of states favorably because RPSs have “clearly played a central role in fostering rapid and significant expansion of the amount of renewable energy provided in a state.” Rabe states the following facts for the states which are listed as follows:

1) Texas is the only state in full compliance with an RPS that has required substantial generation investment. In early 2007 it met its 2009 quota of 2,000 new renewable megawatts in territories that were open to retail competition. All utilities and competitive retailers are required to obtain a percentage of their supplies from renewables or obtain credits for them. Nearly all of the added capacity is wind. The RPS has since been extended to 5,000 MW of renewables by 2015 and a nonbinding goal of 10,000 by 2025, at least 500 of which are to be non-wind. Texas has built its required renewables, but the Pew Report does not examine their actual contributions to power supply and reliability discussed above.

2) Massachusetts required that 1% of all delivered power per year be from renewables between 1998 and 2002, after which the amount was to rise by 0.5% per year through 2009. Wind was expected to dominate compliance investments, but rural residents, environmentalists, and elected officials have successfully stopped or delayed most construction. Utilities used banked credits from 2002 to achieve compliance in 2003, fell 32.6% short in 2004, and 37.4% in 2005. They failed to comply despite a required payment to the state, currently $55.13 for each deficit MWh/01

3) The Pew report asserts that Nevada could become the “next Texas,” thanks to its geothermal capabilities and empty, windy deserts.102 Its RPS requires annual progress to 20% by 2015, with 5% of renewables solar at that date.103 Nevada’s utilities have signed contracts with renewables providers that nominally put the two of them taken together into compliance with its RPS.104 Nevada Power met its 2006 requirement by purchasing 1.02 million kwh of credits from Sierra Pacific Power. As opposed to quantities under contract, the actual outputs of renewables are well below the utilities’ quotas, currently 9%. Both are also in deficit on their solar quotas.

4) Pennsylvania enacted a two-tiered “Alternative Energy Portfolio Standard” in 2005. The first tier consists of nonhydro renewables and includes an 0.5% solar setaside. The second includes incinerated trash and waste coal. Tier 1 facilities are to generate 8% of the state’s power by 2021, and Tier 2-10%.106 Utilities are exempt from its provisions during their authorized periods for recovery of transition costs incurred in connection with restructuring. The alternative energy requirement began to run for three of them on Feb. 28, 2007, and the rest will begin on or before Jan. 1, 20II. As of this writing, no data on compliance are publicly available.

5) Colorado in 2004 became the first state to bypass its legislature and enact a 10% 2015 RPS (including a 4% solar setaside) by referendum.108 In 2007 its legislature increased the requirement to 20% by 2020, with a 4% solar setaside. Unlike most other RPS states, its municipal and cooperative utilities must also comply, but at a lower level than investor-owned systems. Statewide compliance data are not currently available. (Michaels, 2008)

In a 2002 report of the Government Accountability Oversight entitled: “Transition to Competitive Markets Underway but Full Benefits will Take Time and Effort To Achieve’ states that four lessons have been identified which “will limit competition, unless addressed and diminish the ability of electricity restructuring efforts to achieve their full expected benefits.” Those four lessons are stated as follow:

Different rules apply to the various regional electricity markets;

The Federal Energy Regulatory Commission has limited jurisdiction in wholesale markets;

Wholesale and retail electricity markets have developed separately; and Generation and transmission siting decisions are subject to federal, state, and local government jurisdiction. (GAO, 2002)

Stated as a fifth lesson is the “need for better monitoring of market performance to determine how well restructured markets are functioning and the extent to which these markets provide consumer benefits.” (GAO, 2002)

The work entitled: “Wholesale Competition in the U.S. Electric Power Industry Fact Sheet” states that over the past twenty years the Federal Energy Regulatory Commission (FERC) has encouraged competitive market development for wholesale power trading. The following facts are stated in this report: (1) Non-utility generation capacity in the U.S. markets has increased substantially; (2) The Public Utility Regulatory Polices Act of 1978 demonstrated that the generation of electricity is not a natural monopoly by fostering the growth in nonutility generators and independent power producers; (3) With the introduction of competition, wholesale power trading has increased markedly; and (4) With the growth in power marketing companies, the volume of power trades has increased significantly in recent years. (nd) The reports states the following as ‘share of U.S. Generation Capacity, 1991 and 1999.

Share of U.S. Generation Capacity, 1991 and 1999

The following chart shows the status of the electricity industry restructuring as of February 2003.

ANALYSIS OF FINDINGS

The present is likely not the most opportune time to go forward with electricity industry restructuring and this is particularly true at the state level. Long-term benefits noted as having resulted from electricity industry restructuring include:

1) Investments in new, more efficient power plants;

2) The proliferation of risk-management mechanisms;

3) The introduction of new demand management and energy efficiency services; and 4) Continuing innovations on both the supply and demand sides.

Deregulation has occurred across the U.S. states in a fashion that is not equal and that has resulted in disparities in electricity service kilowatt-hour pricing, which has been found in this study to be the ‘key’ element that indicates whether a utilities company will restructure or whether they will not restructure. More knowledge and understanding is needed about institutional arrangements and incentives that will produce efficient and socially desirable outcomes. These institutions pertain to independent transmission providers, regulatory mechanism to control and oversee utility markets, and open retail access for small consumers.

Because of the current state of affairs in the economy and the skeptical view of corporations, markets and electricity industry restructuring it is likely that any political or regulatory action at the present would likely be inclusive of safeguards and other types of governmental intervention that would result in more harm than good. It is argued by those who support national electricity policy that restructuring of the electricity industry might provide a direction and vision of the type of industry liberalization which should take place. Alternatively, a national policy on electricity might have little to offer in the way to hope for improvement of matters.

Clearly, the information reviewed in this study has shown that a national policy on electricity would most assuredly be inclusive of subsidies and other favors to special interests groups as well as likely leading to price distortion and due to the skeptical view of electricity markets be stamped with mistrust not only of markets but of central planning tenets as well. Those who support a national policy do so upon the assumption that the federal government is benign in promoting the principles of a free market. It is likely that a national policy would result in failing to serve the long-term interests of the consumers because a national electricity policy is likely, at this time to require a large amount of governmental presence that would simply create the identical problems that have been experienced with traditional regulation and those being poor incentives for controlling costs and innovations, distorted price signals and other policies that compromise economic efficiency.

It is important in this analysis to consider the work of Fox-Penner, et al. which states that While much of the nation’s power infrastructure is aging, the industry must keep up with the need for more capacity, increased reliability and power quality, and lower environmental impacts. Thus, the industry must invest in a new generation of power plants, environmental controls, and transmission lines to reduce the impact of high fuel prices and increased reliance on gas-fired generation.” (Fox-Penner, 2008)

The new investment proposed by Fox-Penner will ensure reliability as well as bring about diversity in the fuel mix increasing environmental performance however, “with added costs.” (Fox-Penner, 2008) The recovery of rate cost increases will be a determination of the financial condition of the industry and the industry’s ability to “make the next generation of investments in a timely manner.” (Fox-Penner, 2008) Should the industry handle rate treatment effectively it will be able to provide reliable services at costs that are reasonable.

Recent increases in electricity prices industry-wide are stated to account for approximately 95% of increases “in total operations and maintenance costs experienced by electric utilities in the last five years.” (Fox-Penner, 2008) While the price of natural gas has historically been a little higher and more volatile than coal, in the past few years the prices of natural gas high increased and since 2003 the price of natural gas has increased in excess of 100% and in excess of 300% since 1999. Coal represents more than fifty percent of all net generation in the country; and electric utilities utilize ninety-two percent of all coal consumed.

Spot prices are stated to have risen in “every major geographic region of coal production.” In the Powder River Basic prices have risen from $5.00 per short ton in March 2003 to approximately $15.00 per short ton in March 2006. Natural gas prices are far too uncertain and coal prices have risen dramatically. It is like that the gap between movements of spot prices and the deliverable prices to generate electricity will result in price escalation as the higher cost of coal is reflected in the new contracts. The forecasts of delivered coal prices as stated in the work of Fox-Penner et al. are shown in the following chart.

Forecasts of Delivered Coal Prices

Source: Fox-Penner et al. (2008)

Allowing spot prices to move parallel to natural forces of the market will likely not be desirable due to price volatility and as well may not be politically feasible. It is likely that regulators will desire to protect the consumer from price fluctuations which could be achieved through the position of price caps on the retail level however, this process contains potentiality for distortion of market outcomes and as well the potential for creating a jeopardy for efficiency gains and long-run consumer benefits.

The reality is quite simple: a bottom-up approach is the only feasible or promising method of accomplishing the goals of deregulation which result in a benefit and return to the customers or users of the electricity services. There is however a unique challenge existing in the United States in terms of how to precisely create institutions and incentives for the purpose of stimulation of adequate investments in transmission and serious reservations exist

CONCLUSION

It is clear from the material reviewed in this study that at this point there is no feasibility to turning back from restructuring but instead it is critical that the electricity industry move forward because the underlying premise for restructuring is just as if not more valid that it was when first conceived. Restructuring that has been successful has been characterized by a bottom-up rather than top-down approach and has concerned itself with the benefits that consumers receive for the services for which they pay. The forces which move in the electricity industry against a more competitive market are strong indeed however, historically deregulation has been effective and efficient as well as beneficial for the consumers and society at-large.

Of course, the removal of all political factors that influence the industry is not a reasonable nor realistic goal. The acknowledgement of this fact, is critical in avoiding a transitional period characterized by disaster placing the restructuring effort at jeopardy. There has not yet been a resolution by analysts insofar as making identification of the institutional policy processes that would make provision of the proper incentives for expansion of the capacity of transmission and achievement of low transaction costs while creating efficient risk allocations among market players. In the rush to restructure it is very possible that policymakers, politicians and regulators are taking too much of a change and that restructuring should instead be a gradual and evolving process developing substance to the changes in the restructuring process to sustain the changes and the integrity of the electricity utilities industry.

Bibliography

Ardoin, P.J. And Grady, Dennis (2006) The Politics of Electricity Restructuring across the American States: Power Failure and Policy Failure. State and Local Government Review. Vol. 38. No. 3 (2006.

Ardoin, Phillip J. And Grady, Dennis (2006) The Politics of Electricity Restructuring across the American States: Power Failure and Policy Failure. State and Local Government Review. Vol. 38, No. 3, 2006.

Brennan, Timothy J. (2003) State and Federal Roles in Facilitating Electricity Competition: Legal and Economic Perspectives. 2003 April, Discussion Paper 03-24 Resources for the Future.

Cooper, Mark, N. (2000) Reconsidering Electricity Restructuring: A Short Circuit Or A Total Blackout. Consumer Federation of America 30 Nov 2000. Online available at http://www.consumersunion.org/telecom/deregdc1100.htm

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Michaels, Robert J. (2008) National Renewable Portfolio Standard 17 May 2008, 06:00 CDT

Michaels, Robert J. (nd) Market Monitoring Organizations in Electricity: What We Can Learn From the Economies of Regulation. Fullerton University Economics. Online available at http://business.fullerton.edu/Economics/rmichaels/workingPapers/030514%20Michaels%20.pdf

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Electricity Restructuring