Generation

Castle Gate Power Plant near Helper, Utah operated by PacifiCorp.

Transmission

Distribution

THE

ELECTRIC POWER

INDUSTRY

from regulation…

…to competition

Destructuring

…not what we had expected or hoped for.

Wholesalers Wholesalers exploiting market exploiting market

power?power?

REGULATION – REGULATION – TRANSITIONTRANSITION – – COMPETITIONCOMPETITION

1. Regulation versus Antitrust and Vertical Integration/Price-Squeezing

2. Competition Policy

Two Forms of Public InterventionTwo Forms of Public Intervention

Economic RegulationEconomic Regulation-prophylactic-prophylactic

Antitrust OversightAntitrust Oversight

-reactive/post-hoc-reactive/post-hoc

- Lighter and less - Lighter and less frequentfrequent

After the restructuring/deregulation, it is expected that antitrust enforcement will replace economic regulation…

…but there is a transition period.

The Culture of the The Culture of the MarketMarket

Regulated Industry

Monopolistic;

Incentives relate to:

assuring reliability and fair prices (to consumers)

promising predictability and normal returns (to shareholders)

Competitive Industry

Entrepreneurial;

Incentives relate to:

low prices, product line diversification (to consumers)

cost minimization, profit maximization (to shareholders)

Culture of the EnforcerCulture of the Enforcer

RegulatorsRegulatorsPaternalisticPaternalisticConcerned with:Concerned with: Public interest mandatePublic interest mandate ReliabilityReliability Striking balance btwn lower-Striking balance btwn lower-

than-monopoly prices and than-monopoly prices and returns sufficient to attract returns sufficient to attract capitalcapital

Antitrust EnforcersAntitrust EnforcersAlso paternalistic? Also paternalistic? Concerned with:Concerned with: Maintaining process of Maintaining process of

competitioncompetition Market structure, Market structure, firm conduct (pricing and output firm conduct (pricing and output

decisions), and decisions), and market performancemarket performance

The FPA and AntitrustThe FPA and Antitrust

The FPA conditions the issuance of a license by the The FPA conditions the issuance of a license by the Commission on the absolute prohibition of Commission on the absolute prohibition of “combinations, agreements, arrangements, or “combinations, agreements, arrangements, or understandings, express or implied, to understandings, express or implied, to limitlimit thethe outputoutput of electric energy, to of electric energy, to restrainrestrain tradetrade or to or to fix, maintain orfix, maintain or increaseincrease pricesprices for electrical for electrical energy or service.” 16 USC § 803(h)energy or service.” 16 USC § 803(h)

……but, given the pervasiveness of FERC, maybe it is but, given the pervasiveness of FERC, maybe it is not yet time:not yet time:““public utilities should be subject to the antitrustpublic utilities should be subject to the antitrust laws in inverse proportion to the degree of control laws in inverse proportion to the degree of control exercised by regulatory agencies.” exercised by regulatory agencies.” Hale & Hale, Competition or Control V: Production & Hale & Hale, Competition or Control V: Production & Distribution of Electric Energy, 110 U Pat Rev 57 (1961)Distribution of Electric Energy, 110 U Pat Rev 57 (1961)

Antitrust Cause of ActionAntitrust Cause of Action

A commonly recognized cause of action against A commonly recognized cause of action against vertically integrated electricity companies: vertically integrated electricity companies:

Price Squeezing

Proponents of Vertical Integration…

…in some cases at least.

Mansurdistinguishes:vertically integrated firms – no incentive to

price highandlarge net sellers – do have the incentive

MichaelsIt’s complex – need to find the most

economically efficient balance between integration and competition.

David Spence and Politics versus Economics

The markets need new entrants to help keep prices down, but…

prospective entrants need to know they will make their money back.

Politicians and regulators let prospective entrants know they are more willing to instead protect the consumers from high prices, so…

Ironic result: less Ironic result: less actors actors less less competition competition higher priceshigher prices

Policies Proposed by SpencePolicies Proposed by Spence

1. 1. Let energy prices be reflected by the forces Let energy prices be reflected by the forces of supply and demand - let the price signal of supply and demand - let the price signal work to attract new entrants into the work to attract new entrants into the market.market.

2. 2. Regional transmission planning - broaden Regional transmission planning - broaden the geographical scope of energy planningthe geographical scope of energy planning

3. 3. Enhance demand response Enhance demand response

Diana Moss and the New Era:

low-carbon, efficient production and usage

Old objectives versus new objectives/constraints

Competition Policy challenges during transition to the “new era:”

1. Demand Response Technologies – Market Access2. Transmission Planning

a. requirements for information exchange-facilitates market entry, so good competition

policy.-but potential to facilitate collusion, so be

careful.b. vertically-integrated transmission owners’

influence over approving or rejecting proposed projects that would relieve transmission constraints

-potential to exercise market power

What we have not talked about:What we have not talked about:RELIABILITYRELIABILITY

Reliability means Regulation.Reliability means Regulation.

There’s a fork in the road:

Reliability?

or Competition?