Lave CEIC 2-5-07 1

Assessing Restructured Electricity MarketsAn APPA Symposium

Lester B. Lave

Carnegie Mellon Electricity Industry Center

February 5, 2007

Lave CEIC 2-5-07 2

Accomplishments of RORR

• Minimized risk to investors => rapid expansion of electrical system after 1910

• Incentives for reliability & customer service

• Universal service

• Help other utilities

National Academy of Engineering: Electricity system greatest engineering accomplishment of 20th century

Lave CEIC 2-5-07 3

Problems with RORR• Over-investment – gold plating

• PUC Red Tape

• PUC knowledge of Business & technology

• Focus on Efficiency or Equity or Politics?

• Revolving door for commissioners

• Punish risk-taking; little R&D

• Hiring risk averse managers & engineers

Lave CEIC 2-5-07 4

Goals for Deregulation

Lower Price now & in future through competition

• Customer choice

• Shift risks to investors

• Improve operations

• Speed innovation

• Lessen regulation & give managers the same freedom as unregulated companies

Lave CEIC 2-5-07 5

Consequences of Deregulation

• Price levels & cross-subsidization

• Incentives for market manipulation

• Investment incentives: generation & transmission

• Industry Profits (adjust for risk & fuel price)

• Utilities enter other businesses (foreign utilities, water companies, telecommunications…)

Lave CEIC 2-5-07 6

Today is the First Day of the Rest of Your Life

• PJM ad hoc adjustments: market monitor, capacity market, mitigation payments …

More radical change? What else comes with new legislation & rulemaking?

• Re-regulation?• Redesign of competitive market?

– Eliminate hourly market?– Real time pricing for large customers– Fuel-Technology portfolio balancing

Lave CEIC 2-5-07 7

Redesign Competitive Market?

• Eliminate incentive to manipulate market

• Have retail price reflect wholesale price

• Investment incentives for generation

• Balance Fuel-Technology portfolio (risks)

• RTO controls transmission (investment)

• Incentives for locating generation & load

Lave CEIC 2-5-07 8

Success of Deregulation?

• Lowering Price: (absolute or relative to RORR utilities?)

• Customer choice (large & small customers)• Improving operations• Shifting risks to investors• Incentives to invest• Profits to companies• Lower regulation more manager choice• Speeding innovation