Retail Electricity: Has Deregulation Flopped?

Robert J. Michaels

California State University, Fullerton

Energy Bar Association

Mid-Year Meeting

Washington, D.C.

November 17, 2000

A flop by nature or design?

• Success of deregulation in gas, telecom, rail freight, etc.

• There, regulators did not impose markets and call it deregulation

• Electricity: success inversely related to degree of a state’s “revolution”– Impetus for change was success of bilaterals– Some utilities [PG&E] and regulators [ERCOT]

wanted expansion to end-users

The “Market Monitor” Paradigm

• Wolak (Cal ISO): Market an alternative regulatory tool, must itself be regulated

• No other deregulation rationalized this way

• Justifies imposed markets, discontinuity– Building efficiency in or letting it evolve?– Naively abstracts from political interests

• A textbook standard of efficiency– Are economists gullible?

One big short-term energy market: The PoolCo ideal

• Regulators can make usual price / expense comparisons to find abuses

• Rationalized by nature of electricity [?]• Maximum scope for FERC to pressure states on

competition • Utilities retail monopoly, customer “access” to

energy price• No real market functions like this • Maintains state regulatory redistributions

The small consumer, object of our affections

• Important stakeholders advanced own interests claiming concern for small users

• Rationalizes “benefits” like rate freeze– Contradiction between value of wholesale

price signals and logic of freeze– And small consumers can’t be metered – Would small consumers really be excluded

from bilateral benefits?

Strategy and market design

• Primacy of stranding recovery

• Maintenance of utility customer shares– As long-term strategy for diversification– As managerial imperative– Defense against distributed power

• Costs of participating in the “collaborative”

Be careful what you want…

• San Diego G&E got everything it said it wanted at the outset– Stranding recovery– A centralized PX that looked a lot like

PoolCo– End of its generation responsibilities– Dominant retail share at end of transition

California: Worse before it gets better?

• Wholesale passthrough v. a range of contracts

• Transitional rate freeze and stranding “headroom” inhibit competitor entry

• Two basic problems: supply and demand

• How about political risk insurance?– That’s what old-time regulation was

Pennsylvania and Texas

• Both have relatively “price-to-beat” – Kahn: Bribing customers isn’t competition

• PJM markets pre-existing, expansion of bilaterals

• ERCOT is not “designing” a market, just extending access to bilaterals

• If ERCOT turns out better, is it because or in spite of FERC’s absence?

Abandoning or reforming?

• Remember the world we wanted to leave?

• How possible to get back to utility rate-based generation?– Long-term contracts? – Export restrictions?

• Antibypass rates in abundance

Retail choice won’t go away

• Too many states• New competitive actors learning politics

– Too many of them to allow resumption of utility dominance

• Blurring of wholesale / retail distinctions• FERC / state boundaries

– Retail markets in the Constellation merger – Competition among states by example

Two overused metaphors: the Genie and the Devil

• “The genie is out of the bottle”– 1994 - 98: “and can’t be put back in”– 1998 - 99: “and must be taught to behave”– 2000: “and has to go back in”

• “The devil is in the details”– What case for politically influenced micro-

design?– Who planned details of all the other markets?