THE PRICING TURMOIL THAT STRUCK MIDWEST POWER markets during the week of June 22, with allegations of price gouging and calls for a wholesale price cap imposed by the Federal Energy Regulatory...
More than a decade ago, at the 1981 Edison Electric Institute (EEI) Fall Financial Conference in Palm Beach, FL, I presented my vision of the future of the electric industry. I called my talk "Let's End the Monopoly." In it I urged, "Let's open electricity generation to competition (em with free entry, no franchises, and no obligation to serve." The response was underwhelming.
From the perspective of the last 14 years, how have my forecasts turned out? As with most predictions of the future, the answer is mixed: Some forecasts proved right, some went wrong, and some are yet to be verified.
"Right" on Generation
In the "right" category, free-market competition at the generation level has become a reality for new generation in the United States and for all generation in much of the rest of the world. And the first wave of distribution companies are now shopping around among competitive suppliers. Ironically, the first wave consists of municipals and cooperatives (em not spinoffs from integrated electric utilities. But I still believe that will come soon.
I envisioned regional transmission systems back in 1981. While I still believe that RTGs (regional transmission groups) are the first step, regional transmission probably belongs in the "yet to be determined" category. But back then, my focus on regional transmission was driven by three factors:
s the economics inherent in wide-scale dispatch
s concern over the maximum manageable size of the dispatch system
s a desire for open access through "postage stamp" rates within the region.
Today, those factors still exist, but concern has also sprung up over fair and efficient pricing of transmission services.
The problems of "loop flows" and transmission bottlenecks have moved to the forefront. Solutions (em such as Virginia Power's "Impacted Megawatt-Mile" pricing (em
correctly focus on actual, rather than contractual, paths. But these solutions become immensely complicated when applied to the entire Eastern Interconnection. Similarly, true open access may be feasible within a region, but impossible over larger areas.
On the other hand, concerns about average cost, embedded cost, marginal cost, and monopoly exploitation would be largely moot if the regional transmission owner and operator were owned by the region's regulated distribution companies.
Much closer to the mark (em but with the jury still out (em was my prediction of the spinoff of generating assets to compete in the free market. Many companies, including Virginia Power and Western Resources, have made the first step in forming separate business units for generating assets.
"Wrong" on Markets
In the "wrong" category, my forecast missed the true nature of power marketing or brokering. I predicted that the regional transmission operators would also operate as market makers. Instead, we have Enron and Duke-Dreyfus and LG&E matching up buyers and sellers. The futures market for power contracts that I envisioned has not developed (em yet.
Perhaps my biggest miss involved the operation of the spot market. I envisaged distribution companies buying a portfolio of long-term contracts. But the regional operators would dispatch based on marginal cost. The difference (em almost always positive (em would represent a