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Electric Restructuring: An Urgent Proposal

Fortnightly Magazine - November 1 1995

in new roles.

Essentials of a Restructured Industry

Capturing the benefits of the new generating and communications technologies will obviously require structural change. These technologies will produce an industry driven by customer choice on the demand side and by competitive pressures on the supply side. Competition is required in the production and marketing of power. Transmission and distribution, the transportation link between generators and marketers, will remain regulated and include dispatch, coordination, and reliability services.

Generators will produce a commodity that is essentially sold in an open competitive market. Marketers will purchase power in this market and compete with each other in selling the power to end users under various terms and conditions. Utilities will provide transmission and distribution services on a common-carrier basis, and the fees they charge will be regulated.

Marketing. The marketing function in the electric power industry is archaic. Customers have virtually no role in determining the type, quality, and price of the electric services they buy. Instead, the utility and the regulator decide through an administrative process that makes little provision for customer input. No mechanism exists to test customer preferences in the tradeoff between price and quality. Customers are disenfranchised.

Competition in marketing will grow through the presence of numerous power marketers that have the ability to piece together various kinds of services. Entry must be made as easy as possible, and marketers must be rewarded for providing service-price combinations that customers consider superior. This step will be achieved by unbundling all services: metering, billing, and ancillary services. This will enable power marketers to combine as many of these services as they desire with the services they produce themselves to produce the product they offer customers.

Much of the benefit will likely occur in metering, where advances in communications technology come into play. Two-way, real-time communications will enable customers to express their preferences and direct product development and pricing. The potential benefits in terms of customer satisfaction and economic efficiency are enormous. For instance, a metering service may arrange to curtail power on certain uses that the customer specifies when the time-of-day prices rise above a certain threshold. Services like this could shrink peak demand, thus lowering rates.

Generation. The ability to generate electric power efficiently with plants that supply only a small portion of a local market suggests that the power generation business can support workable competition. But effective competition requires a number of conditions that do not exist now. First, enough generating companies must enter the market so that none exerts undue market power. The creation of a market that is geographically as large as possible could encourage an adequate number of market participants. Liquidity and price transparency must also exist. Until these conditions arrive, regulation must prevent the abuse of market power, and provide a favorable environment for competitive conditions to develop.

Effective competition also needs market mechanisms that promote vigorous activity in spot transactions as well as longer-term contracts. Simple evolution could fulfill this requirement; or the market can sponsor a pool. Either path would hopefully lead to the same final result: