[BETA] Fortnightly

Some benefits promised by deregulation seem uncertain, but the industry is ripe with new ways of doing things.

The past year was a tumultuous one for electricity markets . The march of retail competition continued to move forward. Most notably, San Diego residents were the first customers in the United States to be granted the freedom to choose their electricity supplier without the backstop of price caps, frozen rates, or standard offer service at guaranteed prices. The timing of San Diego's first foray into retail competition without retail price caps could not have been worse. Customers were subjected to the volatility of wholesale markets just as gas prices doubled, NO _x allowance prices more than quadrupled, and a tight supply/demand balance of generating capacity caused prices to spike. San Diego customers had expected to benefit from price reductions when their price cap and transition cost collection period ended. Instead, the bill of an average residential customer in San Diego rose from $55 per month to $150 per month.

Despite this retail-level deregulation debacle, it is important to note that deregulation at the wholesale level has achieved the intended consequence of increasing innovation in the supply of power. There are numerous examples.

One example is innovation in methods of running existing power plants. As assets have moved out of the regulated rate base, early evidence suggests that new profit-motivated owners have found ways to reduce the operating cost of generating facilities while improving reliability. For instance, PG&E Generating reduced staffing at its New England assets from 927 people in 1996, when they acquired the assets, to 571 people in 1999. At the same time, it has maintained an average availability factor of 90 percent-far above the industry average for similar assets.

A second example of innovation is in the actual deployment of generating assets. For instance, Williams Energy has developed a fleet of power plants on trucks that can chase market peaks around the country. In one instance, Williams was able to install a 35-megawatt gas turbine complex in only 11 days. When power prices drop in the region where the plant is located, they likely will disassemble the plant and move it to another region of the country where it can generate higher profits. Such employment of capital ultimately will benefit consumers as mobile capacity could be used to respond to changes in weather conditions and provide additional reliability without having to increase reserve margins.

In one final example of innovation, power plant developers, financiers, and marketers have pooled to introduce tolling contracts. In a tolling contract, a marketer "purchases" the right to supply all of the gas, and market all of the electricity output from a plant. The fee paid by the marketer to the developer allows the developer to finance the project using significant amounts of debt. This innovative concept has allowed capital-limited developers to focus on what they do best-building new power plants. In return, a marketer is able to gain control of physical assets without having to develop competencies in power plant development and operation. In the wake