Perspective

Fortnightly Magazine - November 15 2002
This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.

FERC's Standard Market Design: Too Detailed To Evolve

The Federal Energy Regulatory Commission's standard market design (SMD) proposal states objectives that are important and supportable, both theoretically and empirically. Uniform rules and business practices reduce transaction costs and limit opportunities for institutional arbitrage, increase the extent of the market, and increase market liquidity and investment. In fact, the goal of unleashing market incentives for transmission investment is prominent in the SMD, and that goal is correct and crucial for continued dynamism and value creation in the electricity industry.

The current SMD proposal, though, is too mired in details to be a good blueprint for institutional change in electricity regulation. The SMD proceeds on the assumption that mandating a single, uniform set of detailed rules is preferable to mandating simple, general rules across the country and letting the parties figure out the details that suit them best. Such detail will make the SMD static and costly to change as the industry evolves. FERC faces the problem of walking the fine line between uniform general rules to reduce transaction costs and top-down imposed, detailed rules that will create advantages for some market participants. To be robust and create the most possible value, the SMD should comprise simple rules that will adapt to the unknown, not dictate the specifics to the extent contained in the current proposal.

This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.