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A Welcome Truce in the Electricity Wars

Let's enjoy this brief period of diminished acrimony before implementation of this landmark law.

Fortnightly Magazine - October 2005

and pro-market forces that is long overdue.

With all this talk of markets, it is easy to forget that well over 90 percent of today's ratepayers still take service from a traditional bundled provider. Three-fifths of the country (by area) has no RTO, and more than 30 states do not have electric retail choice.

In the Energy Policy Act, Congress did not forget all this. At the same time it leveled the playing field for markets and consumers Congress seemingly codified the rights of vertically integrated electric companies-whether owned by customers or investors-to exist within a market framework. Although these utilities must grant comparable access and observe reliability rules, they are entitled to long-term transmission rights and other more amorphous native-load protections. These provisions are the sound of Congress bowing to post-"California crisis" state and local desires to insulate against energy supply and market risks, even if this means more traditional or more local control. It is a belt-and-suspenders strategy for troubled energy times: Enable markets, but enable self-supply as well where voters perceive this as a more secure option in highly uncertain times.

The Prospects for Expanding Markets

For 50 years, the complexity and balkanization of electric power regulatory authority has been a defining feature of this industry in the United States. Many point to this aspect of the industry as the primary culprit for the relatively weak results of electric deregulation in America, as compared with, for example, Great Britain. The obvious question to ask in the wake of the Energy Policy Act is whether this law fixes our transmission capacity and authority problems enough to make electric deregulation universal.

Unfortunately, on this central question there is no fast answer. There is an unquestionable improvement in grid governance and the policing of electric markets. New transmission economic policies-such as accelerated depreciation and incentive rates will help, assuming they are implemented thoughtfully. These are essential and positive steps toward ensuring that the markets we do have work reasonably well. When they improve their track record, it is possible we will see an expansion of markets into retail and other areas, though probably not until then.

But the more important objective is to convince all stakeholders that we can expand our grid in a reasonably fair and efficient manner and thereby make our present system work reasonably well.

In short, there still is the overarching question as to whether a hybrid industry vertical structure can succeed much beyond the level of performance we observe today. The new act seems to say that major portions of the industry can remain vertically integrated and receive treatments that enable them to continue to serve their customers, while deintegrated load serving entities buy entirely through the market. The legislation may help, but we may be searching for a coexistence that is simply impractical in the long run, because a mixture of integrated and deintegrated firms in this highly scale- and capital-intensive industry is inherently unstable. Regardless of whether this is true, creating an industry structure that allows continued vertical integration-physical or effective- alongside a robust market