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Viewpoint: In Defense of Markets

The latest resistance to deregulation is built on a foundation of lies.

Fortnightly Magazine - June 2007

German electricity market has come to be regarded as one of the least competitive in Europe.

The Third Kind of Lie

Benjamin Disraeli said, “There are three kinds of lies: Lies, damn lies, and statistics.” If recent assertions made by their critics are to be believed, market and system operators are bloated organizations, engaged in an orgy of profligate and ever-burgeoning expenditure. Of course, this would lead one to ponder whether their regulators are out-to-lunch, given most of these entities are subject to regulated revenues, or why the hundreds of customers of each organization, who foot the bill, have not been more vocal. Ironically, though, most of the criticism has originated in regions that don’t have markets, or associated market infrastructure, in place.

Market-operator critiques generally are characterized by a mire of statistics, often based on selectively chosen data, jumping around between years, markets and models; what Darrell Huff (How to Lie With Statistics) 10 referred to as a “sample with built-in bias.” Common statistical tricks include:

Misleading Extrapolations: A classic example is the presumption that market-operations costs increase linearly with demand—patent nonsense that ignores the potential for economies of scale, and which denies a long-established precept of market operations: Increased volume/liquidity drives down transaction costs.

False Cost Drivers: Assuming market operations costs are driven only by demand, or some other single factor, rather than by a range of variables including functions performed, market-design features, and jurisdiction-specific arrangements.

“Apples Against Oranges” Comparisons: Comparing the benefits of the market against the combined cost of market and system operations, or comparing two market operators performing very different functions (due to differences in market design).

Such tendentious analysis may have emotive impact, but it is frequently without empirical merit. In the words of Huff: “By the time the data have been filtered through layers of statistical manipulation and reduced to a decimal-pointed average, the result begins to take on an aura of conviction that a closer look at the sampling would deny.” 11

In a new tactic, some of these critiques have taken to replacing their traditional universal condemnation of electricity markets with a concluding prescription for further navel-gazing, calling for more studies, to add further to the existing statistical morass. Ultimately, though, this “call to inaction” is just another delaying tactic, and the associated market-operator critiques simply another attempt to promote an entrenched anti-market position.

A Prescription for Progress

So everything is perfect? No, far from it! Market restructuring in many parts of the world remains piecemeal, and is still far from complete. Sizable obstacles to competition remain, some of which will not be resolved effectively without concerted action at a public-policy level. As with any competitive endeavours, electricity markets will continue to evolve, driven by changing participant and regulatory requirements, and ongoing corporate improvement. As these markets mature, there is a fair expectation that greater cost and operational efficiencies will begin to be seen, both through evolutionary change, and organizational and functional consolidation on a cross-market basis.

Furthermore, in many parts of the world, most notably the United States and