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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

Europe, electricity markets are governed by a patchwork quilt of regulation and legislation, at state, local, and national (and in Europe, pan-national) levels. This has resulted in a confusing muddle, where some classes of utility aren’t subject to competition ( e.g., public power in the United States), and others are. Some regions don’t have markets, and others do. No two markets are the same, and regulatory jurisdiction often is murky.

These are not problems that can be solved at the local level. Most logical regions of the grid encompass multiple political jurisdictions (states, for instance). The flow of electricity within these regions, however, is defined by physics, not politics. As stated by Craig Glazer of PJM: 12 “When you do this stuff state by state, it doesn’t work. It’s like having an air traffic control system state by state.” Action at the national or pan-national level is called for. This, however, has met with mixed success, as shown by the United States and Europe.

In recent years both FERC in the United States and the EU Directorate General of Energy and Transport (DGET) have driven through some important changes to encourage competition. More progressive regions have embraced these changes and moved forward to institute markets. Neither FERC nor DGET, however, has sufficient teeth to enforce the participation of the recalcitrants, and large areas within their respective domains remain, in real terms, uncompetitive. Even worse, large incumbent players have been able to expand and consolidate—with ineffective competition providing little opportunity for smaller new entrants—leading to increased market concentration and potential to exercise market power, particularly in Europe.

Legislative action at the national level is required if this logjam is to be broken. Almost every successful electricity market in the world outside the United States, 13 has had a clear legislative mandate for market restructuring. It is ironic that a nation considered a bastion of free markets is one of the few countries in the developed world that has failed to take concrete legislative action to bring competitive reforms to one of its most important industries. Surely others, besides the authors, find it strange that Southern China has an electricity market, but the southern United States does not.

Moreover, in the last few years, the cost of market operations in many regions increased as markets went through a period of rapid establishment—and in many cases, enhancement to introduce more sophisticated features ( e.g., locational marginal pricing, reserve markets). The achievement of these goals within relatively short time frames has, as with any business change of a similar nature, resulted in inefficiencies.

Contrary to mischievous assertions, however, these costs are not increasing inexorably. The cost ramp-up of recent years is primarily a function of the stage of market development. As markets reach a level of maturity, they can be expected to enter a period of stabilization, with operational costs leveling out, or experiencing modest reductions. This is difficult to see in places such as the United States, where many markets are at a similar stage of development, but becomes evident if the horizon