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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

for study is expanded to encompass more mature markets, such as NEMMCO in Australia, which for a number of years has experienced stable operating expenses and reductions in participant fees. 14 None of this is meant to suggest that these efficiencies will occur by osmosis. They must be actively sought out and implemented.

Organizational and Functional Consolidation

Jurisdictions such as the United States and Europe encompass a number of electricity markets, each with its own set of market rules and separate operating costs. Many participants, however, operate in multiple markets, requiring them to comply with the rules and processes of each. Additionally, market operations costs do not increase linearly with load, but benefit from economies of scale. Both these factors create strong incentives for a market to encompass as large a region as possible.

The most effective way to achieve this is through organizational consolidation—in other words, the merger of existing market operators, particularly those in contiguous geographic regions, and the inclusion of any newly competitive regions into existing markets. Recent years have seen some success with geographic expansion, in markets such as PJM, Nord Pool, and Australia. Most attempts at mergers, however, have failed, due more to issues of politics and parochialism than of engineering or economics.

Where pragmatic or parochial concerns prevent the creation of a single market, harmonization arrangements can result in some efficiencies. For example, Powernext (France), APX (Netherlands), and BelPX (Belgium) have instituted a “market coupling” mechanism to create a single, virtual liquidity pool. In the United States, PJM and Midwest ISO have put arrangements in place for inter-regional congestion management. These mechanisms are superior to standalone operations, but always will be less efficient than full consolidation of these markets.

It also may be possible to gain some efficiency benefits through functional consolidation. Under this model, each market operator remains an independent entity but centralizes selected functions to a service bureau operated by a third party. Functions that are clear candidates include credit management and market-information publication. Benefits include cost savings and a common set of processes across multiple markets. They also may include additional service-specific benefits. For example, for credit management it would be possible to net collateral requirements across markets, and to leverage the operational expertise of an external party, such as the NYMEX clearinghouse, to run the service.

In sum, if the benefits of electricity markets are as elusive as their opponents would suggest, it must set one to wondering why so many regions around the world have engaged in restructuring? Is it a form of collective delusion? Or do these regions see the merits in market competition and recognize electricity market restructuring for what it is—a fundamental transition from the old order to the new?

Unfortunately, the onslaughts of the recalcitrants can be expected to continue until the day restructuring is complete, with the complaints of the naysayers extending even beyond that. Current attacks on market operators eventually will abate as these markets mature and efficiency gains become evident, only to be supplanted by other, more exotic excuses, and continued delaying tactics. Each