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The High Cost of Restructuring

RTO markets aren’t living up to the promise of cheaper power.

Fortnightly Magazine - February 2008

With rapidly increasing electric rates in a number of states — at the moment, Illinois and Texas top the list — a heated debate has emerged concerning the merits of deregulation. Various explanations have been proffered to account for the increases, ranging from the cost of natural gas to the lack of transparency in the restructured markets. A dispassionate analysis using data accumulated by the Energy Information Administration suggests the lack of transparency and the resulting prevalence of strategic bidding may be the best explanation.

There is discussion about what restructuring means, when it began, and how much it has achieved. Adherents of administered markets date it from April 1, 1998, when the complex California agencies started operations. Others date it a decade earlier when the simple, dependable, and far less-controversial Western Systems Power Pool (WSPP) started selling bulk electricity at market rates throughout the western states and provinces. Choosing a start date also signals one’s position. If you choose 1987, you believe restructuring means the creation of open-access markets on the Wall Street model — free entry, open outcry, full disclosure. Choose April 1, 1998, and you believe in tightly centralized markets administered by a central bureaucracy that are its heart.

Alvin Alexanderson, the former general counsel of Portland General Electric, one of the industry’s early leaders in wholesale restructuring, often remarked that the high ground in any debate is claimed by the side with the most evocative title for its position. In the restructuring debate, both sides lay claim to the word “competitive.”

An analysis that avoids this debate focuses instead on whether markets administrated by Regional Transmission Organizations (RTO) markets have performed better or worse than open wholesale markets over the past decade. The data suggests they have lost ground compared to open wholesale markets like the WSPP since April 1, 1998 (see Figure 1) .

Market Benchmarks

Anyone who has lived in a western economy has witnessed the efficiency of markets. Open markets for commodities have proven themselves again and again as crucibles of innovation and refineries of efficiency. In general, markets are successful when they provide incentives for increased efficiency, when they allow easy entry, and when innovation leads to success. But tightly centralized, administered markets do not fare well by these standards. In fact, in the past decade, prices have increased more rapidly in the administered markets even when corrected for fuel costs. The exercise of market power is common and there is little or no evidence of efficiency improvements.

Creating centralized, wholesale electricity markets on the British model may have been a mistake. Rather, America’s natural gas model of deregulation has allowed more entry, efficiency, and innovation.

The issue is even more pertinent today when Professor William Hogan and others lobby for intervention in the

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