Power Markets Disconnected? How to Reconcile Retail with Wholesale

Fortnightly Magazine - September 15 1999
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Shopping credits, capacity rules and other mistakes from California and PJM.

With retail electric markets opening rapidly, why are so many getting off to a slow start? Why do suppliers abandon some markets and consumers decline to participate in others? The answer may lie in a series of disconnections between wholesale trading patterns and retail opportunities.

Utilities, marketers, suppliers and electric customers have joined with state public utility commissions to invest thousands of hours and millions of dollars to set up these new markets in a way that will help consumers and regional economies. Their goals are laudable. Yet they have paid little, if any, attention to the intricate interfaces between the retail and wholesale markets for electricity. This omission has slowed or crippled development of even potentially robust retail markets.

One need not look far to find causes for these disconnections. In large part they stem from conflicts between state and federal rules at the PUCs and the Federal Energy Regulatory Commission. In general, there appears to be a lack of appreciation for how wholesale rules can affect the success of retail competition. Meanwhile, regulators get distracted by seemingly more pressing issues, such as stranded costs, reliability and customer protection. And within some regional markets, organized by an independent system operator, or ISO, it appears that some members really would prefer to slow down competition.

Overall, we can identify five disconnections between wholesale and retail electric markets, suggesting the need for five corresponding solutions:

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