Electricity Market Restructuring: Reforms of Reforms

Abstract

Electricity systems present complicated challenges for public policy. In many respects these challenges are similar to those in other network industries in providing a balance between regulation and markets, public investment and private risk taking, coordination and competition. As with other such industries, naturally monopoly elements interact with potentially competitive services, but electricity has some unusual features that defy simple analogy to other network industries. Following a reversal of a long-term decline in real electricity prices, the last two decades of the twentieth century were for the United States a time of reform, reaction, and reforms of reforms in electricity systems, moving slowly towards greater reliance on competition and markets. Changing technology, new entrants in the generation market, and a legislative mandate to provide access to the essential transmission facility accelerated a process that required major innovations in institutions and operations. Complete laissez faire competition is not possible, and the details of an efficient competitive electricity market are neither obvious nor easy to put in place. The benefits of reform may be substantial, but they require careful attention to market design. A review of the past identifies some choices on the road ahead.