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” In, 2010.
Excerpt from the Summary:
The power sector in the U.S. has been slowly evolving from a series of vertically integrated monopolies providing electric service to discreet geographic service territories, and then to a regionally interconnected, increasingly competitive marketplace. While the transition has been different from region to region, the general trend in the bulk power wholesale market has been one of progress. The changes in the past 20 years have been particularly dramatic. Under prodding by Federal authorities, we have witnessed the emergence of regional transmission organizations (RTOs), sophisticated transmission pricing, the independent power sector, restructured electric utilities, trading in electricity futures and transmission rights, real-time and day-ahead energy markets, and industry unbundling.
However, the situation at the retail level, where state regulation reigns supreme, has been less clear. While approximately half of state retail markets have not been opened to competition, much of the changes realized in retail markets were not as deep as the changes in wholesale markets. Rates were formulated on an average cost basis. Blended, rather than real-time prices, offered limited opportunity for effective demand-side response.
This pricing failed to pass on to end-users the sophisticated price signals emanating from the increasingly sophisticated wholesale market. In effect, the price signals for a more efficient power sector were being deflected before they could meaningfully influence demand itself, the most effective influence on overall efficiency. In short, states fell into two broad categories: one characterized by preservation of the monopoly, and a second that featured the somewhat superficial enabling of competition without fully empowering consumers to make the choices that are generally associated with competitive markets.
There are a variety of reasons for this disconnect between the wholesale and retail markets. An egregious example, of course, was the very conscious decision by California policymakers to legally preclude the passing of wholesale market prices on to end-users. This was a misguided measure that contributed significantly to the crisis that occurred. In most places, however, the disconnect was less a conscious decision than it was the result of other factors. The factors included political difficulties in further reforming markets, the legal residue of the monopoly model, and, not inconsequentially, the lack of a technological infrastructure to support full-market reformation.
The emergence of smart grid technology can enable us to reform electricity markets and create more efficient and allow cleaner use of electricity. This technology promises to provide customers better and more timely information in order to influence more efficient behavior. Digital automation can fundamentally increase the controllability, functionality and resilience of the electric system. High power quality microgrids can potentially operate as innovative distribution service hubs within the electricity supply system. In addition, two-way communications, real-time meters, day-ahead pricing, micro-generation, appliance controls and other products have the potential to make electricity use far more efficient.
The issue in this white paper, therefore, is to determine what legal and regulatory relics of an earlier era are still present and may serve as barriers to, or enablers of, the full, economically justifiable deployment and exploitation of smart grid technology. Through an analysis of 11 states, this paper is focused on identifying those historical barriers and enablers, with an emphasis on state regulation. The rationales for those barriers and enablers are then analyzed in both a historical and policy context. The states examined for the purposes of this paper are California, Colorado, Connecticut, Florida, Illinois, Pennsylvania, Massachusetts, New Mexico, New York, Ohio and Texas. This paper then culls the lessons learned from the restructuring experience. Finally, recommendations are made for policymakers, regulators and other stakeholders in both restructured and non-restructured environments.