By confining regulators to judicial constraints when they are acting in a legislative capacity, the Herculean task of directing the path of electricity restructuring is being undertaken under rules that require decision-makers to be utterly passive and only minimally inquisitive. Regulators should be free, when acting in their quasi-legislative capacities, to act like legislators and not like judges.
To the extent that any industry is central to the prosperity of economies and to social welfare, it is the energy industry, and particularly the electricity industry. The availability of electric supply is essential for both economic development and quality of life. It is also a critical requirement for human development. By its very nature, the energy services industry in general and the electricity industry in particular is capital intensive, technologically sophisticated, and, in developing countries as well as in many developed ones, highly dependent on foreign trade, services, and investment. That dependence derives from, among other things, lack of sufficient domestic capital, lack of trained personnel, and the fact that manufacturing of needed technology and fuel is often located outside the national boundaries of most developing countries. As a result, the development of the electricity industry, whose purpose is focused on domestic needs, is inextricably linked to the global flow of capital, equipment, fuels, and services. The result is that the regulatory regime designed to meet the requirements of the domestic market is inevitably compelled to interface with international trade and the rules surrounding it. The energy services industry, like all network-dependent businesses (e.g., natural gas, water, and railroads), has elements that are monopolistic in nature and other aspects that are suitable for competition. Monopolistic aspects of the industry, which may vary from one jurisdiction to another, cannot simply be left to the market. Doing so would permit abuses of monopoly power, including extracting very high rents, tolerating unacceptably low levels of service quality and productivity, and precluding the evolution of viably competitive markets. Thus, the centrality of electricity to the economy, combined with the unavoidable monopoly aspects of the industry , invites some measure of State regulation. The question governments face is not whether to regulate, but how and how much to regulate.
While the past 20 years have seen the rapid development of wholesale electricity markets, sophisticated wholesale pricing has largely failed to be replicated in state retail markets. The emergence of Smart Grid technology, including metering and use of the Internet, has the very real potential to reduce, if not entirely remove, the disconnect between wholesale and retail markets, and enhance overall economic and energy efficiency.
Brown, Ashley. Controversies and Sources of Resistance to Smart Grid Deployment." Presentation to the Harvard Electricity Policy Group, Sixtieth Plenary Session, Cambridge, MA. September 30, 2010. 11 pages."
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.