Generation Castle Gate Power Plant near Helper, Utah operated by PacifiCorp. Transmission Distribution THE ELECTRIC POWER INDUSTRY from regulation… …to competition

Destructuring …not what we had expected or hoped for.

Wholesalers exploiting market power?

REGULATION – TRANSITION – COMPETITION 1.Regulation versus Antitrust and Vertical Integration/Price- Squeezing 2.Competition Policy

Two Forms of Public Intervention Economic Regulation -prophylactic Antitrust Oversight -reactive/post-hoc - Lighter and less frequent After the restructuring/deregulation, it is expected that antitrust enforcement will replace economic regulation… …but there is a transition period.

The Culture of the Market Regulated Industry Monopolistic; Incentives relate to:  assuring reliability and fair prices (to consumers)  promising predictability and normal returns (to shareholders) Competitive Industry Entrepreneurial; Incentives relate to:  low prices, product line diversification (to consumers)  cost minimization, profit maximization (to shareholders)

Culture of the Enforcer RegulatorsPaternalistic Concerned with:  Public interest mandate  Reliability  Striking balance btwn lower- than-monopoly prices and returns sufficient to attract capital Antitrust Enforcers Also paternalistic? Concerned with:  Maintaining process of competition  Market structure,  firm conduct (pricing and output decisions), and  market performance

The FPA and Antitrust The FPA conditions the issuance of a license by the Commission on the absolute prohibition of “combinations, agreements, arrangements, or understandings, express or implied, to limit the output of electric energy, to restrain trade or to fix, maintain or increase prices for electrical energy or service.” 16 USC § 803(h) The FPA conditions the issuance of a license by the Commission on the absolute prohibition of “combinations, agreements, arrangements, or understandings, express or implied, to limit the output of electric energy, to restrain trade or to fix, maintain or increase prices for electrical energy or service.” 16 USC § 803(h) …but, given the pervasiveness of FERC, maybe it is not yet time: …but, given the pervasiveness of FERC, maybe it is not yet time: “public utilities should be subject to the antitrust laws in inverse proportion to the degree of control laws in inverse proportion to the degree of control exercised by regulatory agencies.” Hale & Hale, Competition or Control V: Production & Distribution of Electric Energy, 110 U Pat Rev 57 (1961)

Antitrust Cause of Action A commonly recognized cause of action against vertically integrated electricity companies: Price Squeezing

Proponents of Vertical Integration… …in some cases at least. Mansur distinguishes: vertically integrated firms – no incentive to price high and large net sellers – do have the incentive Michaels It’s complex – need to find the most economically efficient balance between integration and competition.

David Spence and Politics versus Economics  The markets need new entrants to help keep prices down, but… prospective entrants need to know they will make their money back.  Politicians and regulators let prospective entrants know they are more willing to instead protect the consumers from high prices, so… Ironic result: less actors  less competition  higher prices

Policies Proposed by Spence 1. Let energy prices be reflected by the forces of supply and demand - let the price signal work to attract new entrants into the market. 2. Regional transmission planning - broaden the geographical scope of energy planning 3. Enhance demand response

Diana Moss and the New Era: low-carbon, efficient production and usage  Old objectives versus new objectives/constraints  Competition Policy challenges during transition to the “new era:” 1. Demand Response Technologies – Market Access 2. Transmission Planning a. requirements for information exchange -facilitates market entry, so good competition policy. -but potential to facilitate collusion, so be careful. b. vertically-integrated transmission owners’ influence over approving or rejecting proposed projects that would relieve transmission constraints -potential to exercise market power

What we have not talked about: RELIABILITY Reliability means Regulation. There’s a fork in the road: Reliability? or Competition?