Retail Electricity: Has Deregulation Flopped? Robert J. Michaels California State University, Fullerton Energy Bar Association Mid-Year Meeting Washington, D.C. November 17, 2000

A flop by nature or design? Success of deregulation in gas, telecom, rail freight, etc. There, regulators did not impose markets and call it deregulation Electricity: success inversely related to degree of a state’s “revolution” –Impetus for change was success of bilaterals –Some utilities [PG&E] and regulators [ERCOT] wanted expansion to end-users

The “Market Monitor” Paradigm Wolak (Cal ISO): Market an alternative regulatory tool, must itself be regulated No other deregulation rationalized this way Justifies imposed markets, discontinuity –Building efficiency in or letting it evolve? –Naively abstracts from political interests A textbook standard of efficiency –Are economists gullible?

One big short-term energy market: The PoolCo ideal Regulators can make usual price / expense comparisons to find abuses Rationalized by nature of electricity [?] Maximum scope for FERC to pressure states on competition Utilities retail monopoly, customer “access” to energy price No real market functions like this Maintains state regulatory redistributions

The small consumer, object of our affections Important stakeholders advanced own interests claiming concern for small users Rationalizes “benefits” like rate freeze –Contradiction between value of wholesale price signals and logic of freeze –And small consumers can’t be metered –Would small consumers really be excluded from bilateral benefits?

Strategy and market design Primacy of stranding recovery Maintenance of utility customer shares –As long-term strategy for diversification –As managerial imperative –Defense against distributed power Costs of participating in the “collaborative”

Be careful what you want… San Diego G&E got everything it said it wanted at the outset –Stranding recovery –A centralized PX that looked a lot like PoolCo –End of its generation responsibilities –Dominant retail share at end of transition

California: Worse before it gets better? Wholesale passthrough v. a range of contracts Transitional rate freeze and stranding “headroom” inhibit competitor entry Two basic problems: supply and demand How about political risk insurance? –That’s what old-time regulation was

Pennsylvania and Texas Both have relatively “price-to-beat” –Kahn: Bribing customers isn’t competition PJM markets pre-existing, expansion of bilaterals ERCOT is not “designing” a market, just extending access to bilaterals If ERCOT turns out better, is it because or in spite of FERC’s absence?

Abandoning or reforming? Remember the world we wanted to leave? How possible to get back to utility rate- based generation? –Long-term contracts? –Export restrictions? Antibypass rates in abundance

Retail choice won’t go away Too many states New competitive actors learning politics –Too many of them to allow resumption of utility dominance Blurring of wholesale / retail distinctions FERC / state boundaries –Retail markets in the Constellation merger –Competition among states by example

Two overused metaphors: the Genie and the Devil “The genie is out of the bottle” – : “and can’t be put back in” – : “and must be taught to behave” –2000: “and has to go back in” “The devil is in the details” –What case for politically influenced micro- design? –Who planned details of all the other markets?