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Recitations 2 & 3 . February 12 & 19, 2010

Regulation of the US power sector Prof. Ignacio J. Pérez-Arriaga

Engineering, Economics & Regulation of the Electric Power Sector ESD.934, 6.974

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Source: Andy Whitaker

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North American Organized Markets Roughly half the installed capacity

Geographic footprint of organized wholesale markets in North America

Source: ISO

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The electricity crisis of California

Lack of generation

•  Regulatory uncertainty (responsibility not clear) •  No regulatory instruments to ensure enough firm capacity •  Administrative difficulties

•  Low hydraulicity •  Climate •  High Demand

•  High prices •  Rationing

•  Market design & structure •  Lack of demand response

•  Natural Gas •  NOx

•  Risk allocation (CTC, contracts)

Bankruptcy

•  SDG & E •  PG & E, SCE

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2000-01 Crisis

Source; Gary Stern, Southern California Edison Company

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There are other explanations...

“The California crunch really is the result of not enough power-generating plants and then not enough power to power the power of generating plants” George.W. Bush (then President elect) (Interview by the New York Times, January 14, 2001)

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Wholesale electricity prices in California, $MWh$M

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PX Terminated Day-Ahead Trading January 31, 2001

Feb. 2002 - Sep. 2002, Bloomberg SP15 Average Price are Shown

Image by MIT OpenCourseWare.

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Regulatory U-Turn

  2007 Nationwide survey confirmed dramatic reversal of support among state utility regulators for “deregulated” energy markets

  One third of regulators in currently competitive states said they are seriously considering “re-regulating” utilities in their jurisdictions

  Asked to identify states operating most successful deregulated energy markets, majority of commissioners replied, "None"

  Survey found no measurable support among state regulators for any form of retail competition in foreseeable future RKS Research & Consulting, 2007

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The “textbook model” of the restructured &

liberalized power sector

Some material for this section has been borrowed from S. Littlechild & P. Joskow in Electricity Market reform: An international perspective, Elsevier, 2006.

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Components of the “textbook model” (the 10 commandments)

  Privatization, to enhance performance & reduce the interference of the government

  Vertical separation of competitive & regulated monopoly activities

  Horizontal restructuring to create a level playing field for competition

  Independent System Operator   Voluntary energy & ancillary services markets &

trading arrangements

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Components of the “textbook model” (the 10 commandments)

(continuation)   Open access to the transmission network, plus

adequate locational signals   Free choice of supplier with an adequate design &

utilization of retail tariffs   Creation of independent regulatory agencies   Provision of transition mechanisms   … & nothing more!

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The standard structure of full fledged electricity markets

Generator

Power Exchange

Supplier

Consumer in the market

Generator Generator

Distributor/ Retailer

Consumer at a regulated tariff

Supplier Distributor/ Retailer

Consumer in the market

Consumer at a regulated tariff

Wholesale market

Retail market

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… however, avoid “cut & paste”

  Models which appear to work well in some circumstances & places may not be easily transferable to countries facing different circumstances

(peak load, level of development, industry initial structure & ownership, fuel mix, interconnections, institutional framework)

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Successes…

  Where the textbook model has been basically followed the new regulation has been quite successful  Nordic countries  UK  Argentina (before the country’s financial crisis)  Texas & Northeast of the US  Australia

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… & failures

  And where the textbook model has been abandoned because of omission or commission, there have been problems  Omission: France (no comprehensive wholesale market),

Germany (lack of true open network access), New Zealand (no independent regulator), …

 Commission: California (poor assignment of risk), Chile (pioneer but too restrictive market & transmission rules), Spain (too much governmental intervention & horizontal concentration), …

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Most frequent failures

“When structure is not conducive to competition, the regulator & pool

operator will find themselves unsuccessfully chasing after conduct. The solution is not a better rule, but

a change in structure”(*)

(or a gradual introduction of competition, with rules that restrict the freedom of the market agents & prevent

market power abuse)

(*) From “Governance & regulation of power pools & system operators”, Barker, J., Tenenbaum, B. & Woolf, F., World Bank, 1997.

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Frequent failures

  Inadequate sector structure for competition  Horizontal concentration  Insufficient vertical / diagonal unbundling

 Generation & system operation  Distribution & retailing  Generation & retailing (¿?)

  Incorrect risk allocation in the regulatory design  Default tariff design (pass through of costs to consumers)

 Authorized trading instruments  Ultimate responsibility to supply

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Frequent failures

(continuation)

  Attempting to apply “textbook-like reforms” in countries without an appropriate power sector structure &/or an adequate institutional framework

  No liquid &/or supra-national balancing markets

  Insufficient competition in the markets for fuel

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Frequent failures

(continuation)

  Absence of executive regional institutions in supra-national markets  Lack of needed harmonization  Inadequate cross-border trading rules

  Scarce available commercial capacity of interconnectors  Physical capacity / long-term previous contracts

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Model 1: Monopoly

Generation

Transmission

Distribution/ Retail

Consumers

Generation

Transmission

Distribution/ Retail

Consumers

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Model 2: Purchasing agency (single buyer)

IPP

Single buyer

Distribution/ Retailer

Consumer

IPP IPP

Distribution/ Retailer

Consumer

IPP

Single buyer

Distribution/ Retailer

Consumer

IPP

Distribution/ Retailer

Consumer

Own generation

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Model 3: Wholesale competition

Generator

Wholesale market

Distribution/ Retail

Consumer

Generator Generator

Distribution/ Retail

Consumer

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4: Retail & wholesale competition

Generator

Power Exchange

Supplier

Qualified consumer

Generator Generator

Distributor/ Retailer

Captive consumer

Supplier Distributor/ Retailer

Qualified consumer

Captive consumer

Wholesale market

Retail market

FIN DE LA PRESENTACIÓN

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