Friday, December 16, 2005

Lessons from the Failure of U.S. Electricity Restructuring

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Among the Top25 articles within The Electricity Journal we can find in position sixth the one called "Rethinking Electricity Deregulation" written in 2004 by Carnegie Mellon University professors Jay Apt and Lester Lave, and researcher Seth Blumsack. In this paper they discussed a number of factors that tend to increase costs: "These include free markets which are not competitive, incomplete markets for essential services, paying market clearing prices for all generation, the cost of new institutions such as [regional transmission organizations], and the increase of the cost of capital due to increased uncertainty."

Professor Jay Apt who is as well executive director of the Carnegie Mellon Electricity Industry Center has still another one in position thirteenth called "Competition Has Not Lowered U.S. Industrial Electricity Prices" Electricity Journal. March 2005. Pg. 52 Vol. 18 No. 2.

This week these professors and doctoral student did a presentation at the Annual Meeting 2005 of the Sloan Industry Studies about "Why deregulation electricity is not a good idea". This recent presentation is based on in their last study "Lessons from the Failure of U.S. Electricity Restructuring." In this study they join a raft of comments filed with the federal Electric Energy Market Competition Interagency Task Force(1) that was formed after passage of the Energy Policy Act to evaluate the progress of electric power industry restructuring. But while other market restructuring analyses by market operators and analysts who have been following the issue tout millions of dollars of savings and benefits, the comments from Blumsack, Apt, and Lave, throw cold water on the process that has been under way for the better part of the past decade. Other deregulated industries such as airlines, natural gas, railroads and trucking have provided price reductions of anywhere from 30 to 75 percent, but restructuring of the electric power industry has not produced any similar reductions.

The report starts with the following synthesis: "Blind faith(2) is unlikely to produce a free market that is competitive. Substituting markets for traditional regulation is only one choice among many policy instruments to achieve a goal of lower prices; such substitution should not be in itself a goal"; and their introduction is devastating: "Our research shows that there is no evidence that restructuring has produced any measurable benefit to consumers or to the systems that have restructured. In particular:
  • Comparison of industrial electricity price data between restructured and non restructured states shows that there no evidence of a substantial reduction in price, or even in the rate of price change, in restructured states, and the record on overall operations costs and thermal efficiencies is mixed.
  • Restructuring has introduced several elements into the industry that act to raise costs, not lower them. These include uncompetitive and incomplete markets for essential services, paying market clearing prices for all generation, expensive new institutions, and a large increase in the cost of capital due to increased uncertainty. The first of these applies to some industries with successful restructuring records. It may be that appropriate regulatory involvement can lead to conditions that foster lower prices in the electricity industry as well, but issues such as shared transmission infrastructure must be resolved.
  • Retail competition in the U.S. has faltered. Even in states that initially saw high levels of interest on the part of consumers and third-party electric service providers (ESPs), the markets for alternatives to the incumbent utility have all but dried up.
  • The U.S. transmission system was not designed to handle the volume of long-distance transactions generated by multi-regional electricity markets. Nodal pricing has failed to produce the appropriate incentives for beneficial grid expansion. Even if a market-based pricing scheme could be devised to promote investment, siting difficulty may prove to be an even more significant impediment to creating a transmission system that facilitates wholesale competition.

No one seriously proposed that restructuring take the form of suddenly eliminating state and federal regulation. Each utility owned the transmission and distribution lines in its area as well as essentially all of the generation. Thus, each utility had a monopoly and could have extracted massive profit by raising prices. There was no uniform model for transforming a regulated market into a competitive one. First California and Pennsylvania, and then other states, committed themselves to deregulation and then worked out market structures that they thought would bring the benefits of a competitive market. Deregulation was assumed to be in the public interest, whether in large urban centers or sparsely populated rural areas.

Deregulation became the end, rather than a means of benefiting society. If consumer welfare is the primary criterion for restructuring success, then restructuring should be frozen until the current, costly experiments have been evaluated to see if there is a benefit and, if so, which, if any, of the current structures is most likely to deliver social benefits. "

(1)Energy Policy Act of 2003. Division A: Reliable and Diverse Power Generation and Transmission Title II: Electricity - Subtitle B: Amendments to the Public Utility Holding Company Act - (Sec. 234) Establishes the Electric Energy Market Competition Task Force as an inter-agency task force to review competition in the wholesale and retail electric energy markets.
(2) About "faith and regulation" Paul Krugman wrote an Op-Ed in New York Times called "The Road to Ruin" on August 18, 2003 after the Eastern Blackout: "...the power industry hasn't spent enough on the control systems and safeguards that are supposed to prevent such things. And the cause of that neglect is faith-based deregulation."..."These experts didn't necessarily oppose deregulation; their point was that deregulation could lead to disaster unless accompanied by policies not just to keep the grid reliable, but to expand it. (To make competition possible, a deregulated system needs considerably more transmission capacity than one based on regulated monopolies.) But their warnings weren't taken seriously; politicians and deregulation enthusiasts simply had faith that somehow "the market" would take care of the problem."

See as well Restructuring the U.S. Electric Power Sector: A Review of Recent Studies by John Kwoka. Northeastern University. Report Prepared for the American Public Power Association. November 2006.

SELECTED LINKS (dated up to 2003, year of the big blackouts in America and Europe)

Andersen, Torben J.; Remedios, Antonio J. (2003). "Strategizing in the deregulating energy markets: Two steps forward, one step back, and where next?". The electricity journal. - Congers, NY : Elsevier Science - Camby and West, Bd. 16 (2003), 7, S. 86-94,

Banks, Ferdinand E. (2002) "A simple economic analysis of electricity deregulation failure". OPEC review. 26 (2002), 2, S. 169-179

Borenstein, Severin (2002) "The trouble with electricity markets: understanding California's restructuring disaster". The Journal of Economic Perspectives: EP; a journal of the American Economic Association. - Nashville, Tenn. : American Economic Association, Bd. 16 (2002), 1, S. 191-211,

--- (2001) "Trading inefficiencies in California's electricity markets". NBER working paper series ; 8620. Cambridge, Mass. : NBER, 2001

Brennan, Timothy J.; Palmer, Karen; Martinez, Salvador. (2002). "Implementing electricity restructuring: policies, potholes, and prospects". Environmental & resource economics. - Dordrecht [u.a.] : Kluwer, Bd. 22 (2002), 1/2, S. 99-132.

Cicchetti, Charles J.; Dubin, Jeffrey A. And Long, Colin, M. (2004). "The California Electricity Crisis : What, Why, And What's Next" 229 pp.

Costello, Ken (2002) "The shocking truth about restructuring of the US electricity industry". The electricity journal. - Congers, NY: Elsevier Science - Camby and West, Bd. 16 (2003), 5, S. 11-19, Ill

Crow, Robert Thomas. (2002) "What works and what does not in restructuring electricity markets: "not invented here" is a recipe for disaster". Business economics : the journal of the National Association of Business Economists. - Cleveland, Ohio : Assoc., Bd. 37 (2002), 3, S. 41-56

Falk, Jonathan. (2003). "Retroactive retrogarde retreat: keeping FERC in the generation pricing business forever". The electricity journal. - Congers, NY : Elsevier Science - Camby and West, Bd. 16 (2003), 7, S. 38-49, Ill

GAO (2001) "Energy markets: results of studies assessing high electricity prices in California; report to congressional requesters" United States General Accounting Office. Report-Nr.: GAO-01-857. Washington, DC, 2001

Green, Richard (2001). "Failing electricity markets : should we shoot the pools?". Centre for Economic Policy Research, London.

Greer, Monica Lynne (2003). "Can rural electric cooperatives survive in a restructured US electric market? An empirical analysis". Energy economics. - Amsterdam : Elsevier, Bd. 25 (2003), 5, S. 487-508,

Abstract: The Federal Energy Regulatory Commission (FERC) issued Orders 888 and 889, in 1996, which were designed to promote competition in wholesale markets for electricity in the US. These Orders were predominantly meant to apply to vertically integrated investor-owned utilities (IOUs); however, when competition did not emerge as was hoped, the FERC issued Order 2000, which indicated the FERC’s intent to make all transmission-owning entities, including those of cooperatively owned utilities and the federal power administrations, subject to FERC jurisdiction (U.S. FERC, 2000).

The paper examines the ability of rural electric distribution cooperatives to continue operating in their present form in a restructured electricity market. More specifically, the paper sought to determine whether these electricity coops were efficient or not. Employing a ultiple-output quadratic cost model, the paper found that rural electric co-ops in the U.S. were not efficient distributors of electricity. The estimated results indicate that these firms are operating in the increasing-returns-to-scale portion of the average cost curve. According to the results of the various efficiency measures employed, none of these firms are distributing anywhere near the cost-minimizing number of megawatt hours. These findings seem to occur because each is too small in terms of the quantity of electricity distributed. The paper concludes that as a result, mergers between these firms could yield substantial savings and help ensure their survival in their present form in a deregulated market.
Hogan, William W. (2002)"Electricity market restructuring: reforms of reforms". Journal of regulatory economics. - Boston, Mass. [u.a.] : Kluwer Academic Publ., Bd. 21 (2002), 1, S. 102-132

Hughes, William R.; Parece, Andrew (2002). "The economics of price spikes in deregulated power markets". The Electricity Journal. - Congers, NY : Elsevier Science - Camby and West, Bd. 15 (2002), 6, S. 31-44, Ill.,

Joskow, Paul L. (2003) "The difficult transition to competitive electricity markets in the US" Bush Presidential Conference Center. May 2003.

--- (2002) "California's electricity crisis: a postmortem". The Milken Institute review / Milken Institute (Santa Monica, Calif.), Bd. 4 (2002), 2, S. 32-44,

--- (2001) "California's electricity market meltdown". OpEd page of the New York Times on January 13, 2001

--- (2001) "California's electricity crisis". NBER Working Paper No. 8442 Issued in August 2001

Lang Weaver, Jacqueline (2004). "Can Energy Markets Be Trusted? The Effects of the Rise and Fall of Enron on Energy Markets". Houston Business and Tax Law Journal.

Mattoon, Richard (2002) "The electricity system at the crossroads: policy choices and pitfalls". Economic perspectives : a review from the Federal Reserve Bank of Chicago. Chicago, Ill., Bd. 26 (2002), 1, S. 2-18,

Navarro, Peter; Shames, Michael (2003) "Aftershocks and essential lessons from the California electricity debacle". The electricity journal. - Congers, NY : Elsevier Science - Camby and West, Bd. 16 (2003), 4, S. 24-30, Ill

Newbery, David M. (2002) "Problems of liberalising the electricity industry". European economic review : EER. - Amsterdam : Elsevier, Bd. 46 (2002), 4/5, S. 919-927

Abstract; The European Commission's attempt to update the Electricity and Gas Directives to underwrite unbundling and full liberalisation coincides with the California electricity crisis. The paper argues that compared to the US, much of the EU lacks the necessary legislative and regulatory power to mitigate generator market power. Unless markets are made more contestable, transmission capacity expanded and adequate generation capacity ensured, liberalisation may lead to higher prices. Ending the domestic franchise could remove the counterparty for the contracts required for adequate investment to sustain competitive pricing.

Reiss, Peter C.; White, Matthew W. (2003) "Demand and pricing in electricity markets: evidence from San Diego during California's energy crisis". Cambridge, Mass. : National Bureau of Economic Research, 2003. NBER working paper series ; 9986

Ritschel, Alexander; Smestad, Greg P. (2003) "Energy subsidies in California's electricity market deregulation". Energy Policy. - Kidlington : Elsevier, Bd. 31 (2003), 13, S. 1379-1391,

Rudnick, Hugh; Montero, Juan Pablo (2002) "Second generation electricity reforms in Latin America and the California paradigm". Journal of industry, competition and trade. - Boston, Mass. [u.a.] : Kluwer, Bd. 2 (2002), 1/2, S. 159-172,

Schiller, Timothy (2001) "Rewiring the system: the changing structure of the electric power industry". Business review/Federal Reserve Bank of Philadelphia / Federal Reserve Bank (Philadelphia, Pa.), (2001), 1, S. 26-33,

Sharon Beder (2003) "Power play: the fight to control the world's electricity". New York, NY New Press, 2003 ISBN: 1-565-84808

Sweeney, James L. (2002)"The California electricity crisis" Stanford, Calif. Hoover Institution Press, 2002. ISBN 0-8179-2912-6*pbk

Taylor, Jerry and Van Doren, Peter (2001)."California’s Electricity Crisis What’s Going On, Who’s to Blame, and What to Do". July 3, 2001. Policy Analysis nº 406. Cato Institute.

Trebing, Harry M. (2001)"New dimensions of market failure in electricity and natural gas supply". Journal of economic issues: jei.- Lewisburg, Pa.: Assoc., Bd. 35 (2001), 2, S.395-403

Weare, Christopher (2003). "The California electricity crisis: causes and policy options". Public Policy Institute of California. ISBN: 1-582-13064-7*pbk.

Williams, Allen W. Jr.(2001) "The US electricity sector : what after California?". The Electricity Journal. - Congers, NY : Elsevier Science - Camby and West, Bd. 14 (2001), 5, S. 51-61

Wolak, Frank A. (2003) "Diagnosing the California electricity crisis". The electricity journal. - Congers, NY : Elsevier Science - Camby and West, Bd. 16 (2003), 7, S. 11-37,

Wolak, Frank A. (2003). "Lessons from the California Electricity Crisis" University of California Energy Institute. Center for the Study of Energy Markets.

Woo, Chi-keung; Lloyd, Debra; Tishler, Asher. (2003) "Electricity market reform failures: UK, Norway, Alberta and California". Energy policy. - Kidlington : Elsevier, Bd. 31 (2003), 10, S. 1103-1115

Zaleski, Pierre, and Meritet, Sophie (2003). "L'energie nucleaire face a la dereglementation des marches d'electricite". Revue de l'energie. - Paris : Les Editions Techniques et Economiques, Bd. 54 (2003), 547, S. 365-384

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Lecciones del Fracaso de la Restructuración del Sector Eléctrico de los Estados Unidos

Entre los artículos del Top25 del The Electricity Journal podemos encontrar en la sexta posición el titulado "Repensar la Desregulación de la Electricidad" escrito en 2004 por los profesores de la Carnegie Mellon University Jay Apt y Lester Lave, y el investigador Seth Blumsack. En este artículo discuten una serie de factores que tienden a aumentar los costes: "mercados libres que no son competitivos, mercados que son incompletos para servicios esenciales, la casación de precios de la generación, el coste de las nuevas instituciones como las RTO [organizaciones de transmisión regional], y el aumento del coste de capital debido al aumento de la incertidumbre."

El profesor Jay Apt que es director ejecutivo del Carnegie Mellon Electricity Industry Center tiene todavía otro artículo en la lista en la posición decimotercera titulado "Competition Has Not Lowered U.S. Industrial Electricity Prices" Electricity Journal. March 2005. Pg. 52 Vol. 18 No. 2.

Esta semana estos profesores y el doctorando han hecho una presentación en la Reunión Anual de 2005 del Sloan Industry Studies sobre "Por qué la desregulación no es una buena idea". Esta reciente presentación está basada en su último estudio titulado "Lecciones del Fracaso de la Restructuración del Sector Eléctrico de los Estados Unidos." En este estudio reúnen un buen número de comentarios archivados por el Grupo de Trabajo de la Interagencia federal de la Competencia del Mercado Eléctrico (Electric Energy Market Competition Interagency(1)) que se creó después de que se aprobara la Ley de Política Energética (Energy Policy Act) para evaluar el avance de la restructuración del sector de la energía. Pero mientras que otros análisis de la restructuración del mercado realizados por operadores de mercado y analistas que han estado siguiendo la cuestión pregonan millones de ahorros y beneficios, los comentarios de Blumsack, Apt y Lave echan un jarro de agua fría sobre el proceso que ha estado en curso buena parte de la última década. Otros sectores desregulados como el del transporte aéreo, el gas natural, el ferrocarril y el transporte de mercancías han reducido sus precios en todas partes entre el 30 y el 75 por ciento, pero la restructuración del sector eléctrico no ha originado reduciones semejantes.

El informe comienza con la síntesis siguiente: "La fe(2) ciega es improbable que produzca un mercado libre que sea competitivo. La sustitución de la regulación tradicional por mercados es sólo una opción entre los muchos instrumentos políticos que hay para alcanzar el objetivo de reducir los precios; esta sustitución no debe ser un fín en sí misma"; y su introducción es demoledora: "Nuestra investigación demuestra que no hay ninguna prueba de que la restructuración haya producido beneficio alguno mensurable para los consumidores o para los sistemas que han sido reestructurados. En particular:

  • La comparación de los datos de los precios industriales de la electricidad entre estados reestructurados y no reestructurados no muestra que haya prueba alguna de una reducción sustancial del precio, ni siquiera de la tasa de variación del precio, en los estados restructurados, y el registro sobre los gastos de explotación totales y la eficiencia térmica es variado.
  • La reestructuración ha introducido varios elementos en el sector que actúan para aumentar los costes, no para bajarlos. Estos comprenden mercados no competitivos e incompletos para los servicios esenciales, la casación de precios de la generación, nuevas instituciones costosas, y un aumento grande del coste de capital debido al aumento de la incertidumbre. El primero de estos elementos se aplica a algunas industrias con reestructuración acertada. Puede ser que la implicación regulatoria apropiada pueda conducir a condiciones que promuevan precios inferiores en el sector eléctrico también, pero hay que resolver asuntos como el de compartir la infraestructura de transporte.
  • La competencia minorista en los EE UU ha fallado. Incluso en los estados que al principio fueron testigos de altos niveles de interés por parte de los consumidores y de terceros proveedores de servicios eléctricos, los mercados de alternativas a la eléctrica titular no se han sino secado.
  • El sistema de transporte de los EE. UU. no estaba diseñado para manejar el volumen de transacciones a larga distancia originados por los mercados de electricidad pluriregionales. Los precios nodales no han logrado proporcionar los incentivos apropiados para acometer una expansión provechosa de la red. Incluso si se pudiera concebir un esquema de fijación del precio basado en el mercado para promover la inversión, la dificultad de disposición de emplazamientos puede ser un impedimiento aún más importante para la creación de un sistema de transporte que facilite la competencia al por mayor.

Nadie propuso seriamente que la restructuración adoptara la forma de eliminar repentinamente la regulación estatal y federal. Cada eléctrica era propietaria de las líneas de transporte y de distribución en su territorio así como esencialmente de toda la generación. De esta manera, cada eléctrica tuvo un monopolio y pudo haber extraído un beneficio masivo subiendo los precios. No existía ningún modelo uniforme para transformar un mercado regulado en otro competitivo. Primero California y Pensylvania, y luego otros estados, se dedicaron a desregular y luego resolvieron que estructuras de mercado pensaban que proporcionarían las ventajas de un mercado competitivo. La desregulación fue asumida en interés público, tanto en las grandes aglomeraciones urbanas como en las zonas rurales de población dispersa.

La desregulación se convirtió en un fin, más que en el medio de beneficiar a la sociedad. Si el bienestar del consumidor es el criterio básico para reestructurar con éxito, entonces la reestructuración debería congelarse hasta que los actuales y costosos experimentos se hayan evaluado para ver si hay una ventaja y, si es así, cuál, si es que hay alguna, de las estructuras actuales tiene la mayor probabilidad de generar beneficios sociales."

(1) La Ley de Política Energética (Energy Policy Act) de 2003. Division A: Reliable and Diverse Power Generation and Transmission Título II: Electricity - Subtítulo B: Amendments to the Public Utility Holding Company Act - (Sec. 234) Establece el ""Electric Energy Market Competition Task Force" como un grupo de trabajo interagencias para revisar la competencia en los mercados eléctricos mayoristas y minoristas.
(2) Sobre "fé y regulación" Paul Krugman escribió un Op-Ed en el New York Times titulado "El Camino a la Ruina" el 18 de Agosto de 2003 después del Apagón de Nueva York: "...el sector eléctrico no ha gastado lo suficiente en sistemas de control y salvaguardas que se suponía prevendrían estas cosas. Y la causa de este descuido es una desregulación basada en la fé"..."Estos expertos no se opusieron necesariamente a la desregulación; su posición era que la desregulación podía conducir a un desastre a menos que viniera acompañada de políticas no solo para mantener la red fiable, sino para expandirla. (Para hacer la competencia posible, un sistema desregulado necesita considerablemente más capacidad de transporte que uno basado en un monopolio regulado.) Pero sus advertencias no fueron tomadas en serio; los políticos y entusiastas de la desregulación simplemente tenían fé en que algo como "el mercado" se ocuparía del problema."

NOTA: El lector podrá enconcontrar al final del texto en inglés, e inmediatamente antes del comienzo del texto en español, una lista de direcciones seleccionadas para descargar documentación desde ellas, fechada hasta 2003, año en cuyo verano se produjeron los grandes apagones en Norteamérica y Europa.

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