Electricity Savings

Rethink the Natural Monopoly Justification of Electricity Regulation (8/18) Last week's blackout suggests that this rethinking of natural monopoly is long overdue. Full text.

Blackouts Were Crystal Clear (8/15) The transmission capacity has been insufficient to support the increased demand while the infrastructure that carries the electrons is outdated. Full text.

This Power Outage Did Not Come Out of the Blue (8/15) The country's halting moves toward electricity deregulation over the past decade have dramatically increased the volume of power flowing on the grids. Full text.

Simplifying the Regulation of Electricity Markets. The Federal Energy Regulatory Commission’s Standard Market Design proposal is a bold attempt to simplify the regulation of electricity markets but risks locking the electricity industry into a regulatory structure that ignores technological advances and is unable to adapt to changing market conditions. Executive Summary | Full Text | Press Release

The Control and Manage Mindset Marches on in California (7/9) The California legislature has entertained a few different bills this year that would reinstate direct access for some electricity consumers. Full text.

Price Caps Keep Lid on Uncertainty. (7/3) Standard offers may contradict the notion of free enterprise but they are necessary tools to facilitate deregulation in the power sector. Without such “guaranteed” rates, state legislators would be reluctant to subject consumers to price volatility. Full text.

The Price Ain't Right. (6/25) Suddenly politicians in Washington are concerned about a natural gas crisis. Indeed, Energy Secretary Spencer Abraham has convened the National Petroleum Council to discuss the matter on June 26 in Washington. Full text.

California's Electricity Network Reliability. (5/30) The reliability of the network and the ability of supply and demand to meet at sufficiently low electricity prices continues to be a challenge in California, and the BAEF study summarizes the challenges facing policymakers as “inadequate infrastructure, an uncertain regulatory environment, a lack of incentives for consumers to conserve, and high retail electricity prices.”. Full text.

Customer Choice and Retail Deregulation. (4/21) Retail choice can create benefits for customers, reduce overall energy use, and encourage the development of innovative energy management solutions. Full text.

California Refunds (4/7) The FERC report focuses on fact finding and analysis in several related areas, all of which interact to indicate if wholesale prices were "just and reasonable." Full text

California Beach Bums (4/8) Put two good environmentally smart ideas together - recycling old tires and creating kelp beds, which along with coral reefs are one of the "rainforests of seas" - and what do you get? In California, only litigation and conflict at the hands of the state's own imperious Coastal Commission. Full text

Giving Deregulation a Jolt (3/28) Deregulation of the electricity sector has been short-circuited. But if markets were truly free, then providers would give consumers more choices that better suit their lifestyles. Full text

Hydrogen Fueling Station Subsidies. (3/26) Hydrogen fuel subsidies are also likely to undercut the creativity of entrepreneurs who will seek to find novel and convenient ways to provide hydrogen fueling to consumers who want it, and to profit from it. Part 3 of the 5-part Let the Hydrogen Economy Evolve series. Full text

Science of Hydrogen. (3/24) Due to the risks associated hydrogen fuel cells, federal research efforts should proceed with caution. Part 1 of the 5-part Let the Hydrogen Economy Evolve series. Full text

Distributed Generation. (3/20) On-site power at industrial facilities or distributed generation in commercial or even residential locations can be the most efficient means for increasing the reliability for those who need it. Full text

Deregulation Works. (3/3) US and Canadian companies indicate that some progress is being made towards standardizing wholesale electricity markets even though events in California and Ontario have slowed momentum on retail competition at the residential level. Full text

Can Government Pick Winners? (3/28) Governments (and corporate bureaucracies, for that matter) have a very poor track record of picking technology winners, and we have little reason to believe that the success rate with hydrogen research will be any different. Part 5 of the 5-part Let the Hydrogen Economy Evolve series. Full text

Hydrogen-powered Buildings. (3/27) While hydrogen fuel cell and hybrid engines to power buildings may not appear to reduce pollution as effectively as using them in vehicles, using them in buildings provides several benefits and avoids some of the costs encountered with vehicles. Part 4 of the 5-part Let the Hydrogen Economy Evolve series. Full text

Vernon Smith Teaches California Utilities (3/26) Vernon Smith suggests that there's little volatility left to hedge in a true competitive market. Markets eventually figure out by trial and error how to solve problems (assuming the PUC isn't involved). Full text

Scapegoating Isn't Energy Policy (3/26) Electricity industry experts and analysts have achieved substantial consensus that California needs market-based restructuring of its electricity regulation. Full text

Innovation in Mature and New Technologies. (3/25) The science of hydrogen as a fuel source indicates that hydrogen fuel cells are not a “silver bullet” to generate clean fuel and eliminate fossil fuel dependence. Part 2 of the 5-part Let the Hydrogen Economy Evolve series. Full text

Fuel-cell Powered PDAs? They're Coming. (3/17) This week is National Energy Education Week, and I would like to celebrate by highlighting some fascinating, and potentially incredibly useful, research being done on ways to use hydrogen fuel cells for mobile electronic devices. Full text

Market Force Manifesto. (2/8) A manifesto signed by professors, consultants, and former regulators urges policymakers to move swiftly and vigorously toward a market-based restructuring of California's electricity industry. Full text

Retail Electricity Markets. (1/13) As Ohio begins its third year of retail electric competition, the Ohio Consumers Counsel sees continuing cause for concern about the health of the state's electric marketplace and the potential long-term risks for Ohio's residential electric consumers. Full text

Utility Takeover a Mistake. (1/21) No sooner have San Francisco voters turned down for the second time the idea of the city taking over the local electric utility than the idea pops up all over California, Florida and other states. Full text

An Electricity Innovation. (12/2) American Superconductor has achieved an important milestone in producing transmission wires from high temperature superconductor material Full text.

FERC Judge Finds for California Refunds. (12/13) This decision should resolve some of the regulatory uncertainty that has been plaguing the energy industry, but outstanding issues of the causes and exercise of market power, and ongoing threats from the California government of legal challenges to FERC’s finding, could prolong the high regulatory costs of putting California’s policy failure behind us. Full text

Understanding Energy Deregulation. (12/2) The Federal Energy Regulatory Commission (FERC) is pursuing a highly needed plan to standardize U.S. energy markets and make them work more efficiently. In spite of some criticisms, mostly stemming from California's electricity fiasco, there are many safeguards in place for consumers because of FERC oversight. Full text

Simplifying the Regulation of Electricity Markets (11/13). The Federal Energy Regulatory Commission’s Standard Market Design proposal is a bold attempt to simplify the regulation of electricity markets but risks locking the electricity industry into a regulatory structure that ignores technological advances and is unable to adapt to changing market conditions. Executive Summary | Full Text | Press Release

Market-based Retail Electricity Pricing (11/4). The “one size fits all” of regulated, fixed, average rates will become increasingly obsolete because of technological change, institutional change, regulatory change, and cultural change that recognizes the diversity of value propositions that the electricity industry can profitably present to consumers. Full Text

Privatization Could More Than Make Up For Loss of Utility Users Tax (10/24). Through contracting out and privatization, a city can obtain the best of both worlds—relief for taxpayers through the abolition of the utility users tax and the maintenance of (or even increase in) the quality and quantity of city services made possible by cost savings and increased competition. Full text | FAQs | Case studies | Press Release | More info

Power to the People (10/16) Vernon Smith explains how perils of limiting competition and distorting market incentives contributed to the California electricity crisis. Full Text | Experimental economics article | Smith Bio | Smith Bio (pdf) | Smith CV | Exclusive Interview

Vernon L. Smith and The Market Laboratory (10/9) Vernon Smith, professor of economics and law at George Mason University, has won this year's Nobel Prize in Economics for his pioneering work in experimental economics. Mr. Smith's experimental economics uses real economic agents facing real choices -- and with the potential to earn real money payoffs -- to create data on economic choices and incentives. Full Text | Smith Bio | Smith Bio (pdf) | Smith CV | Exclusive Interview

Vernon L. Smith and Experimental Economics and Retail Electricity Deregulation (10/9) The recent electricity experiments of Vernon Smith illustrates the power of experimental methodology to create information about what is likely, and what we cannot predict, from different features of electricity deregulation. Full Text

National Energy Policy. (10/2) Lynne Kiesling and Adrian Moore believe the Bush Administration should strip its energy policies down to market-oriented essentials in order to send a clear signal to the Congress as to what constitutes good energy policy. Full Text

What's New with the California Wholesale Price Cap? (10/2) The new price cap has been delayed a month to allow officials to incorporate changes from a computer test of manipulation possibilities. Full Text

Institutional Analysis and the California Electricity Crisis. (10/2) Lynne Kiesling gave this presentation on how the rules governing trade in the California Power Exchange and the ISO created incentives and opportunities for generators to "withold" power until the last minute. Full Text

Government Roles in Distributed Energy. (9/18) Widespread concerns about insufficient transmission grid investment and the security of the grid have increased the attention of policymakers at the federal and state levels to distributed energy. Full Text

CPUC's Misleading Electricity Study. (9/19) California's Public Utility Commission expects the electricity industry to operate on the basis of charity, not on the economic exchange of value for value between buyers and sellers. Full Text

Market-Based Electricity Pricing. (9/10) Retail pricing is a crucial component of an integrated, healthy, dynamic electricity industry. Offering consumers a portfolio of contract choices in a range of market-based prices would make many diverse consumers better off, and would also bolster system reliability and reduce forced outages. Full Text

Oil and Gas Price Stability. (8/28) Even with the threat of military action in the Persian Gulf and the upcoming Labor Day holiday weekend, both crude oil and gasoline prices are pretty darn stable. Full Text

Inept Power Pricing. (8/13) AThis Orange County Register Commentary profiles Lynne Kiesling call for a truly competitive electricity market, which if enacted will provide a great deal of flexibility for innovation and experimentation. Full Text

Digital Monsters. (8/13) The Federal Communications Commission finally got its act together and voted to require electronics manufacturers to include digital tuners in all new television sets by 2007. Millions of Americans had been rioting in the streets, demanding that they pay several hundred dollars more for a feature that they don't want and will never use. Full Text

Good News on the Electricity Competition Front. (8/26) There's a lot of cheery news today about retail electric competition in the U.S. and how the black eye that California and Enron have given electricity restructuring have not been fatal. Full Text

Consumers, Gas Prices Better Off Without Help From Politicians. Lynne Kiesling thinks that by letting the market dictate gas prices, even if that means higher prices, we stand a better chance of reaching many of our long-term energy and environmental goals: conservation, reduced dependence on foreign oil and reduced emissions through the use of alternative fuels. Full Text

Enron Arbitrage. While the rhetoric around the Enron fiasco is falling into accusations of a multi-firm collusion to manipulate California’s wholesale electricity market, Lynne Kiesling thinks some of the strategies Enron used were strategic arbitrage of bad rules and bad institutions exacerbated by price caps. Full text

Network to Nowhere. 80 Percent of Americans have access to broadband technology so why don't more of them use this high-speed Internet access? Are government efforts to expedite the deployment of the technology solutions in search of a problem? Equally important, do government policies hinder the development of this booming market through unnecessary regulation? Reason Foundation Trustee James Glassman ponders these questions in this recent column published on TechCentralStation.com. Full text.

Price Caps: A Recipe for Blackouts and Higher Long-run Costs. Adrian Moore and Lynne Kiesling's April 19, 2001 open letter to the Congress and the California Legislature regarding price caps and their role in the California electricity crisis. Full Text

State Meddling, Not Deregulation, Behind Electricity Crunch. California did not deregulate its electricity industry. George Passantino explores the differences between deregulation and the state's attempt to "restructure" the industry, and explains how state meddling and regulatory intervention were primary drivers of the current electricity crunch. Full Text

GAO and the California Energy Crisis. (7/18) Yesterday the General Accounting Office released a report on the causes of the wholesale electricity price increases in California August-October 2000. Lynne Kiesling thinks this current GAO analysis is not really additionally persuasive beyond the claims of market power put forth in other studies. Full Text

Optimism and the Future of Energy. (7/15) Arnold Kling suggested that Lynne Kiesling explore the fuel cell future in more detail. She intends to delve further into the economics of such technological change, but for now, here's a compilation of several articles on fuel cell research and how close they are to economic viability. Most current analysts predict about 20 years. Full Text

Maine Deregulation. Electricity consumers often hear a lot about California, Pennsylvania and Texas. But other states that have restructured their power markets sometimes get lost in the shuffle. One jurisdiction that gets little national attention is Maine, which has been open to competition since March 2000. Full text

GAO and the California Energy Crisis. Yesterday the General Accounting Office released a report on the causes of the wholesale electricity price increases in California August-October 2000. Lynne Kiesling thinks this current GAO analysis is not really additionally persuasive beyond the claims of market power put forth in other studies. Full Text

Optimism and the Future of Energy. Arnold Kling suggested that Lynne Kiesling explore the fuel cell future in more detail. She intends to delve further into the economics of such technological change, but for now, here's a compilation of several articles on fuel cell research and how close they are to economic viability. Most current analysts predict about 20 years. Full Text

California Electricity Crisis Is Complex Problem. Lynne Kiesling analyzes the California Electricity Crisis. This audio feed was produced by Northwestern University where Kiesling is a Visiting Associate Professor of Economics. Listen Now

Powering up California: Policy Alternatives for the California Energy Crisis. Struggling for answers to the looming electricity crisis, California lawmakers should learn from other states that have successfully deregulated electrical utilities, according to a new Reason Public Policy Institute report. Powering Up California: Policy Alternatives for the California Energy Crisis. In it, Adrian Moore proposes a series of market-based policies to address the current electricity crisis that will move the state closer to the promises of lower price, vigorous competition, and a safe and reliable power supply. Full Text

Last week’s blackout shows that transmission investment has not evolved in keeping with the dynamics of growing wholesale electricity markets. The deregulation of wholesale prices and the removal of geographic restrictions on sales of generated electricity have unleashed dramatic changes in the industry and led to increasing efficiency. Currently, though, the antiquated transmission system and continuing retail and distribution regulation at the state level hamper growth and efficiency in the electricity industry. Backward-looking, static regulatory thinking about how benefits are generated through competition hampers the unleashing of possible benefits of competition in the electricity industry.

Both federal and state policymakers continue to treat transmission and distribution as natural monopolies, meaning they believe one firm could supply the entire demand at lower cost than multiple firms serving the relevant market. From this premise they conclude that transmission and distribution must continue to be regulated, because in the absence of regulation, transmission and distribution owners would not face sufficient competition to keep prices low to consumers and to achieve economic efficiency in transmitting and distributing electricity. Natural monopoly concerns also include wanting to avoid the “unnecessary duplication” of such expensive capital infrastructure as high-voltage wires and transformers. Thus even under current Federal Energy Regulatory Commission proposals to revise the regulation of electricity, both transmission and distribution would continue to be regulated.

Although regulators are considering ways to incorporate more performance-based rates to move away from rate-of-return regulation, the natural monopoly paradigm locks them into a regulatory framework that is becoming outmoded as a result of technological change. Overcoming the traditional regulatory mindsets is a crucial step in delivering a variety of benefits to consumers, the economy and the environment from competition in electricity. Current regulatory proposals (such as FERC’s Standard Market Design proposal) will lead to the construction of additional high-voltage transmission to create a unified transmission network across the country; while this proposal is sure to create some benefits by integrating separate geographic markets, it will also encourage more transmission construction than if regulators allowed for more flexible customer and supplier use of new technologies that will provide substitutes for long-distance transmission. Such substitutes would create competition for transmission, and would reign in a transmission owner’s ability to raise prices to consumers. Through such a process we could actually get closer to achieving economic efficiency in transmission, without running the risk of the regulatory mandate to build more grid that could lead to expensive overconstruction.

Many technological and market innovations have reduced the natural monopoly rationale for traditional electric industry regulation. For example, consider distributed generation. Distributed generation (DG) is the use of an energy source (gas turbines, gas engines, fuel cells, for example) to generate electricity close to where it will be used. Technological change in the past decade and deregulation in the natural gas industry have made DG an economically viable alternative to buying electricity from a monopoly utility and receiving it over the utility’s transmission and distribution grid. The potential for this competition to discipline a transmission owner’s prices for transmission services is immense, but it still faces some obstacles.

Some utilities are offering DG, particularly to large industrial consumers who require higher reliability than the standard offering. These systems, though, tend to serve primarily as backup, because the government-granted monopoly franchise still exists for all utilities. This franchise imposes a twofold legal obligation – an obligation on all utilities to serve, and an obligation on all customers to buy. This relic of monopoly regulation has stifled the spread of DG and its ability to inject competition into the transmission and distribution sectors of the industry. FERC has been working with state regulators to craft a consistent set of standards that would enable DG to interconnect with the grid, and to put any excess power generated onto the grid. This effort has met technical and political obstacles, although the political obstacles have been the more daunting. Utilities generally perceive DG as a threat to their revenue stream, because they still operate under the old regulated business model of “sell more power, make more profit.” But there are other value propositions out there – once utilities realize that they can make more profit by selling less power (e.g., through offering different contracts with market-based retail pricing), DG becomes much less of a threat to the utility business model. This change in mindset, and in business model, is impossible under the current regulatory environment that treats transmission and retail as a natural monopoly.

Such contestability of what was once thought to be a natural monopoly, and opting out of the use of that one-time natural monopoly, is occurring in other network industries, such as telecommunications. As wireless technology and services improve and digital networks expand, more customers are opting out of having a “land line” into their homes, choosing instead to rely entirely on their cellular telephones for service. Customers (specifically large industrial and commercial consumers right now, given existing technology) could reap similar benefits in electricity. However, policymakers are not yet considering the regulatory changes required to achieve those benefits.

Technological change and market dynamics have made the natural monopoly model of electricity regulation obsolete. While technological changes and market innovations that shape the electricity industry’s evolution have received some attention, their roles in making natural monopoly regulation of transmission and distribution obsolete have not received systematic treatment. For that reason, the policy debate has focused on creating regional transmission organizations to rationalize grid construction, but has not dug more deeply into the possible benefits of dramatically rethinking the foundations of natural monopoly regulation. Last week’s blackout suggests that this rethinking of natural monopoly is long overdue.

by Lynne Kiesling