Study warns against return to regulation in electricity markets
Study warns against return to regulation in electricity markets
By Kathleen Hart
SNL Power Daily
December 9, 2008
While many states and stakeholders in the electric utility industry are advocating a return to regulation, a study released Dec. 8 at a COMPETE Coalition media event finds that competitive markets lead to more cost-effective infrastructure investments.
“America must meet the dual challenges of energy security and environmental sustainability in a highly competitive global market. It is estimated that we may need a more than $2 trillion investment in our energy infrastructure to address these issues,” William Massey, a former FERC commissioner and counsel for the COMPETE Coalition, said in a news release. “This study provides resounding confirmation that electricity competition fosters the innovation, discipline and efficiencies to most effectively make this investment.”
The report, “Embrace Electric Competition or It’s Déjà Vu All Over Again,” was prepared by the NorthBridge Group and commissioned by Reliant Energy Inc. It urges policymakers to learn from mistakes made during the 1970s in navigating the energy challenges facing the nation.
“The response to the energy crisis of the 1970s resulted in a $200 billion mistake, in which monopoly markets led to excess capacity and cost overruns which were felt for decades,” COMPETE said in the news release. Four flaws of regulation at that time included “a lack of clear price signals resulting in a reserve margin twice as large as necessary; perverse capital incentives that unnecessarilycost consumers billions of dollars; improper allocation of risks to consumers rather than investors; and a tendency for regulatory fixes to overcompensate.”
Competition provides “the right price signals and promotes efficiency in existing plant operations and customer consumption,” Frank Huntowski, a director at the NorthBridge Group, said Dec. 8.
“The decisions we make will be difficult, but decades of experience and this study suggest that monopoly structures are not well-equipped to meet such challenges.”
Recent experience in restructured electricity markets and experience in other competitive industries “suggests that competitive markets are well-equipped to meet these challenges. We should learn from this history and avoid ‘déjà vu all over again,’” he said. Massey said that policy decisions aimed at meeting electricity generation and transmission infrastructure challenges should be made “with a long-term focus on what model will foster efficiency, reliability and sustainability over time. Competitive markets continue to prove that they are better equipped to reach these goals.”
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