An Electric Revolution, Chapter Seven: An Inconvenient Experiment
Historically, the central problem in developing competitive electricity markets is the need for a system operator to manage complex, short-term power grid interactions and maintain system reliability. The key is to continuously maintain the balance of power supply and consumption under all conditions. In the past only utilities could master the task. But complex consumer digital demands combined with aging analog controls have seriously eroded utility companies’ ability to maintain operational control, leading to increased unreliability and insecurity. An intelligent deregulated system using digital controls is essential to meeting 21st century needs.
To many in the electric utility industry, deregulation is a word with exceptionally negative connotations. Market reforms attempted in California during the 1990s turned out particularly badly, bringing about changes that were more “destructuring” than deregulation, yet carried a whiff of regulatory glasnost. What the state put in place was a volatile combination of bad economic theory and worse political practice, which ultimately put California and its rate-payers at the mercy of Enron’s traders at the zenith of the firm’s malevolent power. This was the equivalent of leaving the state’s front door unlocked and posting a sign welcoming burglars.
California’s inconvenient experiment began with the creation of a group of isolated wholesale markets, contrary to the well-established competitive business model that emphasizes development of both wholesale and retail markets. In effect, California created a volatile wholesale market structure, but maintained a closed retail electricity market with fixed sales prices. Fundamentally this disconnect cannot work, since efficient retail pricing and incentives are essential if consumers are to benefit from competition. California’s true problem was not deregulation, but rigid retail price regulations, coupled with the prohibition of long-term wholesale supply contracts that led to bankrupt utilities.
