1 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 2 Source: Andy Whitaker2 North American Organized Markets Roughly half the installed capacity Geographic footprint of organized wholesale markets in North America Source: ISO 5 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 © ISO / RTO Council. ll rights reserved. This content is excluded from our Creative Commons license. For more information, see http://ocw.mit.edu/fairuse..4 2000-01 Crisis Source; Gary Stern, Southern California Edison Company 8 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) 300250200150100500JulAprJanJanOctOctJulJulAprAprJanOctJulAprJanOctJulAprJanOctJulApr200320022001200019991998Wholesale electricity prices in California, $MWh$MWhPX Terminated Day-Ahead Trading January 31, 2001 Feb. 2002 - Sep. 2002, Bloomberg SP15 Average Price are Shown Image by MIT OpenCourseWare.5 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 10 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, 2006.6 11 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 12 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!7 13 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 14 … 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)8 15 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 16 … & 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), …9 17 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, 1997.10 19 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 20 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 fuel11 21 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 22 Model 1: Monopoly Generation Transmission Distribution/ Retail Consumers Generation Transmission Distribution/ Retail Consumers12 23 Model 2: Purchasing agency (single buyer) IPP Single buyer Distribution/ Retailer Consumer IPP IPP Distribution/ Retailer Consumer IPP Single