Electric utility deregulation: failure or success

Abstract

The electric utilities approach for restructuring the power market determines the failure or success of electric utility deregulation. It will cost billions of dollars, if restructuring is not done properly. Federal Energy Regulatory Commission (FERC) Order 2000 endorses competitive power markets, and price signals for the purpose of managing electricity grid congestion and achieving reliability. In a deregulated competitive electricity market, companies have to pay for the reactive power losses out of the revenues they earn. If the investors are reimbursed for reliability, there might be more investments. California deregulated in 1998 but the deregulated market was not structured efficiently and allowed some companies to manipulate the market by sending the power out of California and then reselling it back into the state. The utilities were not allowed long-term contracts and were required to sell many of their existing plants. California's experience is unique; in fact, when done well, the success stories in Pennsylvania, Ohio, Texas, England, and Japan show the benefit to both consumers and sellers from electric utility deregulation. Deregulation has been successful in New York, Virginia, and Ontario by protecting the customers from price volatility by price caps. By definition, price caps are not effective in a deregulated market, however, a price cap (i.e., a little regulation) to protect consumers in the transition period to deregulation is good. The price caps can be removed at a later date when the deregulated industry has matured like the power market in New Jersey. Circumstances like the August 14th, 2003 blackout in the northeast of the United States (not caused by deregulation) brought industry uncertainty to investors and consumers. Under deregulation, dispersed power generation (such as co-generation, biomass, microturbines, solar photovoltaic cells, wind turbines, fuel cells, geothermal, and diesel generators) is being promoted vigorously and more prominence is being put in the ancillary services and FACTS devices because of shortage of transmission lines in a deregulated power market. One of the results of economic deregulation of the electric power industry has been the development of a market for advanced nuclear power plants that will be cheaper to build and cheaper to run. In conclusion, by implementing a limited price control, the electric utility deregulation can be successful.