Connecting Currents: Toward the Integration of North American Electricity Markets

Article excerpt

I. INTRODUCTION

As recently as 1991, closed markets and governmentally owned or regulated monopolies characterized the electricity industries of Canada, Mexico, and the United States.(1) In the past, trade in electricity among these nations consisted only of limited power transfers between border utilities.(2) Today, North American electricity markets look quite different. All three countries have liberalized their industries to varying degrees by promoting competition at the wholesale level.(3) This liberalization is creating new opportunities for the trade of electricity across North American borders, thus, leading one Canadian industry executive to predict that North American electricity markets will integrate to form one market within the next ten years.(4) Interestingly, unilateral actions taken by the United States to open its domestic industry to competition, rather than the momentous ratification of the North American Free Trade Agreement (NAFTA),(5) precipitated this movement toward the integration of North American electricity markets.(6)

Historically, vertically integrated,(7) government regulated monopolies dominated the U.S. electricity industry,(8) In the early 1990s, Congress initiated regulatory reforms to promote competition in U.S. electricity markets.(9) The reforms, which amounted to an incremental "restructuring"(10) of the industry, began with the enactment of the Energy Policy Act of 1992 (EPAct).(11) EPAct permits regulated competition in the electricity generation market and, by extension, the wholesale electricity market.(12) EPAct further allows U.S. power generators to serve foreign markets directly, to the extent foreign markets are open to such service,(13) and permits foreign power marketers to compete in the growing wholesale market of the United States.(14)

Although not necessarily designed to do so, the reforms of EPAct promote electricity trade among the United States, Canada, and Mexico. Current market conditions in the three countries make increased power transfers irresistible to each.(15) Canadian utilities find that utilizing their excessive generating capacity to sell millions of dollars of electricity in the competitive U.S. wholesale market is an obvious antidote for their current financial woes.(16) Large investments in production facilities coupled with several years of stagnation in demand have resulted in Canadian utilities being burdened with the cost of immense generating capacity without sufficient markets for their power.(17) These utility companies believe they will be successful in the U.S. wholesale market because the low cost of producing hydroelectric power in Canada makes their prices attractive to U.S. purchasers.(18)

Mexico finds that competitive U.S. wholesale prices make purchasing U.S. electricity a viable means of meeting its rapidly rising demand.(19) Mexico's government owned monopoly, the Comision Federal de Electricidad (CFE),(20) does not have the financial ability to invest in its own generating capacity and meet the current rate of demand growth.(21) The EPAct increases the number of buyers and sellers of electricity, which increases Mexico's chances of finding U.S. suppliers to meet its demand.(22) Therefore, by purchasing U.S. power at competitive prices, Mexico is able to delay investment in its own production facilities and still buy power cheaper than it can produce it.(23)

The United States also has economic incentives to increase trade in electricity with its neighbors. The introduction of cheap Canadian power into the U.S. wholesale market will eventually reduce retail prices to U.S. consumers, and offering consumers the lowest price is one of the primary goals of market liberalization in the United States.(24) Furthermore, U.S. power generators will benefit from the accessibility of foreign markets in which they can sell their power.(25) Mexico is particularly enticing to them since its demand is steadily rising. …