The Electricity System at the Crossroads-Policy Choices and Pitfalls

By Mattoon, Richard | Economic Perspectives, Spring 2002 | Go to article overview

The Electricity System at the Crossroads-Policy Choices and Pitfalls


Mattoon, Richard, Economic Perspectives


Introduction and summary

In the mid-1980s, electricity policy in the United States began a new chapter when wholesale electricity markets were opened to competition. While the immediate goal was to increase the diversity of supply for electricity generation, proponents of restructuring also cited other dimensions of success arising from the restructuring of other network industries (such as telecommunications, airlines, and natural gas) as justification for introducing competition to the electric utility industry. Wholesale competition for producing electricity would improve generation efficiency, diversify supply, promote innovation, and even lower prices. Success in opening the wholesale market, proponents argued, would eventually be extended to the retail market, and all consumers would have the opportunity to choose their supplier and pick an electricity service that best fit their individual needs.

The initial enthusiasm for restructuring was particularly noticeable in states with high electricity prices. In theory, splitting the traditionally integrated functions of a utility--power generation, transmission, and distribution--into separate functions would expose cross-subsidies and inefficiencies, and competition among power generators would lead to lower prices for all classes of customers. Restructuring was designed to introduce open market competition only in electricity generation. Transmission and distribution services would still be subject to varying levels of regulation. By 2000, almost half of the states were pursuing some form of restructuring. However, several recent events have cooled the enthusiasm for abandoning the traditional heavily regulated and integrated utility system. Foremost among these was the California electricity crisis. The state garnered daily headlines as a series of events, including a flawed restructuring plan, left California facing skyrocketing prices, potential blac kouts, and bankrupt utilities. California's high-profile bad experience clearly demonstrated that the costs of a flawed electricity restructuring policy could be very high. In addition, states that had demonstrated early success in restructuring, such as Pennsylvania, Connecticut, and Massachusetts, were beginning to find that sustaining competition and promoting new market entrants was harder than they had anticipated.

This apparent conflict between theory and outcome has left restructuring at a crossroads. States are examining what elements and structures need to be in place to realize the promise and benefits of opening electricity markets to competition. The questions policymakers need to answer include the following:

* Is the physical infrastructure (particularly, adequate supplies of generation and transmission) in place to support new market entrants and a competitive market?

* Are the incentives for investing in new electricity facilities adequate? What can be done to improve these incentives if they are lacking?

* Do new institutions need to be developed to facilitate this new structure for delivering electricity? Should these be federal, regional, state, or quasi-public institutions? What is the role for existing regulatory institutions?

* Should restructuring expose consumers to changes in electricity prices, even when those prices can be volatile?

* What is the relationship between meeting environmental goals and generating greater power supply? Can the two successfully coexist?

In this article, I examine what restructuring means in the electricity field. I discuss the legacy of the existing electricity system, which favored local electricity provision by integrated and highly regulated monopoly utilities, and describe the issues involved in moving to a more market-based system. Then, I use the five states of the Seventh Federal Reserve District as a case study for examining how restructuring issues are being addressed at the state level. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Electricity System at the Crossroads-Policy Choices and Pitfalls
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.