The Past and Future of Electricity Regulation

Article excerpt

   By 2006-2011, electricity will be purchased and sold in both wholesale and 
   eligible retail markets by any willing creditworthy participant. Markets 
   will clear with competitive prices. Competitive prices will function so as 
   to ration existing supplies efficiently in the short run and to elicit 
   adequate technology and infrastructure in the long run, so that there will 
   be no involuntary curtailment of service at market prices. Electricity 
   markets will be both transparent and liquid, and market participants will 
   have opportunities to hedge risks. Although regulation of monopoly service 
   providers will continue, even these monopolies will feel some pressure of 
   competitive market forces. (1) 


The goal of the Federal Energy Regulatory Commission (FERC) staff to achieve competitive electricity markets by 2011 is overly ambitious, but nonetheless worthy. There is much to note in the quotation. First, both wholesale and eligible retail markets will be competitive, transparent, and liquid. Second, the markets will be so efficient that consumers will not experience involuntary curtailments. Third, market actors will be able to hedge risks, which is necessary for supply reliability. Finally, regulation of monopoly service will continue. This Article concentrates on the continuing regulation of the electricity industry by looking at the past and speculating about the future. Like Heisenberg's Uncertainty Principle, which held that an observer cannot know both the speed and position of an electron, the present state of electricity regulation is too dynamic to pin down.

The last eighteen months have been remarkable for the electricity industry. The California crisis of the summer of 2000, the war against Afghanistan, and most recently, the Enron debacle, called attention to industry restructuring and the future of national energy policy. While each of these events have been catastrophic for California, Enron, and the world (in the case of Afghanistan), none of them should change the direction of electric energy policy. At bottom, the California crisis was about poor economic predictions and poor regulatory design. The Enron debacle was about poor financial hedge management along the lines of the Long Term Capital Management collapse in 1998. (2) And the Bush administration's energy policy was set in place before September 11, 2001 and the following Afghan war. In short, none of these events should affect restructuring because none of them addresses what is most significant, the ability to construct and maintain an efficient reliable transmission system.

Continued regulation is warranted because the transmission segment of the electric industry maintains natural monopoly characteristics. Further, until there are significant technological advances, for example in distributed generation or fuel cells, regulation is justified. The discussion of electricity transmission will be placed in context by briefly discussing the California crisis and Enron in Part II. Part III examines the remaining aspects of natural monopoly in the electricity industry. Part IV discusses the role of electricity in national energy policy. The Article concludes by identifying five challenges facing the industry and its regulators.


The language we use in policy analysis is almost as important as the language we use in legal analysis. The popular perception is that the Reagan Revolution was the beginning of deregulation during the last quarter of the twentieth century. That perception is inaccurate. The Carter administration engaged in the deregulation of airlines, trucking, energy, and other industries. (3) Still, the Reagan years stressed the importance of deregulation across a broad range of industries including electricity. Deregulation was and is driven by politics and economics. …