Academic journal article Journal of Economic Issues

Social Goals and Partial Deregulation of the Electric Utility Industry

Academic journal article Journal of Economic Issues

Social Goals and Partial Deregulation of the Electric Utility Industry

Article excerpt

Electric power is an essential and vital element of the nation's infrastructure. The electric power industry is also extensively regulated. Federal policy is moving toward partial deregulation of the generation/wholesale power portion of the industry.(1) The purpose of this paper is to consider the impact that the federal government's policies of partial deregulation will have on the attainment of beneficial social objectives.

Reducing Regulation

As with other regulated industries, such as transportation, telecommunications, natural gas, and banking, federal policy toward the electric utility industry has been to reduce regulatory oversight through partial (though substantive) deregulation.(2) The Federal Energy Regulatory Commission (FERC) has played a major role in the movement toward regulation by market forces. FERC's open market vision for the electric industry is that greater reliance on market forces achieved through increasing levels of deregulation will stimulate the development of a workably competitive industry.

In the 1980s and early 1990s, the FERC moved away from its cost of service standard for pricing and toward reliance on market-based rates. The FERC allowed utilities to substitute negotiated rates for short-term sales. The FERC approved transmission pricing that allowed utilities to gamer economic gains arising from their wholesale customers' efforts to secure lower cost supplies from other utilities.(3) And FERC allowed utilities to charge buyers market-based prices for the sale of wholesale power if the utility could demonstrate an "absence of market control" over a buyer - even when the market itself is not workably competitive.(4)

The Energy Policy Act of 1992 has furthered the process of partial deregulation. The Act expands the definition of generating entities that can be exempted from traditional pricing and operation regulatory controls and makes it easier for utilities to establish and expand "exempt wholesale generation" corporate affiliates.

Social Goals and Industry Characteristics

There are a variety of social goals that are important for the ordering and operation of the electric power industry. Social objectives include efficient supply and utilization of electricity, consumer protection, equitable responsibility for maintaining the electric power infrastructure, reduction of adverse environmental and social externalities, community cohesion, and promotion of socially beneficial technological progress and pathways. These objectives require institutional processes and control mechanisms that are congruent with the characteristics of electric production and utilization-and support the promotion or protection of socially enhancing values for consumers and producers alike.

The characteristics of the electric power industry pose significant challenges for achieving these social objectives. The technology of electric power is not conducive for sustaining completely open and competitive electric markets. Electric power technology exhibits significant cost-subadditivities.(5) Utilities experience extensive economies of scale in transmission, though to a. lesser degree in generation. Economies of utilization tend to favor a single distribution service provider in a given service area.

Electric power technology is also associated with a variety of externalities. Electric power poses significant environmental problems at all stages of operation, stresses that include greenhouse gasses, sulfur and nitrogen oxides, air toxins, ionizing radiation, thermal pollution, electromagnetic fields, aesthetic effects, and others. In addition, negative reliability externalities exist in the delivery of electric power. Electric power technology service cannot be maintained when demand exceeds available supply. Because of the interconnected nature of electric utility systems, and because electricity follows the path of least resistance, increased usage by one consumer increases the probability of outages for others. …

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