Is There a Rational Path Towards Salvaging Competition?

Fri Mar 01 15:24:38 EST 2002
By Dr. Karl McDermott and Dr. Carl Peterson

Since the movement toward a less regulated retail electric market began in the early 1990s, some states attempted a total restructuring of the industry and an overly hasty introduction of customer choice, instead of concentrating on wholesale market development and proper pricing structures for the retail market. Recent events in California and other jurisdictions have led state regulators to ask themselves: has competition failed? In this article published in The Electricity Journal, NERA Special Consultants Dr. Karl McDermott and Dr. Carl Peterson argue that the market "failures" witnessed so far are failures of the particular experiments that were employed to switch to a retail market and not necessarily the failure of competition per se.

Assuming that the goal of industry reform is a model of end-state competition, they review and analyze the institutional, regulatory, and market design issues that have led to the failures of policy that have occurred since 1996. The authors propose policies that can introduce competition on an incremental basis while increasing efficiency in production, promoting entry to market and incorporating demand-side responsiveness and urge the industry to implement a number of common-sense experiments to test the market before abandoning competition and returning to a regulated industry.

This article was published in the March 2002 issue of The Electricity Journal.