Retroactive Retrograde Retreat: Keeping FERC in the Generation Pricing Business Forever

15 August 2003
By Jonathan Falk

In this lively article in the August/September 2003 edition of the Electricity Journal, NERA Vice President Jonathan Falk takes on Stanford professor Frank Wolak's prescriptions for fixing the California electricity market. In a recent paper, Professor Wolak diagnosed the problems with the California electric market which led to the 2000-2001 crisis, critically discussed the contemporaneous response to that crisis by the Federal Energy Regulatory Commission (FERC) and proposed a set of ameliorative measures of his own.

Mr. Falk's criticism is directed not at Professor Wolak's diagnosis or his proposed fixes, but rather at his understanding of the regulatory process which animates them. Mr. Falk argues that somewhere along the way, we have lost the sense of why we ever wanted to deregulate electricity markets in the first place -- which he reminds us is to avoid the ills of regulation. The danger of forgetting the original underlying rationale -- as he argues Professor Wolak has by proposing new and untested regulations, which are tantamount to continuing the regulated regime of the past rather than concentrating on methods to foster competition -- is to resign ourselves to a position of reduced social welfare for no particularly good reason.

The fundamental theme of Mr. Falk's paper is that when we remember why electricity restructuring was pursued in the first place, regulatory solutions to problems in newly deregulated markets seem a very odd choice. If we cannot create deregulated electricity markets, we need to acknowledge that and identify a way back to a regulated scheme that, whatever its infirmities, is at least understood and is functional. Constant tinkering with the regulatory regime, even where every change represents an improvement (which Mr. Falk admits is a dicey proposition in the long history of regulation) is often worse than sticking with a constant suboptimal regulatory scheme to which everyone can adjust.