Electricity Deregulation: Where Do Things Stand?
AEI Center for Regulatory Studies
About This Event

Infrastructure deregulation has many successes to its credit, including airlines, railroads, trucking, natural gas, and petroleum. So when electricity costs began to rise in many states, economists came back to their favorite solution: deregulation. By the early 1990s, a series of states had moved (haltingly) toward the deregulation of Listen to Audio

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the generation and marketing of electric power. Because the steps were only partial and were suffused with political compromises, they met with, at most, mixed success. For most politicians and policymakers, the end of electricity deregulation and restructuring came with the California debacle of 2001-2002. Since then, the only state that has moved toward deregulation has been Texas. Nonetheless, the underlying economic reasons for changes in electricity regulation still exist and will only grow in the future.

Why is the process of restructuring and institutional change so different in electricity than in other infrastructure industries? What is the current status of state and federal electricity policy? How can electricity policy objectives at the federal and state level evolve to match innovation and technological change? Discussing these and other questions were economist Lynne Kiesling, whose work at Northwestern University focuses on electricity regulation and restructuring; John A. Anderson, president of the Electricity Consumers of America; and Peter Fox-Penner, a principal at the Brattle Group who is an expert on energy and electric power industry issues. AEI resident scholar Kenneth P. Green, acting director of the AEI Center for Regulatory Studies, moderated the discussion.

Event Summary

WASHINGTON, MARCH 18, 2010--At an AEI conference on electricity deregulation, four panelists discussed the nature of the electricity market in an effort to answer three fundamental questions. First, why is electricity deregulation so difficult? Second, what is the current state of electricity deregulation? Third, what does the future hold for electricity deregulation?

Why Is Electricity Deregulation So Difficult?

John A. Anderson, president and chief executive officer of the Electricity Consumers Resource Council, offered ten reasons deregulation of electricity markets is so difficult in light of the successes deregulating the telecommunications and aerospace markets. He said many of his reasons could be traced to the nature of the market itself, including low demand for electricity, an ill-defined and poorly priced product, and the "unilateral market power" of electricity firms. He argued, "We can never have real competition with a one-sided market and residual market power, and the bifurcated federal-state regulatory structure--federalism if you like--prevented the successful integration of price reform. There is no demand side."

Peter Fox-Penner, chairman emeritus of the Brattle Group, echoed Anderson and stated that deregulation has become so difficult because of a problem of overblown expectations. Deregulation was initially sold as a "gigantic, cost-saving, rate-reducing bonanza," when in reality the "likely gains of restructuring were quite modest." The failure of deregulation to meet expectations encouraged policymakers to believe regulation was the better option. Anderson and Fox-Penner also suggested that the current resurgence in regulation stems from the fear and uncertainty related to global climate change.

What Is the Current State of Electricity Deregulation?

Today's electricity market closely resembles a government-sponsored monopoly. Anderson noted that the federal government is causing moral hazards and fostering a "too-big-to-fail" mentality among regionalized electricity firms. The apparent federal power grab into the electricity sector has led to what Anderson called "underderegulation" and increased lobbying to secure monopoly rents.

Panelists noted that several factors are responsible for the monopolistic nature of the industry. According to Lynne Kiesling, senior lecturer at the Kellogg School of Management at Northwestern University, deregulating today is hampered by an "overly simple and obsolete" model of market monopolies that makes unrealistic assumptions about economic actors. Furthermore, regulation today is based on static and century-old ideals, or as Kiesling puts it, "the static nature of regulation and its embedded incentives to make regulatory institutions, regulated firms, and regulated consumers maladaptive to living in a dynamic, private economy." Still, demonopolizing the market may prove difficult; both Kiesling and Fox-Penner argued that the nature of electricity distribution is monopolistic and will be so until technological changes make wire obsolete.

What Does the Future Hold for Electricity Deregulation?

All of the panelists seemed to acknowledge that future attempts to deregulate electricity markets will be hampered by both political and economic obstacles. Kiesling pointed to several obstacles, saying institutional change is wrought with difficulty due to a lack of political leadership and because electricity firms are exempt from antitrust laws. Anderson stated that electricity policy has changed course; its new direction leads to less deregulation in favor of carbon price-setting.

Despite the obstacles, there are reasons to expect further deregulation in the future. Kiesling noted that the upcoming generation is shifting American culture toward decentralized coordination and market efficiency. Fox-Penner, perhaps the most optimistic member of the panel, asserted that a "second era of deregulation" is on the way. He said, "The coming deregulation era will be driven by technology," especially with the rise of the smart grid. Nevertheless, he said that even with new technology, some politicians may seek more regulation because of the highly technical nature of electricity and its implications for cybersecurity.

--Stephen Marietta

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Speaker biographies

John A. Anderson is the president and chief executive officer of the Electricity Consumers Resource Council (ELCON), a national association representing large industrial electricity consumers. ELCON's member companies come from virtually every sector of the manufacturing community. They own and operate facilities throughout the United States and in many foreign countries. Many ELCON members cogenerate some of their electricity requirements. Mr. Anderson joined ELCON in 1980. He was named executive director in 1984. He has presented papers and spoken extensively on a wide range of electricity issues of importance to large industrial firms.

Peter Fox-Penner is a consulting executive and internationally recognized authority on energy and electric-power industry issues. He is a principal and chairman emeritus of the Brattle Group, a leading international economic consulting firm. In his consulting practice, Mr. Fox-Penner advises energy companies, government agencies, and their counsels on energy-regulation and market-policy issues. He is most often recognized for his long history of specialization in electricity-market policies and regulation. Although his work has spanned most areas within the energy field, his current focus is on electric-industry competition and structure, global climate change, and energy-efficiency policies. He is the author of numerous publications and books and a frequent speaker at conferences and meetings. His most recent book, Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities (Island Press, 2010), examines strategies for the development of an energy-efficient business model for the utility industry. He is also the author of Electric Utility Restructuring: A Guide to the Competitive Era (Public Utility Reports, 1997), a book widely considered an essential handbook for understanding deregulation of the utility industry. From 1993 to 1996, he was a senior official in the U.S. Department of Energy and the White House Office of Science and Technology Policy. He has also held staff positions in the Illinois governor's office. He serves on the boards or advisory boards of Enviance, Gridpoint, the Solar Foundation, and other Cleantech firms and was a cofounder of Environment 2004 and the Environmental Alliance.

Kenneth P. Green is a resident scholar at AEI where he studies public policy with respect to air pollution and climate change, energy and the environment, transportation and the environment, and environmental chemicals. His work includes analysis of Canadian environmental policy. He has authored numerous policy studies, newspaper and magazine articles, several encyclopedia entries and book chapters, and a textbook for middle-school students entitled Global Warming: Understanding the Debate (Enslow Publishers, 2002). Mr. Green has worked on both U.S. and Canadian policy, first at California's Reason Foundation, then for nearly three years at British Columbia's Fraser Institute.

Lynne Kiesling is a senior lecturer in the Department of Economics and the Social Enterprise at Kellogg program in the Kellogg School of Management at Northwestern University. At Northwestern, she is also a faculty member in the Northwestern Institute on Complex Systems and a faculty affiliate in the Center for the Study of Industrial Organization. Ms. Kiesling is the author or coauthor of many academic journal articles, book chapters, policy studies, and public-interest comments, most of which analyze electricity policy and market design issues. Her specialization is industrial organization and regulatory policy, and she is a noted expert in demand response, end-use technology, and retail competition of electric power market design. She has served as a peer reviewer for the U.S. Department of Energy and the National Science Foundation and for academic journals including Energy Journal, Public Choice, and Review of Economics and Statistics. Ms. Kiesling is currently a member of the GridWise Architecture Council, a group of thirteen experts volunteering their time to articulate the guiding principles for an intelligent, transactive energy system of the future and to guide and promote measures to transform the nation's electricity system into a more reliable, affordable, secure network in which users collaborate with suppliers in an information- and value-rich market environment.

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