Ever since returning from the CMU conference I’ve been pondering the ideas that Mike discussed in his previous post. Conceptually, there’s a big tension that is at the core of these discussions: does command-and-control centralization to reduce transaction costs work?
Here’s the issue, I think. The SMD proposal(s) establish centralized platforms, RTOs, in which the RTO serves as both the system operator and the market operator. The economic justification for such an approach is the reduction of transaction costs and the increase in transparency and information. These improvements lead to more accurate price signals, as well as inducing more participation in markets.
Yes. But it’s still a constructivist approach and not a spontaneous order, ecological approach (to use the language of my colleague Vernon Smith from his Nobel address). It also cuts off the development of, for example, competing system operators and/or competing market platforms. In essence, it replaces the old vertically integrated government-granted monopolies with regional RTO monopolies. Given the coordination requirements of AC networks competing system operators might be too much to ask at this point in our technological development, but the opportunity cost of eliminating competing market platforms might be large.
So one question is, does this constructivist step to create a centralized platform to reduce transaction costs move us in the direction of a more organic network of economic interactions in electricity? Or, put another way, does the SMD/RTO approach get us a better foundation from which we can evolve into competing market platforms or system operators? I think some at FERC would answer “yes” to that question. But I think the jury is still out, and furthermore, the amount of money that is spent in establishing RTOs might really push out the development of more organic competition well into the future.