There was a time when the economics of public utilities was probably the sleepiest of back corners of practical economics. People went into utility economics for the same reasons that widows invested in utility stocks: so they could sleep soundly at night.
No so much anymore.
As luck has it, retail price caps on electric power in Maryland – part of the state’s power industry restructuring package of 1999 – are set to expire at a time in which fuel prices are relatively high and still rising. (See Lynne’s earlier post.) Politicians, regulators, and members of the industry in Maryland have been staying up late trying to find some way forward. (Or, in the case of some, backwards.)
If it is true, as I once wrote in too-extravagant prose, that consumers are the sleeping giant of electric power markets, the ending of price caps would be the wake up call. But many consumers want state regulators to hit the snooze button on real prices, and now it looks like consumers in Maryland will be able to get that extra 18 months of slumber.
The wholesale side of Maryland’s electric power market, as coordinated by regional transmission system operator PJM, has also been keeping folks up late. Yesterday FERC provided some support for PJM’s “Reliability Pricing Model” – an alternative to PJM’s currently unsatisfactory capacity market – and encouraged regional players to finish the new market design.
FERC Commissioner Nora Brownell made the connection between capacity market alternatives and the expiration of Maryland’s retail rate cap. She said that capacity markets were artificial answers used when existing power markets were not fully developed. She expressed support for the alternative concept of an energy-only approach, but said energy-only markets required a willingness to take the political fallout for the resulting prices. The reaction in Maryland to the prospect of real prices suggested to Brownell that “we are not willing to make that decision.” (The “we” in that quote is explicated as “the people who have to answer the questions of consumers.”)
Like retail rate caps, capacity markets are a kind of snooze button preventing the real awakening of consumer demand. Sure, capacity markets can be designed to “foster” consumer participation, but the more fundamental issue is that a capacity market shifts price and quantity risks associated with generation investment away from dynamic, international capital markets and onto captive retail power consumers.
It is time for energy consumers to wake up and smell the coffee.
(The sleepy theme of this post was likely induced by some combination of income-tax-payment-related sleeplessness, my own staying-up-too-late last night writing too slowly about yesterday’s FERC meeting, and James Grimmelmann’s recent discussion of the book Where Wizards Stay Up Late at The Laboratorium.
You can find Commissioner Brownell’s remarks in the archived webcast of the April 20, 2006 meeting beginning at about the 50th minute.)