On Friday the Mercatus Center filed a public interest comment, written by myself and Michael Giberson (the full comment in pdf form is at the link at the bottom of the page), on the Electric Energy Market Competition Task Force Draft Report to Congress.
The Draft Report to Congress on Competition in the Wholesale and Retail Markets for Electric Energy (Report) provides a high quality overview of the current state of wholesale and retail electric competition in the United States. The Report describes well both the current status of restructuring and the continuing uncertainty about the regulatory rules that will govern the industry in the future. The Report also usefully draws out the critical nature of the link between retail and wholesale markets, and explains how retail rate policies cause that link to malfunction.
While the Report accomplishes much of the task it was assigned, it misses two points, both closely connected to the malfunctioning retail-wholesale market link:
* The most significant shortcoming of the Report is a failure to recognize that advances in electronics and communication systems are dramatically reshaping the potential for demand response. As policymakers have repeatedly recognized, activating consumer demand will encourage conservation, reduce consumer bills, mitigate market power in wholesale and retail markets, and enhance power system reliability. The Report should emphasize that the technology is increasingly available to support active consumer participation in markets, and such participation would promote retail and wholesale competition.
* A second significant shortcoming of the Report concerns the too-brief discussion of capacity payment mechanisms. The Report overlooks the problematic justifications and troubled history of capacity payments in the electric power markets operated by Regional Transmission Organizations and Independent System Operators. The underlying market problems that produce the justification for capacity markets result directly from the lack of active consumer participation in markets. However, recent federal regulatory action appears oriented toward permanently enshrining capacity payment systems in RTO market designs. Given the growing potential for active consumer participation in markets, these capacity payment constructs are likely to become just another further regulatory impediment to the emergence of retail competition. The Report should highlight the potential of advances in technology to activate demand and complete the missing link between wholesale and retail markets as an alternative to continued exploration of capacity payment mechanisms.
Addressing these two deficiencies in the Report will help present a full picture of the state of retail and wholesale competition in power markets.