The Challenge of Retail Electricity Restructuring: Dynamic Pricing and Enabling Technology

Lynne Kiesling

Here’s one reason why I’ve been so incommunicado for the past few weeks: Retail Electricity Deregulation: Prospects and Challenges for Dynamic Pricing and Enabling Technologies, a paper for the new Searle Center Annual Review of Regulation at Northwestern University. Here’s a teaser from the introduction:

Optimistic expectations from the 1990s restructuring changes have not been met, and rising consumer concerns about high fuel costs are leading to state-level decisions to delay restructuring, or to continue retail price caps in restructured states. Some observers proclaim electricity restructuring a failure, but in the face of economic growth and technological change, the traditional regulatory model is itself obsolete. Furthermore, environmental issues and the opportunities afforded by digital communication technology to manage electricity use and enhance its efficiency make it all the more important to think differently about the problem of regulation.

Yet the electric power industry, the backbone of our modern, technology-rich lives, is the most technologically backward industry in the country, an analog relic of the early 20th century. Similarly, regulatory institutions have not adapted to these exogenous technological changes, resulting in regulated investments and service offerings that perpetuate this analog equilibrium.

This paper focuses on the interaction between technology and state-level retail regulation, particularly with respect to retail pricing. Specifically, the development of digital communication technology in the past 20 years has increased the possibility of offering dynamic pricing (particularly time-based rates) and differentiated products, even to residential customers. The technology that enables this is the two-way programmable communicating thermostat and digital advanced metering infrastructure. Making that outcome a reality requires not just technological change, but also institutional change, including the removal of regulatory barriers to pricing and product differentiation. Another important institutional change is informal; customer culture would have to adapt over time to different ways of buying and consuming power. …

However, these enabling technologies change both the policy environment and the nature of the research questions. They create a network with highly distributed intelligence, whereas before physical control and economic response were much more highly centralized. The conclusion (Section V) suggests some dimensions of a conceptual and theoretical framework for analyzing individual behavior and regulatory institutions in this highly decentralized environment.

Comments welcome.

2 thoughts on “The Challenge of Retail Electricity Restructuring: Dynamic Pricing and Enabling Technology

  1. Very well done. Nice succinct review of the important laws, making it easy to follow how regulations got from A to M(?).

    One thing I didn’t understand is on page 30 (the Olympic Peninsula program) where you explain Figure 1:

    ‘…at X=500 hours, Y=600 kilowatts, meaning that in 500 hours during the almost 10 months in the time series, total consumption in an hour was at least 600kW.’

    I understand your point about the line being straight if consumption were distributed uniformly, but I don’t see where you get the numbers.

    Now, you need a lyricist to do something with ‘prices to devices’. The tune’s already been written.

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