Also in the Spring 2011 issue of Regulation magazine is Andrew Kleit’s article on a proposed Pennsylvania Power Authority. In the course of explaining why such a state power agency would be a bad idea, Kleit explains a lot about how the wholesale power market works in Pennsylvania (and elsewhere).
Noteworthy is Kleit’s response to a utility commissioner’s complaint about the difficulties faced by companies seeking to borrow money to finance construction of power plants:
As Pennsylvania Public Utilities Commission vice-chair Tyrone Christy explained during the 2009 legislative hearings, “because of the uncertainty in where the rates are headed — I mean, they go up and down like the roller coaster — it makes it extremely difficult to finance a capital-intensive power plant.”
Note that power authority advocates do not make an argument specific to electricity markets. Investment in all industries in a market economy is risky. To acquire funds to make such investment, an investor must either use his own money or acquire equity or debt funding from other parties. Those parties will seek assurances that they will have an opportunity to gain a reasonable return on their investment. Indeed, such challenges can be seen as a benefit of market economies, in contrast to investment made by government entities that have no such assurances. Put another way, and borrowing a term from commentary on computer software, this restriction on investing is “a feature, not a bug” of the competitive market system. This is in contrast to regulated markets with government-guaranteed investment, which have been shown in electricity markets to lead to huge cost overruns that were eventually paid by electricity consumers.