Transcript Rethinking Vertical Integration in Electricity

Rethinking Vertical Integration
in Electricity
Robert J. Michaels
California State University, Fullerton
[email protected]
18th Annual Western Conference
Center for Research in
Regulated Industries
San Diego, California
June 24, 2005
The Economics that
Electricity Forgot
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Restructuring is about replacing vertical
with market relationships
Most traditional reasons for vertical
integration continue in force
Disregard of large literature on economies
of integration
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And inadequate studies of benefits of markets
Restructuring history almost entirely about
vertical abuses, not benefits
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With permanent institutional consequences
The Old Economics of
Vertically Integrated Utilities
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Interdependence of generation, transmission,
distribution as rationales
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Second-by-second coordination for efficiency
Responses to system stress, risk management
Rationalizes investment planning
Regulation and generator market power
Implicitly, markets are unnecessary or pernicious
In 1970s and 1980s utilities show that market
transactions possible
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And then PURPA, EPAct, Order 888, Blue Book, etc.
Some Intellectual History of
Restructuring
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1970s – Lawyers assume no reason for
vertical integration without evidence
Otter Tail finds vertically integrated
utility can use transmission to harm
competition for distribution franchises
1980s – Continued emphasis on
franchise competition without efficiency
considerations
What Economists Know about
Vertical Integration
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Econometric work between 1985 and present,
various samples back to 1970, U.S, Japan,
Italy
Near 20 studies, methods usually
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Testing separability of translog or quadratic cost
functions for utilities
Estimating production functions for stages and
seeing if integration with earlier stage cuts cost of
later stage.
Other studies of integration into fuel supplies,
generator maintenance
Vertical Integration and Reliability
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No public studies re vertical integration and
reliability
NERC and FERC concerns:
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Grid design and generator locations not
coordinated, underinvestment in grid
Market-induced variability in flow patterns may
cause operating problems
Increase in transmission loading relief calls may
reflect competitive and reliability concerns
Participant funding of transmission as solution or
worsening of the problem?
Vertical Integration and Restructuring
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California 1994: Regulators and experts
say vertical integration unnecessary,
makes competition impossible
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Minimal discussion of efficiency aspects of
integration
State law and FERC market power
standards for PX and ISO call for
divestiture of generation
California and After
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Pre-2001 prices in state’s markets usually
track cost fairly closely
Utility generation divestitures held as partial
causes of market collapse
New economic models claim that vertical
integration can constrain generator market
power
Utilities taking advantage of transition to
attempt vertical re-integration
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IPP overbuild adds to their incentives
What Did We Learn About
Integration?
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Few studies of operating efficiency under
RTOs as alternatives to integration
Other state’s transitions handled stranded
cost and divestiture differently, generalization
hard
View growing that partial integration is
appropriate for utilities with POLR obligations
under retail choice
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Vertical market power now conspicuous by
absence from the discussion
Estimating the Benefits of
Markets and RTOs
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Verified economies of integration and scope,
but little on markets
Numerous studies claim benefits for RTObased markets
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Mostly just efficient dispatch models and not
analyses of new institutions
Most of projected long-term savings comes from
technological progress
Most do not net out lower consumer bills against
decreased generator wealth to get welfare gain
Remarkable cost increases in most RTOs finally
coming to light