electricity market reform and ‘reform of the reforms’book chapters and articles. his most recent...

Int. J. Global Energy Issues, Vol. x, No. x, xxxx 1

Copyright © 200x Inderscience Enterprises Ltd.

Electricity market reform and ‘reform of the reforms’

Fereidoon P. Sioshansi Menlo Energy Economics, Walnut Creek CA 94598, USA Fax: 925-946-0870 E-mail: [email protected]

Abstract: For over two decades, policymakers and regulators in a number of countries around the world have been grappling with market reform, liberalisation, restructuring and privatisation issues. Although a great deal has been learned in the process and a blueprint for implementation has emerged, successful market design still remains partly art and partly science. The international experience to date indicates that in most cases, initial market reform leads to unintended consequences, which must be addressed in subsequent ‘reform of the reforms’. Aside from this, a number of new issues and concerns have emerged challenging the wisdom and the feasibility of introducing market reform in other markets.

Keywords: competition; electricity market reform; liberalisation; market design; market performance; regulations; restructuring.

Reference to this paper should be made as follows: Sioshansi, F.P. (xxxx) ‘Electricity market reform and ‘reform of the reforms’ ’, Int. J. Global Energy Issues, Vol. x, No. x, pp.xx–xx.

Biographical notes: Fereidoon P. Sioshansi is the President of Menlo Energy Economics, a consulting firm based in San Francisco, California, specialising on the economics of the electric power sector. Dr Sioshansi’s professional experience includes working at Southern California Edison Company (SCE), the Electric Power Research Institute (EPRI), National Economic Research Associates (NERA) and, most recently, Global Energy Decisions (GED). Dr Sioshansi provides consulting services to the industry, policymakers and regulators on a wide range of topics. He has authored numerous reports, books, book chapters and articles. His most recent book, Electricity Market Reform: An International Perspective, was published by Elsevier in 2006. He is the Editor and Publisher of EEnergy Informer, a monthly newsletter founded in 1990. He is a frequent contributor to The Electricity Journal and Energy Policyand is on the editorial board of Utilities Policy. He has degrees in Engineering and Economics, including an MS and PhD in Economics from Purdue University.

1 Market reform: an overview

Since the mid-1980s, a number of countries around the world have engaged in market reform initiatives, including liberalisation, privatisation and/or restructuring the Electricity Supply Industry (ESI). A taxonomy of keywords used to describe different approaches to market reform is presented in Box 1.

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Box 1 Taxonomy of key market reform words

Terminology used to describe different approaches to change the regulatory paradigm Restructuring is a broad term, referring to attempts to reorganise the roles of the market players, the regulator and/or redefine the rules of the game, but not necessarily ‘deregulate’ the market. California, for example, restructured its market, ‘deregulated’ its wholesale market by lifting nearly all restrictions to how wholesale prices could be set by generators, but kept its retail market fully ‘regulated’, in this case capped. Many problems ensued. Liberalization is synonymous with restructuring. It refers to attempts to introduce competition in some or all segments of the market and remove barriers to trade and exchange. The European Union, for example, refers to their efforts under this umbrella term. Privatisation generally refers to selling government-owned assets to the private sector, as was done in Victoria, Australia with former SECV, in Italy with ENEL and in France with EdF and GdF. It must be noted that one can liberalise the market without necessarily privatising the industry, as has successfully been done in Norway and in New South Wales, in Australia. Corporatisation generally refers to attempts to make State-Owned Enterprises (SOEs) to look act and behave as if they were for-profit, private entities. In this case, a SOE is made into a corporation with the government treasury as the single shareholder. For example, former SOEs in New South Wales, Australia, have been corporatised. They vigorously compete with one another, while all belong to the same, single shareholder, namely the Government of NSW. Deregulation is essentially a misnomer. No electricity market has been (or, in fact, can be) fully deregulated. Experience suggests that even well-functioning competitive markets need a regulator or as a minimum, a market monitoring and anti cartel authority.1Until recently, Germany was the only major country attempting to go without a regulator but with an anti cartel office, monitoring the behaviour of the market participants.

Source: Sioshansi and Pfaffenberger (2006). Electricity market reform: an international perspective, Elsevier.

The motivations for changing the organisation of the industry and the regulatory regime vary from case to case, but are generally driven by a desire to introduce competition by forcing the players to become more efficient. The ensuing lower prices and improved services are widely hoped to benefit ultimate consumers.2

Chile is generally regarded as the first major country to experiment with market liberalisation and massive restructuring of its ESI in 1987. England and Wales followed with an even more impressive privatisation and liberalisation scheme in 1989 – which has been widely studied and copied since. The pattern has been repeated in a number of countries large and small as summarised in Table 1.

Electricity market reform and ‘reform of the reforms’ 3

Table 1 Selected countries with electricity market reform

Country Market reform highlights and comments

Argentina Experienced problems due to economic crises. Australia Various dates in various states, some states have privatised, others

corporatised resulting in un-level playing field. Brazil Initial market reforms continue to be modified due to problems with initial

market design. Canada Alberta and Ontario introduced competition; Ontario has rescinded

following public pressure following price increases; Alberta has succeeded.

Chile First to introduce market reform in1987, continues to evolve. Colombia Introduced market reform in 1994–1995 and is experiencing problems in

retail and wholesale markets. England and Wales Introduced massive privatisation and restructuring in1989, has gone

through at least three major phases of reform, continues to evolve, has been widely studied and copied as a successful model.

European Union 25 members of EU continue to progress towards a Pan European integrated market, various deadlines for implementation have been set but not fully implemented, full retail competition expected in 2007.

Japan Introduced limited competition to date with a cautious pace. Korea Created Korea Power Exchange and broken up KEPCO Into several

generation companies. Full liberalisation, however, has stalled due to political and labour opposition.

New Zealand Experienced some problems in the absence of a regulator, which has been introduced.

Nordic Countries Considered among the most successful markets, has expanded to include all Nordic countries, market survived a major drought without meltdown.

Singapore Considered successful despite a small market, limited number of players. Thailand Liberalisation and privatisation stalled due to labour union opposition and

lack of political support. USA Wholesale competition encouraged since 1992 and considered successful;

retail competition introduced in selected markets since 1998 with mixed results, progress stalled since opening of Texas market in 2000.

Source: Compiled from various chapters of F. Sioshansi and W. Pfaffenberger (2006) Electricity Market Reform: An International Perspective, Elsevier and other sources.

2 Market design, implementation challenges and reform of the reforms

The introduction of market reform generally follows the following five steps:

1 First step entails an acknowledgement of problems and/or deficiencies associated with the existing system – prompting a search for alternative ways to organise, operate, manage and regulate the ESI. The old adage, ‘If it ain’t broke, don’t fix it,’ generally applies in the sense that if retail prices are low, supplies are adequate and system operates reliably, there is no compelling motivation to change.

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2 Second step entails a debate on what is broken and how best to fix it, i.e. the process leading to an alternative and hopefully superior market design. With more experience gained over the past two decades, there is now a growing body of knowledge on what works and what does not. In most cases, new laws must be passed and the structure and organisation of the ESI must be changed before a new market structure can be implemented.

3 Third step involved the implementation of the design elements as defined by the previous step. While the theory may be sound and the ideas behind the new market design may be rational and logical, there is no guarantee that the implementation will go smoothly or without major surprises. In many cases, technically sound principles did not translate well in practice, resulting in problems and chaos. For example, the introduction of retail competition to large numbers of residential and small commercial consumers has proven problematic logistically in nearly all markets.

4 Fourth is the realisation that the introduction of market reform does not necessarily or automatically lead to many of the expected benefits and outcomes. For example, while wholesale auctions generally result in stiff competition among the generators, this may not necessarily result in immediate lower retail costs for consumers. Nor is there a guarantee that the competition will attract additional investment to the electric power sector.

In many cases, the initial market design may have inherent flaws that will only become apparent after the passage of some time. Sometimes, external events, political (e.g. new government with new policies), economic (e.g. high or low growth, inflation, devaluation) or natural (e.g. an unusual heat wave or drought) derail what could otherwise been an acceptable outcome. Fuel price increases unrelated to the market reform process, for example, can result in significantly increased retail prices, eroding public and political support for market reform. In nearly all cases, initial market reform leads to unintended consequences, which must be addressed in subsequent ‘reform of the reforms’.

5 Fifth step, usually an ongoing process, involves dealing with the problems associated with the initial market design flaws and/or flaws in implementation or unanticipated problems resulting from external factors or events. Droughts, fuel price increases, market dominance of few key players, uneven competition resulting from uneven playing field, poor and/or ineffective market monitoring and regulation, inadequate investment in infrastructure are among the reasons often cited for the need for subsequent meddling in the market.

The introduction of market reform has been eventful with decidedly mixed results. In a few cases, notably California, well-publicised disasters has dampened interest in neighbouring regions or states. In some cases, politicians were able to weather out initial kinks, allowing markets to do what they are supposed to do, as in Alberta, Canada. In other cases, as in the Province of Ontario, the politicians withdrew their support of market reform at the first sign of trouble – allowing a temporary aberration to derail the process before it had a chance to succeed. By contrast, the Nordic market was able to withstand a significant drought with serious hardships but no market manipulation, no blackouts and no collapse, reinforcing everyone’s faith in the market (Amundsen et al., 2006).


Overall, the implementation of market reform has not been easy. In nearly all cases, the initial reforms have been followed by what Joskow calls ‘the reform of the reforms’ to fix the initial shortcomings of the liberalised market (Joskow, 2006a,b). The British market, for example, has arguably gone through at least three distinct reform stages, from the original, central, mandatory Pool in 1989 to the New Electricity Trading Arrangements (NETA) in 2001, to the British Electricity Trading and Transmission Arrangements (BETTA), introduced in 2003. Likewise, Brazil has gone through several reincarnations of its original reform agenda, each addressing problems introduced by the previous reforms and the process of modifying and adjusting the original reforms continues in most countries.

The key question, of course, is are we better off for introducing market reforms in the ESI?3 The answer varies from a definite yes, e.g. in Britain, to a definite no, e.g. in California and everything in between. With a few exceptions, the benefits appear to have outweighed the costs – but it is not necessarily easy to say by how much. Nor have all the benefits accrued to ultimate consumers, sometimes enriching the generators, investors or distributors.4

Broadly speaking, the implementation of market reform has been more manageable in small, isolated markets, such as New Zealand or Singapore. Both, for reasons that are not entirely clear, have adopted a rather complex nodal pricing regime, which, in the case of Singapore, does not make a lot of sense, given its small physical size. Large interconnected markets such as those in the USA or Europe, have proven more challenging. In the latter case, separation of generation from the grid and supply has not been successful or complete, creating opportunities for some players to subsidise competitive functions from network-based regulated functions (Haas et al., 2006). Likewise, in some markets, notably Australia, some players remain state-owned while others have been privatised, making a mockery of the concept of competing on a level playing field (Moran, 2006).

In the European context, despite numerous directives with specific deadlines from Brussels, market liberalisation has stalled in a number of key countries and there is very little competition at the retail level (Brunekreeft and Bauknecht, 2006). While a number of European countries have liberalised both electricity and gas markets, others have done so only on paper and even that has been accomplished grudgingly. The July 2007 deadline for full market liberalisation in the European Union (EU) is viewed as a mere formality by some sceptics.

In a recent survey article on European energy markets, The Economist (2006) identified the following as the prime reasons for failure to create a unified, competitive energy market:

Deliberate state interference motivated by a desire to support the so-called national energy champions.

Lack of interest by dominant players or governments to build additional transmission lines to facilitate cross-border trade.

Weak enforcement of EU directives at country level.

Needless to say, a harmonious pan-European energy market has not yet materialised resulting in continued retail price disparities, chronic transmission bottlenecks and dominant players maintaining significant market share in key markets. Figure 1 shows the disparities in retail energy prices among European countries as evidence.

AU: Figures have been renumbered. Please check.

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Figure 1 Not quite harmonious yet; electricity and gas prices in selected countries € ¢ kWh 1*

*Electricity prices based on April 2005 data for consumer with 1,000 kW demand using 450,000 kWh month 1, excluding VAT. Natural gas prices based on September 2005 data for consumer using equivalent of 2,931,000 kWh year 1 excluding VAT. Including VAT, which varies from country to country, would significantly add to costs.

Source: The Economist, 11 February 2006 based on NUS Consulting results.

Similar obstacles frustrate regulators at the Federal Energy Regulatory Commission (FERC) in the USA (O’Neill et al., 2006). Yet in this case, slow progress has been made in creating a number of large Independent System Operators (ISOs), a critical step in introducing competition at the wholesale level, a precursor to competition at the retail level. Despite setbacks and delays, more than half of the US generation capacity is now under the control of large ISOs – with significant implications for retail markets (Table 2 and Figure 2). Table 2 Growth of US wholesale markets under ISO control: current status of ISOs in the

USA, 2005

System operator Generating capacity (MW)

ISO-New England (TRO) 31,000 New York ISO 37,000 PJM (expanded) (RTO) 164,000 Midwest ISO (MISO) 130,000 California ISO (CAISO) 52,000 ERCOT (Texas) 78,000 Southwest Power Pool (RTO)* 60,000 ISO/RTO total 552,000 Total US generating capacity 970,000

*Organised markets being developed. Source: Joskow (2006b).


Figure 2 Operating ISOs and RTOs in the USA

Source: FERC (2006).

In a survey article on the American state of the market, Joskow concludes that ‘significant progress has been made on the wholesale competition front,’ but adds, ‘The framework for retail competition has been less successful’ (Joskow, 2006b). A major study of the wholesale and retail markets by FERC came to similar conclusions (FERC, 2006).

3 US experience in market reform

In the USA, the development of well-functioning, competitive power markets continues to be a work in progress.5 Although the difficult transition to retail choice has soured state regulators’ appetite for market reform, 20 states and the District of Columbia offer some form of customer choice to all or part of their customers6 (Figure 3).

Figure 3 Current status of retail competition in the USA

Source: Tschamler (2006).

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Several developments, however, indicate that the transition to a national competitive electricity market has stalled in the USA. Among the reasons often cited are:

The spectacular failure of the California market has left a bad taste in the mouths of many state-level regulators and legislatures.

Mixed results in a number of states that have introduced retail competition.

Lingering problems in some wholesale markets that have not performed as expected.

Lack of interest by the US Congress to push retail competition at the national level.7

Not surprisingly, the pace of growth in retail competition has slowed in recent years as reported by Tschamler (2006; Figure 4).

Savings attributable to restructuring and market reform have been estimated for a number of jurisdictions in the USA. Some estimates include mandated rate reductions that accompanied the initial introduction of customer choice.8 Anecdotal examples follow:

Nationally. ‘For residential customers between 1996 and 2001 where retail generation monopolies were ended, residential rates declined on average 15.9% in constant dollars. Residential rates in states that maintained traditional retail monopolies declined 11.6%’ and ‘in constant dollars, 11 states cut commercial rates by 20% or more. Of these, four are non-retail restructured and seven are retail restructured. Industrial rates are the same or down in constant dollars in 23 states and in nominal dollars in 15 of the 29 non-retail restructured retail market states’ (Citizens for Pennsylvania’s Future, 2002).

Texas. ‘Retail customers have saved, at minimum, over $1.5 billion in electricity costs during the first year of competition as compared to the regulated rates in effect during 2001. Commercial and industrial customers … paid approximately $645 million less in 2002, compared to 2001 bills’ (Public Utility Commission of Texas, 2003).

PJM. A 2003 study (Sutherland, 2003) reported that competition has resulted in more than $3 billion in total savings in 2002 in the Mid-Atlantic region, with individual states and jurisdictions as follows:

New Jersey, $1.46 billion.

Pennsylvania, $993 million.

Maryland, $662 million.

Delaware, $97 million.

The District of Columbia, $74 million.

California. By contrast, not all restructuring approaches led to price reductions.9 The California experience led to substantial price increases – on the order of 33% between 1998 and 2002.10 Residential prices increased approximately 14% while commercial and industrial customers saw increases of 40%. If the California Energy Commission’s 2003 price estimates are included in the calculation, commercial prices will have risen 47% and industrial prices by 51%. Prior to the crisis, the California market design did not permit prices to fluctuate with the underlying wholesale market, which led, in part, to the


dramatic increase in prices. Consequently, the price increases that occurred in California are not the result of decontrolled prices.

Figure 4 US peak load served by competitive suppliers, 2001–2005, GW

Source: Tschamler (2006).

4 One or two markets?

Retail competition is, of course, a mere component of market reform. The electric power business consists of several components: generation, transmission, distribution and retailing. Of these, the middle two are network-based and are not amenable to competition. Only generation and retailing – also called the supply business – can be competitively provided. Consequently, care must be taken to make the whole new system work efficiently and congruently while making parts of the total competitive. A particularly significant issue is how best to bring the benefits of competition to customers – as opposed to investors, shareholders and speculators.

The early thinking was that the best way to benefit the ultimate customers is to give them choice, the ability to choose their electricity supplier among a number of competing firms. This is generally regarded as an important attribute of a competitive market – perhaps putting undue emphasis on the significance of customer switching rates. With the passage of time, there is a new recognition that

There are distinct market segments with rather different characteristics and requirements.

Customer choice and switching rates, while significant, are not unequivocal proof of functioning markets.

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Table 3 shows the distribution of customers by size in the British market (OFFER, 1998). Many markets exhibit a similar distribution of market by size and number of customers, some more lopsided than others. Table 3 Distribution of customers by size in Britain

Customer size Approximate no. Approximate % of load*

Larger than 1 MW 5,000 30 Larger than 100 kW 50,000 50 All customers 25.5 million 100

*These are cumulative percentages, rounded off. Source: OFFER (1996).

Britain opened its market in three distinct stages, corresponding to these tiers (Newbery, 2006). Other markets such as California (Sweeney, 2006) and Texas (Adib and Zarnikau, 2006) allowed the option to switch in a single phase for all consumers. Aside from the logistical difficulties of allowing millions of customers to switch suppliers, which has proven problematic in all cases, is the issue of who really has the opportunity to take advantage of the opportunity to switch suppliers – given significant costs involved.

An examination of competitive markets leads to the conclusion that customers fall into at least two categories, primarily by their volumetric electricity usage.

Large, sophisticated consumers use a lot of electricity and run big monthly bills. In most countries, a relatively small number of large customers account for a significant percentage of the load.11 They are typically served at high voltage levels, on digital interval meters and can participate in dynamic pricing and other sophisticated pricing schemes. They have strong incentives to save on energy costs and generally have the means to do so. They typically, though not always – understand the risks inherent in different types of contracts and options offered to them and can choose to mitigate the risks. They do not need a lot of handholding and education. They have the resources to pay for good advice when it is worth to get. These customers can essentially fend off for themselves. They need little protection.

All indications are that large energy users can and do, take advantage of opportunities provided through competition and benefit from the option to switch suppliers as demonstrated by the relatively large percentage of customers who switch when given the choice (Figure 5).

Mass market, consisting of residential consumers and many small commercial establishments, do not use enough electricity to be worth the bother. For example, for the great majority of residential consumers in the USA, the typical electricity bill represents a relatively small item on the long list of payments – a mere nuisance – compared to the cost of the home mortgage, insurance, food, transportation, entertainment, medicine or other items. These consumers typically do not have hourly digital meters and are billed on flat rates. They have few opportunities to shift or reduce consumption significantly to make a noticeable difference. They may have difficulty comparing complicated options that may be offered to them and may not adequately appreciate the risks and rewards in various contracts. The costs of educating them to the point where they can appreciate all these subtleties may simply exceed the savings that they can obtain from switching suppliers or plans.


Figure 5 Customer switching in large commercial and industrial market segment, selected US states which allow direct access

Source: TXU.

Figure 6 shows the experience in selected markets in the USA where residential consumers have (or in the case of California, had12) an option to choose their suppliers. In Texas, generally regarded as the most robust competitive market in the USA,13 more residential customers have switched suppliers, but this is partly due to artificial constraints placed on the incumbents to make the new suppliers more cost-effective. Even in Texas, the record suggests that residential consumers who have not switched to lower cost suppliers have not benefited from the experience.14 Setting Texas and the District of Columbia aside, the switching rates among residential consumers tend to be in single digits.

Figure 6 Customer switching in residential market segment, selected US states which allow direct access

Source: TXU.

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5 Benefits of extending retail competition to smaller customers

Another problem with the mass residential market is that it is expensive to serve, relative to meager savings and benefits. Many studies in the USA and elsewhere have concluded that retail competition at the residential level may not be cost-effective. A 2001 study by Britain’s National Audit Office (NAO), a watchdog for the British Parliament, concluded that the costs of introducing competition in the domestic supply business have virtually wiped out all the benefits of competition.15 Other studies of the British market, although not all, point out small net gains or even net losses in cost-benefit analysis of retail competition in the residential sector (Newbery, 2006).

Partly as a result of these realities and administrative costs of serving the mass market, Joskow has come to the conclusion that:

“It is not at all clear that retail competition for residential and small commercial customers yields greater net benefits than simply having their local distribution company procure all of their power needs through competitive solicitations in the wholesale market. However, mixing retail competition with regulated default service for these customers provided by local distribution companies, except as a transition mechanism, is likely to yield the worst of both models”.16

In a comprehensive paper, Joskow concludes that most of the benefits of retail competition can be captured and passed on to small commercial and residential consumers through a well-functioning competitive wholesale market (Joskow, 2000). Joskow’s assertions, which have not been seriously challenged, portray a rather dim view of most of the hyperbole surrounding the introduction of retail competition in selected US states. Perhaps coincidentally, only one major market, Texas, has been opened to competition in the USA since 2000. More telling, the Energy Policy Act of 2005 does not even mention the term retail competition that let alone make any proposals to encourage retail competition at the national level.

Joskow’s damning verdict starts with comparing electricity retailing to retailing function in other industries and comes to the conclusion that

“The physical attributes of electricity production, distribution and metering provide a simple and inexpensive method to bring a significant fraction of the benefits of electricity competition to all customers by giving them direct access to the wholesale market”.17

He says, “At the same time, these same physical attributes make it very challenging for retailers to provide significant value added to residential and small commercial customers compared to the value they receive by getting simple cheap direct access to the wholesale market”.

6 Competitive metrics

Currently, there are no generally accepted ‘metrics’ to measure the performance of a given competitive market and compare it to the pre-liberalisation state and/or other liberalised markets. Attempts to compare energy markets are generally subjective, as in the case of a recent OECD study comparing selected countries (Figure 7), where the UK market is ranked high relative to others. What is interesting about this particular ranking


is that it compares various markets based on where they started and where they have ended. Some markets, such as the UK, were highly centralied and state-owned. In this case, it has become highly competitive and private, meaning that it has gone from a relatively poor ranking to the top. Others, such as the US market, were not centralised or state-owned to start with, hence they do not need as far to go when they are restructured.

Figure 7 How do we measure success of market reform? Regulatory rankings for electricity and gas markets in selected countries*

*0–6 scale, 6: most regulated, 0: most competitive. Source: OECD Survey of Switzerland.

Others, such as Oxford Energy Research Associates (OXERA),18 an Oxford-based consultancy, have devised more sophisticated schemes to rank the state of competition in given markets using a number of critical factors (Table 4). Not surprisingly, the UK market is typically ranked high, no matter which scheme is used. Table 4 Our market is better than yours: Competitive scores for selected European energy

markets*

Country Aggregated energy market score Rank

UK 7.7 1 Sweden 7.0 2 Finland 6.1 3 Austria 4.7 4 Spain 3.8 5 Italy 2.5 6

*0–10 scale, 10 = most competitive based on 2001 data. Source: The Relative Extent of Energy Market Competition in the EU and G7,

OXERA, September, 2003.

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Similar attempts have been made by others, including an index developed by the Center for the Advancement of Energy Markets (CAEM) focused on competition at the retail electricity sector (CAEM, 2003). This index is based on 22 subjective attributes covering various components of the retail market (Table 5) and has been used to rank the performance of retail electricity markets (Table 6). Table 5 Attributes of RED Index developed by CAEM

Attribute Description Wt%

Competitive framework cluster

Attribute 1 Deregulation plan 5 Attribute 2 Percent of eligible customers 5 Attribute 3 Percent switching 5 Attribute 4 Competitive safeguards 10 Attribute 5 Uniform business practices 10 Attribute 6 Competitive billing 3 Attribute 7 Competitive metering 2 Generation cluster

Attribute 8 Generation market structure 10 Attribute 9 Wholesale market model 10 Attribute 10 Stranded cost calculation 3 Attribute 11 Stranded cost implementation 3 Consumer cluster

Attribute 12 Customer information 2 Attribute 13 Consumer education 2 Attribute 14 Default provider 10 Distribution cluster

Attribute 15 Default provider price risk 4 Attribute 16 Default provider rates 4 Attribute 17 Performance-based regulation for network facilities 2 Attribute 18 Network pricing 2 Attribute 19 Interconnection to grid 5 Commission cluster

Attribute 20 Regulatory convergence 1 Attribute 21 Commission reengineering 1 Attribute 22 Commission budget 1

Source: Center for the Advancement of Energy Markets (2003).


Table 6 Who has the most competitive retail market? Ranking of selected retail electricity markets

Country, province, state or territory RED index score 2003 World rank 2003

England, UK 88 1 New Zealand 75 2 Texas, USA 69 3 Pennsylvania, USA 67 4 Maine, USA 64 5 Alberta, Canada 61 6 New York, USA 60 7 District of Columbia, USA 54 8 Michigan, USA 52 9 Maryland, USA 52 9 Victoria Australia 50 11 New Jersey, USA 50 11

Source: Center for the Advancement of Energy Markets (CAEM), 2003. 100 = perfect score.

Figure 8 is yet another attempt to compare a number of European energy markets – that is electricity and natural gas – rated on overall competitiveness.

Figure 8 Market competitiveness index: 10 represents perfect score*

*Nine market attributes were used for this scheme, each on a 0–10 scale and the total score is the weighted average of the nine attributes.

Source: Datamonitor.

Among the attributes considered in this case were how easy it is for new entrants to enter a given market (e.g. not easy in Ireland, Spain, Russia or Greece), the dominance of the incumbent players (e.g. falling in France and Italy but still formidable in both), ease with which consumers can switch suppliers – assuming there is a competing supplier, consumer awareness of alternatives and other variables.

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Another complication is that the underlying conditions that drive major performance indices, such as retail prices, are often affected by exogenous variables, such as fuel prices. For example, average retail prices in Texas are significantly higher today than they were prior to the introduction of competition in January 2002. But that is not to say that competition has increased retail prices – the main culprit in this case is the soaring price of natural gas, which is the fuel that sets the market clearing prices for most hours in Texas. In this case, one must ask if prices would have been even higher had competition not been introduced. This is not an easy question, to answer because it is difficult to know how things would have turned up under rate-of-return regulations.

Fuel prices are among the most important variables affecting ultimate prices and their influence is not limited to Texas market. Joskow (2006b), making adjustments for fuel prices in New England and the PJM market (Bowring, 2006), for example, has shown that wholesale prices in these markets have fallen and are below where they would have been under cost-of-service regulations (Table 7). Similar studies done consistently for other markets would help answer how prices today compare to where they might have been. Table 7 Wholesale prices under competition: average wholesale electricity prices in New

England, 2000–2004, $MWh 1

$MWh 1

Year Actual Adjusted for fuel prices

2000 45.95 45.95 2001 48.60 43.03 2002 46.55 37.52 2003 53.40 43.51 2004 54.44 43.33

Source: Joskow (2006b), based on data from ISO New England (2005).

7 Remaining issues

In most markets, the initial introduction of market reform has resulted in problems, which have had to be fixed in subsequent reforms, the so-called reform of the reforms. This is what happened in Britain, which by most accounts is among the most successful in the world thus far. As described in Newbery (2006), the British electricity market has gone through at least three significant phases of reform, each fixing some of the shortcomings of the previous one. Raineri (2006) and Araujo (2006) describe similar experiences in Chile and Brazil, respectively, where the original market designs resulted in significant problems, which had to be subsequently addressed. Similar issues face regulators in nearly all other markets, including Argentina, Colombia (Dyner et al., 2006), New Zealand (Bertram, 2006) and Australia (Moran, 2006).

In a few cases, the original design of the market had major flaws and/or was improperly implemented – with serious ramifications. The best-known example of a botched up market that failed miserably is California, which was forced to suspend retail access and has suffered financial losses. As described by Sweeney (2006), California’s ESI continues to suffer from the lingering political and regulatory uncertainties of the


2000–2001 electricity market crisis. In the case of the province of Ontario in Canada, the politicians decided to withdraw their support of the new electricity market when prices shot up shortly after the introduction of market reforms (Treblicock and Hrab, 2006).

These experiences suggest that market reform may still be as much of an art as science. Even if the design and structure of the market are sound, the implementation and transition issues can go wrong, sometimes with serious consequences. Which may be among the reasons why market reform initiatives have all but stopped at the state level in the USA and have not been introduced at the federal level. Faced with these uncertainties, the introduction of market reform in South Korea and Thailand, to name a few examples, has stalled. The politicians in both countries face significant opposition from the unions and others who want to maintain the status quo. In the mean time, market reform proponents cannot guarantee tangible and immediate benefits, which make it politically untenable to push for market reform.

In some cases, such as Thailand or India, the status quo, while not efficient, offers significant price subsidies for certain segments of the population. The recipients of these subsidies do not favour a liberalised market, which would most likely eliminate these subsidies at the first instance. In the case of Thailand, one study concluded that to attract sufficient foreign investment, the country’s average wholesale price of power would have to be raised by 25%. Such a price increase, while necessary to attract foreign investment, is hardly popular with the voters or the unions. In the case of Japan, policymakers have decided to proceed incrementally and with a cautious schedule (Goto and Yajima, 2006). The risks of unsettling the status quo, which provide highly reliable power at very high costs, are among the reasons for the cautious approach.

Keeping these issues aside, competitive electricity markets have resulted in a number of other perplexing and unresolved problems, which continue to plague policymakers and regulators while challenging some of the best experts in the field. A few of these issues with significant implications for market design follow, not necessarily in order of importance.

7.1 From, function and extent of regulation

While there is consensus on the need for a regulator in competitive electricity markets,19

there is no agreement on how extensive or intrusive it should be. There are also differing views on what should be the central purpose or raison d’etre for the regulator. Should the regulator perform the role of a market monitor or observer, an unbiased referee, a puppeteer or something else (see Box 2)?

Littlechild, himself an ex-regulator believes in ‘Markets when ever possible, regulation when not’ (Littlechild, 2006). Others believe in a more proactive and interventionist regulator. While this may seem like a safe option, it is hard to imagine thriving competition coexisting with a proactive and interventionist regulator.

18 F.P. Sioshansi

Box 2 Alternative views of competition and regulation in the ESI

Fundamentally, there are two extreme views on the form and purpose of regulation

Create level playing field and referee the game. In this case, the regulator sets the rules in such a way that encourages free and fair competition among the players – and plays the role of an impartial referee.

Write a script and make the puppets dance. In this case, the regulator prepares a prescriptive script for the play, making sure that the players act according to the script.

The central ingredients of the former are well-known, namely

Remove barriers to entry in generation.

Privatise or corportise all players so they are on the same footing.20

Unbundle vertically-integrated enterprises to remove cross subsidies and self-dealing.21

Ensure that transmission network is open and accessible to all under transparent and non-discriminatory prices.22

Create wholesale markets that are open and transparent.

Ensure that the grid is managed by an independent operator who maintains reliability, manages transmission congestion, operates various markets to facilitate trade, liquidity and risk management.

Foster competition in the supply business.

These conditions will most likely lead to a number of firms active in various segments of the business engaging in short- and long-term transactions. The participants will find suitable arrangements to transact and the regulator’s role is primarily that of a vigilant referee, making sure that the rules of the game are obeyed, infringements are caught and offenders are punished. Otherwise, market participants are free to roam as long as they obey by the rules and play within the field. This may sound imaginative, but tolerably safe. Most restructured markets have adopted a variation of this theme – with varying levels of autonomy and authority for the referee. This assumes that the players know best and the market is simply the sum of its components. Free market advocates and those favouring laissez-faire favour a limited role for the regulator, allowing market participants maximum flexibility. For example, generators would neither be obliged to bid their capacity in the market nor be required to explain their bidding strategies or prices. The latter case assumes that the regulator or market designer knows better and can produce a prescriptive plot for all the players, most likely requiring many re-writes to get it right. In this case, the roles of the players are carefully orchestrated and their moves are remotely controlled, as a dance of puppets. The regulator plays the role of a chorographer in a dance studio organising and directing all the moves. If the players do not dance as directed or desired, the choreographer must step in to correct the plot and the script. It may be a lot of fun for a playful and highly imaginative regulator, a scarce combination – perhaps an oxymoron. Most economists would consider this an impossibility, since there is no assurance that the scriptwriter, no matter how clever, can get all the parts right.23

Nevertheless, examples of this line of thinking may be found in some countries, notably those who have had a disappointing experience with market liberalisation and reform as described in the following sections of this book.


7.2 Capacity markets

Most, but not all, electricity markets may be characterised as energy-only markets in the sense that generators are rewarded for the energy delivered to the network when and if they are dispatched. In these markets, little if any reward is paid to generators for having ‘extra’ capacity available for long-term system reliability. Most markets, however, operate Ancillary Service (AS) markets, where generators are paid relatively small amounts for providing spinning reserves, reactive power and alike. These are rewards to generators for providing an operational safety margin in real time – not for long-term system reliability.

The issue of capacity markets, where generators are paid significant amounts for capacity – regardless of whether they are dispatched or not – continues to be an issue in at least two contexts. First, in countries where there is significant amount of hydropower,24 thermal generators are likely to be infrequently dispatched in years when ample hydrocapacity is available. This creates problems during drought periods because lack of sufficient incentives to invest in thermal generation may result in severe shortages during such episodes. Second, in countries where excess reserves are externally mandated, as in the USA, average wholesale prices tend to be depressed, resulting in inadequate investment in future capacity. Further complicating the problem is the presence of low offer caps in many markets, which has the effect of limiting scarcity revenues to generators when supplies are short. But designing a capacity payment scheme that encourages adequate investment in new capacity without introducing serious unintended side effects has proven to be a challenge.

The question is: this context is twofold. First, do we need to pay for capacity above and beyond energy? Second, if so, how can we design incentives that produce the desired benefits without serious adverse side effects? There is a growing body of literature on this topic (Cramton and Stoft, 2006), but the fundamental debate has not been settled.25

7.3 Resource adequacy and investment in infrastructure

It continues to be a concern in a number of countries. The basic fear is that insufficient investment is going into generation, distribution and – most notably – transmission sector. The evidence is mixed and it is not entirely clear if markets are failing to deliver because of regulatory uncertainties or other impediments. And there are questions about how best to mitigate such market shortcomings if indeed they are real.26 This issue is closely linked to capacity market, but there are clear distinctions between adequacy and reliability as highlighted in Table 8.

7.4 Market power and monitoring

It has been introduced in piecemeal fashion in a number of US markets in response to the California crisis and the rampant abuses, which took place during the 2000–2001 electricity crisis. As with the broader issue of the role and function of regulation, the issue here is how much and how intrusive should, for example, generators be forced to bid all their capacity in the market or can they decide how much they wish to offer and at what price? Does the market monitor have the right to ask for offer prices on individual units and seek additional information on how the bid prices relate to marginal operating

20 F.P. Sioshansi

costs or are generators allowed to bid blocks of ‘blended’ power at what ever price they choose to quote?

Market monitoring has grown into a big business in the USA – but does not appear to be a hot issue in other markets thus far. What explains this is not entirely clear because many of the issues that concern regulators in the USA applies to other markets, notably in Europe. Table 8 Resource adequacy and reliability

Attribute Objective Resources Incentives

Resource adequacy

Have enough installed capacity to fulfil demand in the medium and long term

Installed capacity subject to availability and technical constraints

Have price signals that provide the incentives to invest in capacity, recovering operation and maintenance costs

Reliability Have the resources to respond to short term fluctuations

Provision of ancillary services to satisfy minimum reliability standards defined by the authority

Have price signals that explicitly account for ancillary services provision

Source: Raineri (2006), personal communication.

7.5 Demand participation

It is much talked about, but has not been effectively integrated with the supply side resources. Most markets currently are supply-focused, in the sense that hourly demand is taken as a given and generation is adjusted to meet the variable demand. Demand inelasticity is a major problem in most markets, notably those with tight capacity – but making demand more elastic remains an elusive goal, technically as well as institutionally. Efforts to introduce variable pricing in the mass market and schemes in order to bring flexible loads to participate in wholesale auctions are still in its infancy, but research continues to push the envelope in this critical area.

7.6 Renewable energy technologies

Many advocates believe that renewable energy technologies deserve government subsidy, but there is little agreement on how best to subsidise the industry – in ways that does not interfere with efficient workings of competitive markets. This is of major concern in the European context where very significant amounts of renewable energy are being integrated into the grid with generous subsidies, occasionally playing havoc with transmission grid as well as conventional generation, which must adjust to absorb the intermittent load. More research is needed to determine how various schemes, for example, renewable portfolio standards, favoured in the USA, compare to feed-in-tariffs, favoured in Europe.

7.7 Distributed generation

Current electricity systems are designed based on large centralised generation and massive transmission and distribution networks serving the loads. Advocates of


distributed generation argue that this model is outdated, especially for meeting distributed load with insufficient grid infrastructure. Currently, there is no consensus on how best to promote decentralised generation in networks, which are centrally designed and dispatched.

7.8 Design, implementation and operation of RTOs/ISOs/TSOs

These including the management of various markets and the cost-effectiveness of the organisations remain controversial. A cursory examination of various ISOs and RTOs in the USA suggests that they have different organisations and functions, operate different markets, handle dispatch and transmission congestion differently and have differing views of energy and/or capacity and how they treat demand participation in the market. Not surprisingly, their costs vary considerably when compared on a per-unit cost, as indicated in Table 9. Like the markets themselves, there is no easy way to measure or compare the function and efficiency of the ISOs/RTOs. Table 9 Operational cost of selected US ISO

GW of load 2000 2004 $ Million GW

1

of load (2004)

CAISO 52 208 238 5.0 MISO* 131 21 202 1.5 PJM† 144 75 200 1.4 ERCOT 81 20 130 1.6 ISO NE 33 49 118 3.6 NY ISO 37 69 112 3.0 IESO‡ 30 N/A AESO‡ 13 N/A

*MISO, created in 2001, is the first FERC-approved RTO in the USA. †PJM is expected to grow to 160 GW in 2005 as a result of planned expansions. ‡IESO is Ontario’s Independent Electricity System Operator; AESO is Alberta’s ISO. The approximate size of these systems are shown for comparison purposes.

Source: The Wall Street Journal (21 July 2005), CERA, EEnergy Informer.

7.9 Market metrics

Currently, there is no general agreement on what constitutes a well-functioning electricity market although the attributes of such a market are generally acknowledged. The key ingredients of a successful market may include low and stable retail costs, competitive transparent wholesale markets, option to choose from among competing suppliers, adequate number of suppliers to choose from, reliability, power quality, customer service, adequate number of generators, adequate transmission, lack of market power, ability of market to attract sufficient investment and ability to survive natural (e.g. droughts) or man-made (e.g. demand growth, economic recession, political upheavals) disturbances.

As it turns out, each of a potential list of attributes such as the ones highlighted here, have multiple dimensions – making it difficult to define, measure and compare. Take average retail rates. It is not trivial to compare average retail rates before and after market

22 F.P. Sioshansi

liberalisation due to the interference of other factors, such as fuel costs. Early attempts to quantify, measure and compare markets have proven how complicated such comparisons can be, especially given cross-market differences.

7.10 Hybrid markets

There is general recognition that in many parts of the world markets are evolving into hybrid forms, where they are not completely unbundled, privatised or fully competitive. Some remain partially privatised or state-owned; some combine generation with supply while others are separated either functionally or physically. In the USA, for example, a relatively vibrant and competitive wholesale market has evolved despite the fact that most consumers continue to receive service, which is regulated with capped prices that do not reflect the variations in hourly prices in the wholesale markets. This, it is believed, is a rich area for further research.

7.11 Industry ownership

It continues to be a contentious issue in many parts of the world, where private and public entities, rural and cooperative coexist with government- and state-owned operators in a permanent state of disequilibria. In the USA, for example, a combination of different types of regulated utilities and non-regulated entities coexist – subject to vastly different rules and regulations (Table 10). Table 10 Make up of the US power industry: US electric power generation by sector, in GWhs,

2004 data

Electricity generation 2004 Generation

(thousands of MWhs) % of Total

Publicly-owned utilities 397,110 10.3 Investor-owned utilities 1,734,733 44.8 Cooperatives 181,899 4.7 Federal power agencies 278,130 7.2 Power marketeers 42,599 1.1 Non-utilities 1,235,298 31.9 Total 3,869,769 100.00

Source: Report to Congress on competitionin the wholesale and retail markets for electric energy, 5 June 2006, FERC.

8 Conclusion

With passage of time, more is being learned about the design and implementation of competitive electricity markets. At the same time, research continues to provide clues on which market design features are more important and which ones are not. Moreover, we are beginning to gain a better appreciation of the inherent complexities of the markets and the fact that no single design or solution is likely to work in all circumstances. Gone are the regulatory naiveté one that ‘restructures’ the market, introduces competition and the problems go away. Painful lessons have been learned in places like California, where

AU: In the reference list, for many references the same book “Electricity Market Reform: an International Perspective”,is given. Please check.


market design flaws and lax regulatory intervention led to expensive failure. But much more is yet to be learned. A lot is at stake, as previous failures have clearly demonstrated.

References Adib, P. and Zarnikau, J. (2006) Electricity Market Reform: an International Perspective,

F. Sioshansi and W. Pfaffenberger (Eds), Elsevier. Amundsen, E. et al. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi

and W. Pfaffenberger (Eds), Elsevier. Araujo, J.L.R.H. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. Bertram, G. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. Bowring, J. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. Brunekreeft, G. and Bauknecht, D. (2006) Electricity Market Reform: an International Perspective,

F. Sioshansi and W. Pfaffenberger (Eds), Elsevier. Center for the Advancement of Energy Markets (CAEM) (2003) The RED Index, Available at:

www.caem.org Citizens for Pennsylvania’s Future (2002) ‘Electricity competition: the story behind the headlines’,

September 16, Available at: www.pennfuture.org Cramton, P. and Stoft, S. (2006) ‘The convergence of market designs for adequate generating

capacity’, prepared for California Electricity Oversight Board, 25 June. Dyner, I. et al. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. The Economist (2006) 11 February. Federal Energy Regulatory Commission (FERC) (2006) ‘Report to congress on competition in the

wholesale and retail markets for electric energy’, Washington, DC, 5 June. Goto, M. and Yajima, M. (2006) Electricity Market Reform: an International Perspective,

F. Sioshansi and W. Pfaffenberger (Eds), Elsevier. Haas, R. et al. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. Joskow, P. (2000) ‘Why do we need electricity retailers? Or can we get it cheaper wholesale?’,

Available at author’s website. Joskow, P. (2006a) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. Joskow, P. (2006b) ‘Markets for power in the United States: an interim assessment’, The Energy

Journal, Vol. 27. Knieps (2006) Gunter in Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. Littlechild, S. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. Moran, A. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. Newbery, D. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier. O’Neill, R. et al. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and

W. Pfaffenberger (Eds), Elsevier.

AU: In ref. Adib and Zarnikau (2006), please supply the place of publication.

AU: In Amundsen et al. (2006), please supply the name of all the authors.

AU: In Dyner at al. (2006), please supply the name of all the authors.

AU: In Haas et al. (2006), please supply the name of all the authors.

AU: In ref. Joskow (2000), please supply the URL of the author.

AU: In ref. Joskow (2006b), please supply the page range.

AU: Knieps (2006) is not cited in the text. Please check and also supply the initial for the author.

24 F.P. Sioshansi

Office of Electricity Regulation (OFFER) (1996) ‘Competitive electricity market from 1998: price restraints’, September, Table 6, p.4.

Public Utility Commission of Texas (PUCT) (2003) ‘Scope of competition in electric markets in Texas’, January.

Raineri, R. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and W. Pfaffenberger (Eds), Elsevier.

Sioshansi, F. and Pfaffenberger, W. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and W. Pfaffenberger (Eds), Elsevier.

Sutherland, R. (2003) ‘Estimating the benefits from restructuring electricity markets: an application to the PJM region’, Center for the Advancement of Energy Markets, September, www.caem.org

Sweeney, J. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and W. Pfaffenberger (Eds), Elsevier.

Treblicock, M. and Hrab, R. (2006) Electricity Market Reform: an International Perspective,F. Sioshansi and W. Pfaffenberger (Eds), Elsevier.

Tschamler, T. (2006) Electricity Market Reform: an International Perspective, F. Sioshansi and W. Pfaffenberger (Eds), Elsevier.

Zarnikau, J. (2005) ‘Texas electricity deregulation hasn’t aided small power users’, The Wall Street Journal, 20 May.

Notes 1The issue of how much regulation is needed and in what form is an open-ended issue. Most economists agree that electricity markets, at the minimum, need a market manager to regulate the flow of power – as any city would need traffic police to enforce traffic laws. There is also general consensus that electricity markets need a market monitor to prevent monopolistic or opportunistic behaviour. Beyond that, there is little agreement because of ideological and political differences of opinion. Some economists do not see any need for a powerful regulator any more than such a regulator is needed to regulate the auto or tire industry.

2This discussion is adopted from ‘Electricity market reform: two decades later’, EEnergy Informer, March 2006.

3For example, see, ‘Now that we have competition are we better off?’ EEnergy Informer, July 2006.

4This, some observers argue, has been the case in Britain, where private investors have benefited more the consumers by some measures.

5For a comprehensive discussion refer to FERC (2006). 6The discussion of retail markets in the US is adopted from Tschamler (2006). 7This lack of interest is evident in the Energy Policy Act of 2005, where the word ‘retail competition’ does not even appear in the massive Bill.

8When retail competition was introduced in mid-1990s in some states, rates were typically rolled back and frozen, in some cases for as long as10 years. These rate freezes are about to become unfrozen, resulting in rather significant price increases in some cases.

9California’s restructuring debacle, according to some estimates, has cost the states’ taxpayers and ratepayers some $30 billion relative to a ‘status quo’ scenario. Other estimates put the total cost around $70 billion.

10According to the California Energy Commission website, the California statewide weighted average retail electricity price including municipal utilities, went from 10.09 cents per kWh in 1998 to 13.41 cents per kWh in 2002. Available at: www.energy.ca.gov/electricity/ statewide_weightavg_rates.html


11In some countries with a high concentration of energy intensive industry, such as South Africa or Tasmania in Australia, the situation is significantly more lop-sided. In South Africa, for example, 24 large, energy-intensive users account for roughly 40% of the generation. In Tasmania, 16 large industrial customers consume roughly 60% of the generation.

12California regulators withdrew retail access following the 2000–2001 collapse of the market, allowing customers who had previously switched to remain with the new supplier.

13The Center for the Advancement of Energy Markets (CAEM) ranked Texas as ‘number one competitive retail electric market in the North America and number three in the world,’ in 2005. See EEnergy Informer, February 2005.

14For example, see Zarnikau (2005). 15The NAO report concluded that the savings to domestic customers amounted to $182 million per

annum. But taking the costs into account would leave a net saving of only $33 million. The NAO said that this small net benefit is likely to be lost due to additional costs of ‘sorting out the remaining problems with the domestic competition systems’. See ‘Is there any gain in all this pain?’ in EEnergy Informer, April 2001.

16Personal communications, 22 July 2005. 17Joskow, P. ‘Why do we need electricity retailers? Or can we get it cheaper wholesale?’, p.56. 18Adopted from ‘Which country has the most competitive energy sector?’, EEnergy Informer,

December 2003. 19Germany and New Zealand initially tried to operate their markets without one, but both have

subsequently decided that one is needed. 20In the Australian context, Victoria has done this while the neighbouring New South Wales has

maintained government control of both generation and distribution, creating an uneven playing field especially in the retail sector.

21Lack of rigorous physical unbundling is considered as a major obstacle to the creation of a vibrant competitive market.

22This remains a thorny issue in the European and US context. 23In case of California, the powerful Public Utilities Commission had to publicly admit that it had

not done a good job of regulating the industry and proposed to restructure the ESI, substituting market discipline for regulation.

24Examples include Chile and Colombia, both have capacity charges, both considered problematic. 25Paradoxically, markets in PJM, New York and New England have decided to proceed with

capacity payment schemes while ERCOT and MISO have examined and rejected them and California is still debating if such a mechanism is needed or not.

26There are those [e.g. Moran (2006)] who attribute any shortcomings of the private sector to continued meddling and regulatory interference.

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