state itself, utilities generate more than 95 percent of their elec- My organization, the Electric Power Research Institute,
itute, has
tricity from relatively inexpensive coal and nuclear plants, while
California relies heavily on natural gas, which fluctuates more
widely in price and has recently become very expensive.
Moreover, new plant construction has kept pace with
demand in Pennsylvania, and its utilities were not required to
sell off their generating plants to out-of-state companies. Utili-
ties were also encouraged to enter long-term contracts for power,
rather than be forced to rely on a volatile spot market. Finally,
restructuring was not imposed all at once. Instead, a two-year
pilot program allowed the state to work out any bugs.
Load management is key
The most effective short-term step that can be taken to ease the
California crisis and help prevent its spread is to improve load
management. Electricity customers need to be given incentives
to conserve energy when it would do the most good from a power
market standpoint. For those customers who are particularly risk
averse, a fixed-price rate can still be offered, but with an “insur-
ance premium” tacked on to protect against rising rates.
Large customers can be offered special rates to interrupt
power when conditions are tight, or opportunities to sell power
they generate. Probably the most effective option is to institute
time-of-use rates and real-time pricing. In this way, the cus-
tomer would know the price of electricity at any given time. The
price reflects the cost of power generation and delivery at that
given time, changing minute to minute, hour to hour.
Electricity Restructuring in
Britain: Not a Model to Follow
BY THEO MACGREGOR
MacGregor Energy Consultancy
T
he model on which U.S. electric industry deregu-
lation was based is, after 10 years, a failure. The
system, established in Britain in 1991, was de-
signed and created through a nondemocratic
process—without public participation or trans-
parent information about the cost data underlying prices.
Although world oil and natural gas prices plummeted, and
electricity employment was reduced by 50 percent, generating
prices in the UK remained so far above the cost of production
that the power companies literally did not know what to do
with all their profits. In a single year, one of the two private
power-generating companies that were created—National
Power—paid dividends to stockholders that exceeded the
entire value of the company’s stock at privatization.
The privatization of what had been a government monop-
oly also resulted in one transmission company and 12 regional
electric distribution companies (RECs). These were seen as
natural monopolies that would need regulating into the future,
whereas it was thought that the generators would soon be
competitive and would not need regulating. An Office of Elec-
studied the benefits of real-time pricing and found, for exam-
ple, that it could lower peak demand in California this summer
by 2.5 percent, thus helping reduce wholesale prices by 24 per-
cent. Inexpensive electronic meters, now being introduced,
can facilitate the spread of real-time pricing.
Other technologies can be applied on the supply side in the
medium-to-long term. Fossil-plant upgrades, for one, could
add 5 percent to the capacity of many units, including an
estimated total of 3700 MW in California. Transmission sys-
tem capacity, too, can be improved by advanced technology,
even before new lines are added. Using tools such as the
dynamic thermal circuit rating (DTCR) software package can
increase the throughput of some thermally constrained trans-
mission paths by 10–30 percent. For areas of the transmission
system that are stability constrained, power electronic tech-
nologies known as FACTS (flexible ac transmission systems)
can boost power flow by 20–40 percent, at a much lower cost
than building new lines.
Still other technologies are available to upgrade mainte-
nance practices throughout the industry, assist service providers
with rate design and market simulation, and help system secu-
rity coordinators integrate grid operations on a regional scale.
Now is the time for engineers to help policy-makers better
understand the technical complexity of power systems and
become aware of new technological opportunities for solving
the current problems before they spread even further. •
tricity Regulation (OFFER) was established to set price caps for
the RECs, and monitor monopolistic behavior on the part of
the generators. Eventually, the office forced the two companies
to divest themselves of a significant number of their power
plants; yet prices remained high above costs.
A Birmingham University professor, Stephen Littlechild,
was appointed the first OFFER director-general in 1989. He
instituted a Power Pool bidding system that was supposed to
lower prices for electricity by subjecting power generation to
competitive market forces. Eight years later, an investigation was
conducted by OFFER and led to the following conclusions:
IEEE SPECTRUM
“There is strong evidence that Pool prices were being
manipulated; that participants in the pool have been using the
rules for their commercial interests; and that higher wholesale
prices have been established that will mean higher prices for
• June 2001
customers. And this manipulation has been accelerating.”
When Littlechild created Britain’s Power Pool, the theory
was simple: every day, generating companies would bid to 15
 S P E A K O U T

supply the nation’s grid system for each half-hour of the fol- New Electricity Trading Arrangements (NETA) that are sup-
lowing day. The lowest bidders would supply the system, and posed to foster commodities-style dealing in Britain’s £7.5 bil-
consumers would benefit from the competition in the form lion wholesale power market.
of lower prices. Markets, not regulation, would thus set elec- The electric industry itself has spent far more because
tricity prices. companies have had to install complex computer systems
Unfortunately, Britain’s market-based electricity pricing sys- and trading desks to be able to participate. In the meantime,
tem became the model for restructuring around the world, consolidation in the industry has meant that there are only
including the United States. The model has spread despite its six vertically integrated electric companies that serve 12
failure to do what it was supposed to do: namely, reduce prices out of the 14 regions in the country. Most of these com-
for consumers. panies supply their own customers, the bilateral contract
Indeed, after nearly a decade of market pricing, electricity market is disappearing, and there are disincentives to sell
prices for residential customers in England in 2000 were 44 into the spot market.
percent higher than in the United States, and they had risen
considerably since 1989 when privatization was enacted. More rules and regulations than ever
Unlike the Power Pool model, where power was centrally dis-
Economic efficiencies, the market way patched (similar to California’s system except that hedging
The major argument made by economists to promote dereg- —buying power on the futures market to “hedge” against
ulation and market competition in electricity pricing is that prices rising—was allowed), NETA allows self-dispatching,
markets lead to economic efficiencies. If unfettered
by regulation, the argument goes, prices will rise
and fall with demand; the “proper” price signals will
lead to efficient usage and energy conservation;
plants will be built when and where needed; and
the need for regulation will decline.
In Britain, as in California and everywhere else
market pricing of electricity has been tried, theory
is bumping up against reality. In Rio de Janeiro,
Brazil, for example, prices following privatization
shot up 400 percent, 40 percent of electricity work-
ers lost their jobs, and the lights went out.
In the real world, power markets are too easy to
monopolize and manipulate—that is, to game—for
the theory to hold. Short of price regulation, there is no
set of rules or regulations that can prevent the wild
price swings and increases that are endemic to markets.
And the electricity industry embodies all the elements
of what used to be (and sometimes still is) called a
“natural monopoly”: there are no good substitutes;
only one provider can efficiently distribute electric-
ity; market entry barriers are high (extremely high cap-
ital costs and siting barriers, among others); electricity
is economically infeasible to store for most purposes; because it which allows the generator companies to send out power as
is a necessity; demand is notoriously unresponsive to price they see fit. Ninety percent of trades happen in the bilateral
changes; and price signaling among suppliers is incredibly easy. market, where a buyer contracts for power directly with a sup-
In fact, one of the early proponents of deregulation in a num- plier, and about which there is no public information available.
ber of industries (rail, trucking, airline, and electricity), Alfred The remainder take place in the Power Exchange, and the
Kahn, an economist at Cornell University and former chair of the system is then balanced by the system operator. The balancing
New York State Public Service Commission, now says: “I am process and announcement of final prices could take months,
• June 2001

worried about the uniqueness of the electricity markets. I’ve during which everyone is kept in the dark.
always been uncertain about eliminating vertical integration….It NETA was just put in place on 27 March 2001, so it is too
may be one industry in which it works reasonably well.” soon to know whether it will foster competition and lower con-
IEEE SPECTRUM

In Britain, the added cost of simply developing and running sumer prices. The cost of the system, plus higher natural gas
the new wholesale market for the first five years was £726 mil- prices in the UK, may actually lead to increased prices, according
lion (approximately US $1.1 billion), including extensive mod- to Simon Harrison, director of energy consultants at Mott Mac-
MICK WIGGINS

ifications after only two years. After just about a decade of high Donald, and Martin Stanley, president of trading at TXU Europe,
prices and market manipulation, Britain spent an additional a major electricity generator and supplier in the UK.
16 £100 million to eliminate the Power Pool and institute the [Continued on page 19]
 [Continued from page 16]
Thus, far from simplifying pricing and eliminating regula-
tions, more rules and regulations than ever existed before have
been implemented since restructuring of the industry began, and
more are being demanded daily. These rules and regulations—
like the structure of the new power exchange itself—have been
designed and put in place without the full participation of those
affected by them.
During the 1990 privatization process, the British gov-
ernment established “consumer councils” to (allegedly) pro-
tect the public’s interest in fair and reasonable electricity
prices. However, members of these councils were appointed
by the regulator himself! Councils issued statements sup-
porting the regulator and never mounted any serious chal-
lenges to his decisions on prices. Recently, in the guise of reg-
ulatory reform, the British government announced that the
regulator would no longer choose the consumer representa-
tives; rather, the central government would select certain
consumer organizations to review otherwise “confidential”
documents provided by the electric companies. They still
would have little influence, and other interested parties still
do not have the right to participate in the process.
Even as the United States has moved to deregulate wholesale
Putting Consumers First
BY GLENN ENGLISH
National Rural Electric Cooperative Association
electricity prices and taken steps in some states toward market
pricing of retail sales, one major difference between the restruc-
tured electric systems in Britain and the United States remains:
in the United States, stakeholders participate fully in the process.
Another difference is that, instead of being allowed to claim
that cost data are confidential and not to be shared, U.S. elec-
tric companies must provide information to the regulators
and to the public that will allow “just and reasonable” rates to
be determined.
The principles of democratic regulation have been sorely
challenged lately by the U.S. Federal Energy Regulatory
Commission’s handling of wholesale pricing in the West
and elsewhere, and by the market structure created in Cal-
ifornia. The hope for restoration of reasonable pricing lies
in the fact that the people affected by the outcomes are par-
ticipating in the decisions being made: through litigation,
negotiation, and legislation.
In Britain, as in most other nations (except Canada), dem-
ocratic regulation is a contradiction in terms. The high and
volatile prices inherent in unfettered markets will become a
feature of the U.S. electric industry as well—unless public par-
ticipation and transparency of information continue to be
standard practice in the pricing of electricity. •

C
alifornia’s troubled experiment with deregu- ting consumers first. Instead, the opposite is happening.
lation has turned up the volume on the debate One of the curious features of electric retail competition
over a new U.S. national energy policy. Elec- as it has unfolded is that the choice is not really the con-
tric industry and other energy problems are sumer’s to make; it is the suppliers who choose the cus-
today’s lead stories in the evening news and tomers. It is completely up to the power suppliers to decide
the morning papers. Yet fundamen-
tal consumer protections are con-
spicuously absent from most leg-
islative and regulatory deliberations
on deregulation or restructuring.
All consumers—residential and
commercial, small and large alike—
are entitled to reliable, universal elec-
tric service priced at a reasonable
rate. This principle has been the
bedrock of state and federal regula-
tion of the electric industry for de-
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cades, and it is being carelessly

tossed aside in the name of “compe-
tition” or “choice.”
Competition is not the end—it is
a means to an end. Competition is
• June 2001

not, therefore, the goal of electric

JOHN HERSEY

industry restructuring. The goal is

reliable, universal service at a rea-
sonable rate. And that means put- 19