Competitive Markets for Electricty Generation

This paper discusses the feasibility of replacing regulation or state ownership with market competition in electric power generation. Interest in competitive electricity markets has been stimulated by recent experiences in the United Kingdom and Brazil with privatization, with deregulation in the United States, and with partial reform in Norway. Whilethe Thatcher government policy offers lessons about the process of privatizing a state monopolyenterprise, the American experiencebecomes relevant to ourunderstanding of howincreasingly competitive markets for electricity actually work. The continuing growth of competition in American electricity markets is an unanticipatedconsequence of the 1978 passage ofthe Public Utility Regulatory Polices Act. Designed as aconservation measure, PURPA established the right of cogenerators and Independent Power Producers (IPPs) to sell electricity to local regulated Investor-Owned Utilities (IOUs). Such rights were broadened substantially by the passage of the Energy Policy Act of 1992 which requires transmission line owners to wheel bulk power (Walters and Smith 1993). Thus, under current federal regulations nonutility power producers can sell electricity to any utility on the grid. Furthermore, in April 1994, the California Public Utility Commission adopted a policy establishing complete open access to all power producers. By 1996 independent generators can compete to sell electricity directly to large industrial customers, effectively bypassing traditional utilities. By 2002, the policy permits all electricity consumers, regardless of size, to purchase electricity