Fortnightly
PoolCo vs. Bilateral Markets
January 01, 1995Robert J. Haywood
Robert J. Haywood
Vice President of Power System
Pacific Gas and Electric Co.
The electric industry is a $200 billion per year industry in the United States \(em the second largest input to the national economy \(em with a structure currently based upon principles of 19th-century monopoly and regulation control that are no longer sensible or valid. The industry can be restructured for the benefit of all Americans by minimizing the antiquated regulation and centralized planning and control that currently exists, and by maximizing free-market discipline. Such a restructuring is achievable, customers demand it, and suppliers can provide it.
However, there are some who want to impede this evolution by imposing inflexible regulation through a centralized and mandated wholesale pool, instead of allowing markets to form multiple competing pools that can constantly adapt and adjust based on financial rewards for efficiency, innovation, and new products
and services that better serve all Americans.
If regulators insist on a single mandatory pool, they embark on a long and questionable path. Designing the market in the hearing room has never been successful. Instead of relying upon market discipline, they would require forced bidding into a central pool in which price and reliability issues would be unnecessarily commingled. Innovation would be impeded as regulators replaced market decisionmaking; voluntary, competing market pools would be prohibited; forward markets would be fragile at best; and the full market discipline of private transactions necessary for efficient markets (which prevail in all other commodity markets) would be foregone.
Why would regulators turn their backs on this precious opportunity to move this huge market to greater efficiencies of customer choice? One reason is the misconception (heavily promoted by those with a vested interest in the status quo) that electricity is so fundamentally different from other goods and services that extreme regulatory control over all market transactions is necessary to maintain reliability. PG&E's extensive operating experience clearly shows this to be totally false; reliability, maintenance, and product pricing can and should be completely divorced. The planning, trading, and pricing of electricity can be managed like other goods and services, none of which use mandated centralized pools. For instance, airline safety clearly must be regulated, and safety is the job of air traffic controllers. But should air traffic controllers regulate the price and bargaining of airline ticket prices? Of course not.
That is why application of the UK pool model in the United States is completely inappropriate. For the UK, the restructuring from full government ownership (with no wholesale market or independent power industry) to privatization with a regulated, centralized pool was at least a move in the right direction. But in the United States (where private ownership is dominant) a robust independent power industry exists; a demand-side management industry is in the making; clean fuels are abundant; and turbine technology, information, and control systems have rapidly advanced. Such a mandatory pool is just unnecessary, regressive regulation. Open markets and full customer choice, with their resulting increases in efficiencies and innovation, are clearly better organizing principles.
We can build on our experience in gas and wholesale electric markets to move this industry forward to full customer choice, letting the market participants form pools
that will be flexible, respond to market forces, and foster product innovation \(em letting competition weed out inefficiencies. Today, PG&E provides unbundled system-control services for a large number of bilateral agreements that enable existing pools to operate and new pools to form. In 1995, PG&E hopes to see the formation of transparent market-pricing indexes, open-access transmission tariffs, and system operator independence. These developments will set the stage for full customer choice in 1996.
Before direct access can begin, we must settle issues such as stranded investment, obligation to serve, and regulatory jurisdiction. Our efforts should, therefore, be directed toward solving these issues, rather than creating an unnecessary wholesale electric pool. Environmental and social programs should not be sacrificed by industry restructuring. They can be fully implemented through unbundled customer charges.
The bottom line is that direct customer choice for full electric physical and commercial transactions can be introduced and expanded throughout the customer base starting in 1996. The opportunity to restructure this major part of our national economy from monopoly regulation to a fully competitive free-choice market is here now. The United States cannot afford to forgo the efficiencies that could be captured in this cornerstone industry of the U.S. economy as we face a 21st century of intense global competition. t
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