A Comparison of the Ongoing
Restructuring of the Domestic Natural Gas and Electricity Industries
Energy Center Pittsburgh
The premise of this presentation
is that the federal and state efforts to restructure the electricity
industry haven't adequately taken into account the different 20-year
history of federal and state efforts to restructure the natural gas
industry; and, yet, the current failures to create viable competitive
retail markets in both industries have common roots or causes.
The gas industry restructuring or deregulation process commenced in the
late 1970's as a result of gas shortages during that decade. The gradual
deregulation of gas wellhead prices occurred as the result of federal
legislation. During the 1980's, as the industry reacted to unexpected
surpluses of gas and lower than anticipated prices, various pieces of
federal and state regulation provided for an evolution to wholesale and
retail markets, the infrastructures of which took years to put in place.
This process was aided by the fact that the retail market being created
was for industrial and large commercial customers only (until the mid
Though the antecedents for the power industry restructuring do go back
to 1970's federal legislation and a Supreme Court decision, it was the
action of various state legislatures in the mid 1990's that really made
electricity restructuring take off. Legislators were convinced that
lower prices could be experienced for all retail customers -
residential, commercial, and industrial alike - instantaneously, with
the passage of legislation and the writing of enabling regulations. The
proper development of wholesale markets, let alone the necessary
infrastructure, was not considered.
At this point, both gas and power competitive retail markets in just
about every state are almost non-existent. If any market is functioning
at all, it is doing so marginally. The reasons for this set of
circumstances are basically twofold. First, state regulators were unable
to change their historic command and control regulation model to one
that would allow markets to function and thereby protect consumers
better than could regulation. Secondly, the growth of competitive retail
markets floundered on the inability of federal regulation to complete
the creation of wholesale markets. In gas, though the commodity
wholesale market was reasonably well established, the capacity wholesale
market never came into being. In power, the evolution from loose power
pools to tight power pools, to ISOs, to rational RTOs with
well-functioning capacity markets, though still proceeding in some parts
of the country, may never develop as federal regulators intended into a
Standard Market Design.
Certainly, there are other reasons for the loss of the power and gas
restructuring or "deregulation" momentum, such as the
proliferation of price caps, the actions of incumbent gas and power
utilities, the meltdown of wholesale trading in both gas and power, and
the accusation of improper or illegal activities by certain entities.
But, to this presenter, the two mentioned above are the more basic
causes of the current situation.