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2003-04 Seminars


A Comparison of the Ongoing Restructuring of the Domestic Natural Gas and Electricity Industries

Slides

Tim Merrill
Energy Center Pittsburgh

Abstract

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 1990's).

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.