Competition in the Electricity Marketplace

The recent movie, "A Beautiful Mind" based on the life of John Nash, the great game theory guru, has illustrated eloquently the pitfalls of classical economic theory with its conclusions on "perfect competition." In so many early forums on electricity market liberalization I have heard the pronouncements that through competition consumer prices would be significantly lower than those under full regulation. Yet, through "gaming" the market has had some sad illustrations of what we now regularly call, "exercise of market power" by various market participants. This gaming, whether legitimate or not, has increased the cost to consumers in most cases. In California, not only did the consumers and transmission companies suffer cost setbacks, but the entire state, and hence, the taxpayer had to foot a very expensive electric energy bill.

Although everyone has agreed that the electricity commodity is quite different from any other commodities, it seems deregulation (or liberalization as our European colleagues prefer to call it) decisions were based either on a belief system, an ideology if you prefer, in the so-called "market economics," analogous reasoning, with other deregulation experiences (e.g. telecom, airlines, gas industry), or a combination of both. One of the unexpected results was that market participants who are fully exposed to price fluctuations, even if they are very good in what they did, are still highly exposed and are at risk at some point. If, as a result, the true risk takers decide to remove themselves from this market, then we are left with the rest of the bunch, the risk-averse entities. But isn’t this the nature of the regulated monopolies, being based on much lower risk profiles?

Although a clear-cut solution is yet to be found, we can restart the thinking process by asking the obvious question: "What would a successful electricity market look like?" The corollary question is, "What would be the corresponding successful transition strategy?"

Stay tuned till next month. In the meantime, I appreciate your direct feedback – adebs@dsipower.com