Electricity Restructuring: Growing Problems

Abstract

For most of its history, the electricity industry has been regarded as
a natural monopoly. Thus, it was believed that efficiency in electricity
provision is greater when the industry is vertically integrated, with in-
dividual firms controlling generation, transmission and distribution
functions in a particular geographic area.
Recent advances in electricity generation technologies, however,
have weakened the reasons why the sector should be vertically struc-
tured and treated as a monopoly. Consequently, in many countries as
well as U.S. states, the goal has been to change this industry to a hori-
zontally structured competitive marketplace.
But designing a regulatory framework for the new system has
proven difficult.
Among the problems that have emerged include generators’ ability
to manipulate market prices. A report by the U.S. Department of Energy
says that firms can increase profits by employing a simple market power
bidding strategy to cut output and increase net revenues from genera-
tion by driving up the market price of electricity. In California, as well
as the United Kingdom, researchers have estimated wholesale electricity
prices to be up to 75 percent above competitive levels at times