WASHINGTON D.C. - The promise of electricity "restructuring," namely replacing regulation with competition in major parts of the electricity industry, has proven to be elusive, The Progress & Freedom Foundation Senior Fellow Tom Lenard writes in a new Progress on Point, "Electricity 'Restructuring': What Went Wrong." Lenard, PFF Vice President of Research, said the Federal Energy Regulatory Commission had been on a viable path toward competition but since has taken missteps.

“After a decade of trying, we have failed in the two policy areas that are key to obtaining the benefits of competition:  developing a transmission policy that is supportive of competitive markets, and developing the demand side of the market," Lenard writes. "The most obvious symptom of our failure to develop and implement a sound transmission policy is the failure to attract the investment capital needed to support the new demands of a competitive wholesale market or even to support the normal growth of the market.”

Congress has failed to enact electricity regulation over the last decade, and in the absence of congressional action, competition policy has been driven by FERC. But Lenard writes that under a new chairman, Pat Wood, FERC undermined a previous competition order (FERC Order 2000) by shifting to a more prescriptive approach, exemplified by FERC’s Standard Market Design proposal. "It proposed to design power markets and institutions at a level of detail virtually unprecedented in our economy and mandated the transfer of all transmission assets under FERC jurisdiction to non-owner, non-profit entities now called Independent Transmission Providers (ITPs)." Such a move displaced for-profit transmission companies (Transcos) but "did little or nothing to improve incentives for transmission investment. Instead, it relied on cumbersome planning processes."

On the positive side, Lenard writes, "FERC has been sufficiently constrained so it is not able to force the new model everywhere." In addition, "if there is another change of personnel at the FERC, it still may be possible to shift policy to get back to the more modest, less prescriptive path the agency was following."

"Electricity 'Restructuring': What Went Wrong" is based on a speech Lenard gave recently at a conference titled “Electricity Transmission in Deregulated Markets:  Challenges, Opportunities, and Necessary R&D Agenda." It was co-sponsored by Carnegie Mellon University, the Electric Power Research Institute and the U.S. National Science Foundation.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.