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Regulating Power: The Economics of Electricity in the Information Age.

This book is part of the Topics in Regulatory Economics and Policy Series edited by Michael A. Crew, Rutgers University. The author, a staff member of the New York Public Service Commission since the early 1970s, argues that utilities have been able to take advantage of asymmetric information and jurisdictional conflicts between state and federal regulators to gain and exert market power in impeding evolution of the industry toward a more competitive and efficient structure. The book relies on power markets and experience in the State of New York for primary evidence. Its first purpose is to demonstrate a theory of market and information control (cartelization) by electric utilities. The second purpose is to outline a new role for regulation.

The book is organized into ten chapters and an appendix on electrical systems. The first two chapters provide background on the control of information and classes of actors or vested interests involved in electricity markets.

Chapter 3 stands by itself, examining the regulatory process at the state level and in a principal-agent framework. Detail is provided both on the flow and asymmetric nature of information and on utility incentives and options to manipulate that information. The significance of the Public Utility Regulatory Act of 1978 is explored along with application of the prudence standard in regulation and jurisdictional ambiguity with Federal and State Institutions.

Utility cooperation in electric power markets is important in promoting system reliability and efficiency. Chapter 4 reviews the basis and evolution of this cooperation in dispatching generating capacity to meet differing electric loads. One focus is the nature of electric agreements and the use of computer models to set prices and share cost-savings. Evidence is offered that jurisdictional ambiguities between federal and state regulation have allowed utility groups to limit cost-reducing cooperation requested by state authorities.

With asymmetric information and the adversarial nature of the regulatory process, it would be reasonable to expect controversy in the use of models. Chapter 5 asserts that established models have been allowed to influence the nature of subsequent questions without adequate examination of underlying assumptions or applicability. Mr. Pechman describes this as model-limited choice and devotes most of the chapter to an analysis of the loss of load probability model and its application to investment in generation capacity and system reliability.

Competition in electric power generation essentially began with the Public Utility Regulatory Act of 1978, which in part required electric utilities to purchase power from qualifying cogenerators, and Chapter 6 examines that evolution and prospects for its continuation. Special attention is given to problems in selecting and pricing non-utility generation and problems with relationships between the non-utility generators and utilities. These matters are clearly important and demand more attention. From this reader's perspective, regulatory oversight may not be sufficient and other options for restructuring ownership might be worth considering.

Conservation and demand-side management are discussed in Chapter 7 as alternatives to investment in generation capacity. Conservation is defined as any reduction in energy use occurring through voluntary consumer choice. Conservation programs are then efforts to provide information, establish incentives or set market prices. Mr. Pechman treats demand-side management as essentially conservation. But he also points out that while some, like Alfred Kahn, argue for consumer sovereignty, others make a persuasive case for utility intervention in the control of consumption. It is furthermore argued that there is a fundamental contradiction between conventional utility regulation and the pursuit of conservation and that this mandates regulatory initiatives. Incentive programs established by regulatory authorities to encourage utility efforts at conservation are described along with controversy over appropriate tests for justification. Finally, non-utility alternatives such as efficiency standards in building codes and subsidy programs are discussed.

Chapters 8 and 9 focus on what Mr. Pechman describes as integrated resource planning and then implications for regulation. Chapter 10 summarizes conclusions.

I recommend this book as a useful source for information on the development of competition in electricity markets. It provides insights from a staff member of one of the more progressive state regulatory commissions in the country and, even though the adversarial nature of the regulatory proceeding seeps through, the reader will come away with more intimate understanding of the regulatory problem in electricity.

Not unexpectedly, it is implicitly and obviously assumed that planning and regulation will work. All that is needed is the right planning framework and regulatory model. Without attempting to detract in any way from the important contributions of the book, work remains to be done on these issues. Regulatory commissions vary significantly in structure and methods. Evidence on the performance and behavior of regulatory bodies should be examined. To what degree is regulation a success or a failure - and depending on this, are their other options besides regulation?

It is worth coming back to the assertion that there is a fundamental contradiction between conventional utility regulation and conservation. If by conservation one means economic efficiency, then the assertion is false. If conservation is to simply mean any reduction of energy usage, then it may be valid. But if this is the case there is no economic justification for conservation.

A final reflection is that good regulation would seem to require good information - for example, good cost information. But market processes are necessary to reveal this information. And, ex ante, regulation distorts or prevents market processes. Perhaps regulation can't work and the best policy is to reintroduce markets where possible.

R. Ashley Lyman University of Idaho
COPYRIGHT 1995 Southern Economic Association
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Author:Lyman, R. Ashley
Publication:Southern Economic Journal
Article Type:Book Review
Date:Jul 1, 1995
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