I just got this and thought you might find it interesting as well.

Amy



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From:  <Eric@EHirst.com>
To: Eric@EHirst.com
Date: Wednesday, August 1, 2001 12:16:55 GMT
Subject: 

Dear Colleague,

The Edison Electric Institute just published a paper, The California
Electricity Crisis: Lessons for Other States, which I wrote. The paper is
available on the Publications page of my website, www.EHirst.com
<http://www.ehirst.com/> . Please let me know if you have any comments on
the paper.

Here is a summary of the paper:

        California was supposed to show the rest of the nation a brighter
electricity future. That future, as outlined by the California Public
Utilities Commission in 1994, envisioned an electricity industry featuring
competitive markets. Such markets were intended to produce lower costs and
more choices for consumers, while ensuring profits for efficient energy
suppliers and encouraging the retirement of old, inefficient power plants.

        Although the first two years of restructuring (beginning in April
1998) seemed to bear out these promises, the last year has been a disaster
for California's electricity consumers, taxpayers, and electric utilities.
Part of the fallout from California's electricity crisis is considerable
concern-even opposition-in other states to restructuring the electricity
industry. 

        Although a few states have decided, based on the California
experience, not to restructure, I believe that is the wrong outcome.
Instead, the primary lessons other states should learn from California are
that competitive markets can work; competition is not to blame for
California's problems; and basic economic principles of supply, demand, and
prices affect market outcomes.

        Section 2 of this paper briefly reviews the history of electricity
regulation and restructuring in California and the problems that occurred
beginning in May 2000. Section 3, the heart of this paper, offers guidance
to other states on the key ingredients of a competitive electricity
industry. This section makes several points: 

*	Maintain a favorable investment and regulatory climate for new
generation to ensure that enough generation capacity is online and planned
to meet growing loads. 

*	Ensure that enough infrastructure (transmission capacity and natural
gas pipeline capacity) is in place and planned to meet growing loads,
maintain reliability, connect new generators to the grid, support large
regional markets, and provide fuel to power plants. 

*	Encourage retail customers to participate in dynamic-pricing and
voluntary-load-reduction programs (i.e., couple retail and wholesale
markets). 

*	Create honest retail competition: avoid standard-offer rates with
artificial discounts and create conditions that encourage many companies to
offer retail services without favoring individual competitors. 

*	Encourage electricity suppliers to manage and diversify their supply
and price risks. 

*	Create efficient and integrated wholesale markets for energy,
ancillary services, and transmission congestion. 

*	Monitor and minimize horizontal market power (generation) and
vertical market power (combined ownership and operation of generation and
transmission). 


        Ultimately, competitive markets for electricity will lower costs and
prices, better align consumer prices with producer costs, improve producer
efficiency in both investment and operation, maintain or improve
reliability, and yield greater innovation in customer services and pricing
options. 

        But, this transition from one industry structure to another is
turning out to be long and complicated. It is complicated because
electricity is so important to our modern, high-tech society; electricity is
our most flexible fuel, providing light, heat, motive power, and the energy
to operate all our electronic equipment. Also, electricity truly is a
real-time product for which production and consumption must occur at the
same time. 

        Although the problems that have occurred in California are
substantial and worrisome, regulators and legislators in other states should
focus on the long-term benefits of competitive electricity markets and
accept the possible short-term problems that may occur. They also need to
recognize that wholesale markets are regional in scope and extend far beyond
the boundaries of any single state. Finally, competition in retail and
wholesale markets must be coordinated; in particular, it is not possible to
have competitive wholesale markets unless at least some retail load faces
time varying prices. 

        If states restructure properly to create competitive markets for
wholesale energy and retail services, we should all benefit. Consumers will
enjoy lower prices, they will have many more choices of energy services and
price-risk tradeoffs, reliability will be improved because most reliability
services will be obtained through markets instead of by engineering edict,
and the financial risks associated with building and operating power plants
will be assigned properly to investors rather than consumers. 

Eric
----------------------------------------------
Eric Hirst 
Consulting in Electric-Industry Restructuring
106 Capital Circle
Oak Ridge, TN 37830
*865-482-5470 (phone & fax)    *Eric@EHirst.com
http://www.EHirst.com <http://www.ehirst.com/>