Hogan_AEEE_011708

Hogan_AEEE_011708 - ELECTRICITY MARKET HYBRIDS: MIXED...

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ELECTRICITY MARKET HYBRIDS: MIXED MARKET DESIGN, REGULATION AND INVESTMENT William W. Hogan Mossavar-Rahmani Center for Business and Government John F. Kennedy School of Government Harvard University Cambridge, Massachusetts 02138 La Asociación Española para la Economía Energética (AEEE) Bilbao, Spain January 17, 2008
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1 ELECTRICITY MARKET Electricity Restructuring The case of electricity restructuring presents examples of fundamental problems that challenge regulation of markets. Marriage of Engineering and Economics. o Loop Flow. o Reliability Requirements. o Incentives and Equilibrium. Devilish Details. o Retail and Wholesale Electricity Systems. o Market Power Mitigation. o Coordination for Competition. Jurisdictional Disputes. o US State vs. Federal Regulators. o European Subsidiarity Principle.
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2 ELECTRICITY MARKET Electricity Restructuring The Federal Energy Regulatory Commission has responsibility for regulating wholesale electricity markets. The stated framework emphasizes support for competition in wholesale markets as a clear and continuing national policy: “National policy for many years has been, and continues to be, to foster competition in wholesale power markets. As the third major federal law enacted in the last 30 years to embrace wholesale competition, the Energy Policy Act of 2005 (EPAct 2005) strengthened the legal framework for continuing wholesale competition as federal policy for this country. The Commission’s core responsibility is to ‘guard the consumer from exploitation by non-competitive electric power companies.’ The Commission has always used two general approaches to meet this responsibility—regulation and competition. The first was the primary approach for most of the last century and remains the primary approach for wholesale transmission service, and the second has been the primary approach in recent years for wholesale generation service. The Commission has never relied exclusively on competition to assure just and reasonable rates and has never withdrawn from regulation of wholesale electric markets. Rather, the Commission has shifted the balance of the two approaches over time as circumstances changed. Advances in technology, exhaustion of economies of scale in most electric generation, and new federal and state laws have changed our views of the right mix of these two approaches. Our goal has always been to find the best possible mix of regulation and competition to protect consumers from the exercise of monopoly power.” 1 A task for regulation is to support this policy framework while developing hybrid markets and dealing with both the limits of markets and the failures of market designs. 1 Federal Energy Regulatory Commission, “Wholesale Competition in Regions with Organized Electricity Markets,” Advanced Notice of Proposed Rulemaking, Dockets RM07-19-000 and AD07-7-000, June 22, 2007, pp. 4-5.
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3 ELECTRICITY MARKET Electricity Restructuring There is a tension in choosing regulation to address immediate market problems and to deal with the continuing challenge of improving electricity market design.
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This note was uploaded on 06/16/2010 for the course MS&E 369 taught by Professor Blakejohnson during the Spring '08 term at Stanford.

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Hogan_AEEE_011708 - ELECTRICITY MARKET HYBRIDS: MIXED...

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