Report to the Competition Bureau of Industry Canada Efficiency Considerations in Designing Electricity Markets
This report summarizes my perspective on several aspects of restructured wholesale markets for electricity. It is intended as a contribution to the Bureau’s examination of design issues in jurisdictions considering restructuring. The Introduction lays out some background and issues that motivate the subsequent discussion. The following sections consider the general architecture of wholesale markets for electricity. The first examines the choice among forms of organization, such as bilateral contracting or multilateral trading, and in the latter, the choice between a market-clearing exchange or a tight pool with centrally optimized scheduling. The second examines the transmission market in some detail, and the third examines the energy market similarly. The final two sections examine linkages among multiple markets in decentralized designs, focusing on the role of contractual commitments and the requirements for inter-market efficiency. To establish a point of departure: the current restructuring of electricity markets is consistent with the analysis by Joskow and Schmalensee in Markets for Power, 1983. They foresaw competitive markets for generation, transmission facilities operated on an open-access common-carrier basis, and retail competition among power marketers that rely on regulated utility distribution companies for delivery. Regulation of the wholesale and retail energy markets would be reduced to structural requirements and operational guidelines and monitoring, while retaining substantial regulation of the “wires” markets for transmission and distribution. These changes entail unbundling energy from T&D, thereby reversing the vertical integration of utilities. The current issues that I address here concern mainly the organization of the wholesale markets for energy and transmission, interpreted as including ancillary services and other requirements for system reliability and security. The examination of these issues in Canada can benefit from the history of restructuring in the provinces, such as Alberta, and other countries such as Britain, Australia, New Zealand, and Norway, newly implemented designs in countries such as Spain, and current developments in several states in the U.S. 2 I emphasize the implications of the general principles of market design based on ideas from economics and game theory, but on some practical aspects my views are parochial because my practical experience has been mostly in California.