Full text of DOI:10.1016/S1040-6190(01)00221-4

Can Retail Survive?
The time for experimentation is over. The key now is to
focus on ensuring the development of vibrant wholesale
markets to support nascent retail markets.
Craig Glazer
iven the turmoil that faces
parts of this country in the
adhering to needed nationwide
open access rules. Were these real
reforms or a fool’s errand?
G
summer of 2001, it is indeed diffi-
cult to clearly define the course for
the future of the electric industry.
How did the best-laid plans go so
wrong? Is the vision of vibrant
retail competition based on vibrant
wholesale competition fundamen-
tally flawed? And what of all those
stranded cost recovery mechanisms
and divestitures of power plants?
Were those a mistake as well?
Although this may sound like
post hoc justification, I firmly
believe that the fundamental
tenets of retail competition are
sound and can still work. I premise
this on the fundamental belief that
markets, when properly function-
ing, are superior to regulation in
disciplining market power, pro-
moting efficiency, and spurring
new investment. By the same token,
I continue to believe that choice,
down to the retail customer level,
is a superior means to bring these
efficiencies to the average citizen.
The biggest problem with retail
choice may not be that the premise
is wrong—it may instead be an
over-promise to the public coupled
with a lack of sufficient flexibility
built into the retail model.
These issues plague each of us.
But they especially lead to sleep-
less nights for former regulators
such as myself. For much of the
past decade, I served as Chairman
of the Public Utilities Commission
of Ohio. During that period, I
Craig Glazer is Manager of
Regulatory Affairs for PJM
Interconnection, LLC. He operates
PJM’s Washington, DC, office. Prior to
coming to PJM, he served for eight
years as Chairman and from 1991 to
2000 as Commissioner of the Ohio
Public Utilities Commission.
worked to champion open compet-
itive markets and played a key role
in crafting Ohio’s natural gas and
electricity legislation. I also fought
to preserve the rights of states to
govern their own destiny while
The problems that both retail
and wholesale competition are
August/September 2001
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facing in parts of the country are
not unique. Indeed, every deregu-
lation effort has had a “shake-
down” period where competition,
once looking so hopeful, goes
stranded cost payments that were
unresponsive to actual market
price fluctuations. Shopping cred-
its were fixed based on assump-
tions about the market, as were
retail rate caps. These decisions
had the effect of insulating the
retail market design from the fluc-
tuations of the wholesale market.
Although from the point of view of
insulating customers this was a
wise move, ultimately it led to an
untenable situation. No retail pro-
vider can long survive with a fixed
leadership of Pennsylvania Chair-
man John Quain were taking steps
to ensure the independence of the
Pennsylvania-New Jersey-
Maryland (PJM) RTO from its
inception. Unfortunately, other
states focused solely on the specter
of low-cost power leaving their
state. Although this was a valid
concern, the ability to control the
export of low-cost power always
lay within the hands of the state
regulator in a “closed” state.
through a period of concentration
in the hands of a few. For example,
at the time that the telecommuni-
cations industry was deregulated,
there was a giant promise made to
the public that competition and
telephone service choices in the
home would flourish. Indeed, the
Telecommunications Reform Act
of 19961 was shaped on the theory
that vibrant competition would be
brought to the home by the cable
television industry in competition
with traditional local-exchange
telephone providers. That compe-
tition never developed —in part
because of the cable industry’s
underestimation of what was
Through its review of the economic
dispatch decisions of the utility in
fuel cost hearings, the state com-
missions in fully bundled states
retained both the subject-matter
jurisdiction and the economic ham-
mer to prevent such action. In short,
if anything, California teaches us
that we were not spending enough
time on (a) ensuring the vibrancy
and liquidity of the wholesale mar-
kets and (b) designing our retail
programs to be responsive to that
wholesale market.
States locked into
stranded cost
payments were
unresponsive to
actual market price
fluctuations.
needed from a technology and cost
point of view, and in part because
of the unanticipated sea change
brought on by the essentially free
Internet. Massive battles were
here does this leave us?
fought between the states and the
Federal Communications Commis-
sion on such arcane and ultimately
irrelevant issues as whether
W
The key must be to focus
now on ensuring the development
of vibrant wholesale markets to
support nascent retail markets. It
has been said by some at FERC
that “the time for experimentation
is over.” We need to determine
what works and move the indus-
try along toward that solution
while, at the same time, being ever
open to change. It is for this reason
that PJM, with virtually unani-
mous support from its members,
has decided to offer to parties, at a
de minimis cost, an Electricity Mar-
ket Blueprint—the actual tools
and design of the PJM market for
adoption (with or without modifi-
cation, as they choose) by any RTO
or transmission provider. It is also
retail margin in a highly volatile
wholesale market.
By the same token, precious few
state regulators were determinedly
focused on ensuring that the Fed-
eral Energy Regulatory Commis-
sion would establish a vibrant
wholesale market. A handful of us,
as state regulators—including the
new FERC appointees Pat Wood,
then chairman of the Texas Public
Utility Commission, and Pennsyl-
vania Commissioner Nora
embedded or incremental costs are
the proper measure—all the time
ignoring the advent of other tech-
nologies and the Internet as an
alternative vehicle for the provision
of advanced services. In short, this
country legislated a telecommuni-
cations model that was inflexible to
change and was based on a set of
assumptions that time passed by.
So, too, with retail competition
for electricity. Much state effort
was focused on peripheral issues
such as slamming, certification of
providers, and dispute resolution
issues. Many states locked in large
Brownell—were speaking out on
the need for large regional trans-
mission organizations (RTOs) and
urging FERC to move the process
along.2 Forward-thinking regula-
tors in Pennsylvania under the
12
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The Electricity Journal

for this reason that states need to
be more involved than ever before
in such arcane issues as the design
of congestion management sys-
tems, the authority of market mon-
itoring units, and the handling of
the infamous “native load” issue
as it affects available transmission
capacity calculations.
market participants in real time
with real data in order that we
have real markets.
stepped (absent strong incentives)
to get customers to “volunteer” to
be exposed to price volatility.4
Fourth, most states simply
Second, to the extent states con-
tinue with the shopping credit
model, the shopping credit and/ or
the retail rate cap are going to have
to be more responsive to fluctua-
tions in the wholesale market prices.
This will require some immediate
design changes in both the work-
ings of the shopping credits and,
potentially, the length of the transi-
tion periods. Although these are dif-
ficult issues to reopen, a static retail
market design simply won’t keep
up with the dynamics of the whole-
sale markets. It is for this reason that
the Ohio legislation, for example,
included an opportunity for the
state PUC to review and adjust
shopping credits and transition
periods when the defined aim of the
legislation was not being achieved.3
Third, although demand
deferred the issue of deregulation
of metering. Absent the ability of
suppliers to obtain sophisticated
metering, and absent proper incen-
tives to the utility to replace the
existing metering stock with
Why this urgency? In many
states, the clock is ticking. Retail
rate caps and price freezes termi-
nate in the next two to six years in
various states. At that point, most
state laws and state public utility
commissions are fuzzy as to what
happens next. To reimpose retail
regulation of overall prices would
require a sweeping change in the
law —something that will not be
accomplished without some bru-
tal tradeoffs. And even if the mar-
kets do somehow smooth out in
this period, the industry faces
another outside pressure on
“smart” meters, real-time pricing
and demand response will never
be achievable on a wide scale.
he bottom line is that we have
Ta massive amount of work to
do, both at the wholesale and the
retail level, to make retail competi-
tion not go the way of the horse and
buggy. It would be wrong to let
free-market rhetoric take the place
of careful design changes at this
critical point. Rather, the challenge
for all of us is to roll up our sleeves,
look again at some of our critical
assumptions, and not be afraid to
make needed incremental changes
to adapt to changing conditions. ᭿
prices—namely, the implementa-
tion of NOx controls throughout
the Eastern Interconnection in the
2004–2005 time-frame.
response is heavily touted and is
critically important, demand
response cannot be fully achieved
given the statutory fixed-rate caps
in place in most states. In short,
under the present regime, unless
customers volunteer to “see” a
market price, and only if expensive
metering can be deployed, can one
legally get beyond the customer’s
present statutory right to an abso-
lute, nonfluctuating price. Thus,
the retail rate caps have made
demand response most difficult to
achieve. Prior to the rate caps, at
least the fuel adjustment clause
fluctuated quarterly or semi-annu-
ally, giving the customer a signal,
albeit a delayed one, for his or her
consumption during peak periods.
Today, because of the fixed retail
rate caps, there remains a discon-
nect that cannot easily be side-
Endnotes:
firmly believe that retail com-
1. Telecommunications Reform Act of
1996, Pub. L. No. 104, § 104, 110 Stat. 56
(1996).
I
petition can work if we focus
on a number of key items. For one,
there must be a vibrant wholesale
spot market supporting the retail
program. Markets will need to be
open and transparent, a feature
missing in a number of the RTO fil-
ings that disclaim any RTO facilita-
tion of the functioning of the mar-
ket. The RTO, as an information
provider, has the critical informa-
tion on system topology and real-
time operations that are critical to
making the market work. It must
be more than a simple grid
2. Regional Transmission Organizations,
Order No. 2000, III FERC Stats. & Regs.,
Regs. Preambles ¶ 31,089 (1999), order
on reh’g, Order No. 2000-A, III FERC
Stats. & Regs., Regs. Preambles ¶ 31,092
(2000).
3. Ohio Rev. Code Sec. 4928.40(B), 1999.
4. Ironically, one of the features of the
California model that has been most
heavily criticized —i.e., the requirement
that utilities purchase through the power
exchange spot market, was designed to
provide price transparency and signals
to the customers. It may just be that the
customers did not like the signals they
were seeing and, due to the lack of retail
choices, could not respond to those price
signals.
operator—rather, it should be an
information provider that puts
critical information in the hands of
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