July 1, 2005 Restructured Electricity Markets: A Risk Management Approach
نویسندگان
چکیده
In this paper, we consider a future path of the electricity industry that builds on lessons learned from experience and the principle of risk management. A main argument is that restructuring of the electricity industry is a process, not an event, which should be evolutionary, depending on local circumstances. This evolutionary path stays midway between extremes of vertical integration and direct liberalization of wholesale and retail markets. This middle path establishes the boundaries of the firm – i.e., the extent to which a retail utility should retain some degree of vertical integration. Its merit is that it builds on the positive accomplishments of liberalization while also reserving an important role for retail utilities. This “Third Way” of industry organization emphasizes that retail utilities should continue to serve a large contingent of core customers – mostly residential and small commercial customers – who rely on inter-temporal smoothing of retail rates. Moreover, we examine the practical aspects of implementing this role within liberalized wholesale markets. A key element is the make-or-buy decision about whether to own and manage supply resources, or to rely on wholesale markets via either spot purchases or longer-term contracts. It also requires restructuring of regulatory policies and redefinition of the regulatory compact to recognize the effects of investment, purchasing, and contracting decisions by utilities in the context of liberalized wholesale markets, and to strengthen incentives for efficient operations. 1 The authors are affiliated with EPRI and Stanford University, University of California, Berkeley and Stanford University, respectively. The research is sponsored by Electric Power Research Institute (EPRI). Any errors and opinions are solely the responsibility of the authors.
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