Structure of the Electrical Power Industry

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How much control the government should have over the pricing and regulating of power companies depends on how one sees energy and other natural resources. Many countries consider energy to be a basic public good, vital to society and essential in everybody’s life; it cannot be replaced by other means and therefore cannot be traded like other commodities. It must be offered in a predictable manner and be made available to everybody based on need rather than profit. Energy regulations must therefore fall under government jurisdiction for setting prices, assuring its reliability and quality of service, and enforcing established environmental laws. In these countries energy sources are nationalized and all aspects of production from recovery, processing, production, distribution and sales are strictly controlled by their governments.

The proponents of the free market economy favor complete deregulation of the energy industry and argue that, to increase competition, energy must be treated as a commodity that follows the same laws of supply and demand that other commodities are subjected to. Any attempt to regulate the market will stifle competition, killing incentives for power companies to invest in new and more energy-efficient generation facilities and to upgrade existing transmission infrastructure. Deregulation will allow power companies to buy and sell electricity in an open market, but also empowers smaller utilities and individual energy producers to compete with the larger utility firms. This provides a more effective load leveling and reduces stress on generators. For example, a rural farmer or a single family homeowner can install photovoltaic cells on his roof or operate a wind turbine in his backyard (See wind energy). In this scenario, the homeowner is both a buyer and a seller of electricity; he can buy electricity at night or during a period of low wind velocity and sell his excess power during the daytime or at high wind velocities. In one plausible scenario, even an electric or hybrid car can be a source of power generation when it is parked in the garage during peak time. As soon as power demand drops, the batteries can be recharged again. Power companies can also benefit from these small entrepreneurs because they do not need to install new expensive equipments during times when demand peaks. The savings can be transferred to customers, lowering the price of electricity.

The opponents of the deregulation argue that when electricity is treated as a commodity, maximizing profits – not efficiency – becomes the ultimate motive. When profit is not a motive, electricity is allowed to move freely in the network along the path of the least resistance. With profit as the primary motive, depending on transmission rights and costs, distributors determine over which lines power is transmitted, even though this may not be the best route as far as demand over the entire network dictates; electricity might travel thousands of miles around the country before it reaches its destination.

Some have proposed a middle-ground where the government allows competition but sets a maximum price that can be charged to consumers. In other instances, some subsidies are provided to assure reasonable profits to the utilities. England, Wales, Norway, and Argentina have followed this approach and have rearranged the electricity infrastructure by breaking up the utility monopolies into separate generation, transmission, and distribution entities (1). Many Eastern European countries undertook similar restructuring as part of the privatization of state-owned assets.

References

(1) Jokow, P., L., “Restructuring, Completion and Regulatory Reform in the U.S. Electricity Sector,” Journal of Economic Perspectives, 22, Number 3, Summer 1997, pp. 119-138.

(2) Toossi Reza, "Energy and the Environment:Sources, technologies, and impacts", Verve Publishers, 2005

Further Reading

Bureau of Naval Personnel, Basic Electricity, Dover Publishing Company.

The Environmental Effects of Electricity Generation, IEEE, 1995.

The Electricity Journal, Direct Science Elsevier Publishing Company, This journal addresses issues related to generating power from natural gas-fired cogeneration and renewable energy plants (wind power, biomass, hydro and solar).

International Journal of Electrical Power and Energy Systems, Direct Science Elsevier Publishing Company.

Home Power Magazine (http://www.homepower.com).

External Links

Federal Energy Regulatory Commission (http://www.ferc.gov).

Energy Information Agency, Department of Energy (http://www.eia.doe.gov/fuelelectric.htm).

California Energy Commission (http://www.energy.ca.gov/electricity).

National Council on Electricity Policy (http://www.ncouncil.org).

Southern California Edison (http://www.sce.com).

Pacific Gas and Electric (http://www.pge.com).