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The Power BrokersThe Struggle to Shape and Control the Electric Power Industry$
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Jeremiah D. Lambert

Print publication date: 2015

Print ISBN-13: 9780262029506

Published to MIT Press Scholarship Online: May 2016

DOI: 10.7551/mitpress/9780262029506.001.0001

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Paul Joskow and the Intellectual Blueprint for Industry Reform

Paul Joskow and the Intellectual Blueprint for Industry Reform

(p.131) 4 Paul Joskow and the Intellectual Blueprint for Industry Reform
The Power Brokers

Jeremiah D. Lambert

The MIT Press

The Federal Power Act, New Deal legislation that regulated wholesale electric rates, did not require the nation’s utilities to interconnect or coordinate their activities. The government could not order one utility to wheel power for another. A vertically integrated utility could therefore protect the electricity it generated from competition by denying third parties access to its transmission lines. Utilities were not common carriers. By the 1970’s, the industry was seen by critics to be an inefficient monopoly enterprise, protected by regulation from price competition except for limited application of the antitrust laws, until an obscure provision of the National Energy Act of 1978, Carter-era legislation, changed the field of play by requiring utilities to purchase power from cogenerators and small power generators at long-run avoided cost, freeing the sellers, called qualifying facilities, from onerous regulation as utilities, giving them transmission rights, and creating out of whole cloth an independent generating sector. Insull’s regulated monopoly model now confronted irreversible change. Free-market economists, among them Paul Joskow of MIT, believed the old order was ripe for deconstruction. Shortly after the WPPSS fiasco, in 1983, together with Richard Schmalensee, an MIT colleague, Joskow co-authored a ground-breaking book, Markets for Power – An Analysis of Electric Utility Regulation, that was sharply skeptical of the industry’s protected monopolies and regulated prices. To create competition in the wholesale market for electric power, the authors found, transmission access was essential. They envisaged a regional power pooling and transmission operator that would own and operate the high voltage transmission network and independent generation companies that would sell power into an unregulated market at marginal prices. The operator would dispatch generation in merit order and make financial settlements. It was a bold model that eventually reshaped the power industry through rulings of the Federal Energy Regulatory Commission (FERC) and legislation that gave third-party independent power producers the right to require a transmitting utility to wheel power to a wholesale buyer and authorized regional transmission organizations to provide open access and self-scheduled transmission while also running a free and competitive market, including an energy auction. Deregulation also gained momentum at the state level, notably in California, which implemented a flawed restructuring scheme that froze retail rates and caused the state’s utilities to sell their generation assets and rely on a spot market in electricity for supply. The California market invited manipulation, shortages, and price gouging and eventually imploded. But Joskow’s vision took operative form on a regional basis as a work in progress and continues to define a restructured power industry.

Keywords:   Joskow, free-market, qualifying facilities, Markets for Power, competition, regional power pooling, transmission operator, marginal prices, energy auction, wheeling, California market

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