Lessons learned from electricity market liberalization.

1. INTRODUCTION

It has been almost 25 years since Richard Schmalensee and I published Markets for Power (1983), almost 20 years since the UK began to design its innovative and comprehensive electricity sector privatization, restructuring for competition, and regulatory reform program Henney (2004)), over 15 years since Green and Newbery (1992) published their simulation analysis of market power in the deregulated wholesale electricity markets in England and Wales under alternative market structures, 10 years since Newbery and Pollitt (1997) published their social cost-benefit analysis of the privatization and restructuring program in the UK, and 7 years since the California electricity crisis and the collapse of Enron. Several additional countries (or portions of countries) have followed the UK's lead and introduced comprehensive electricity sector reform programs and, at least in theory, comprehensive electricity sector liberalization principles now apply to all EU countries. (1) Many other countries have introduced less comprehensive liberalization reform programs. Still others have resisted or slowed down reforms or succeeded in defeating them completely. The U.S. has never enacted a mandatory comprehensive federal restructuring and competition law, leaving the most significant reform decisions to the states. As a result, many U.S. states have introduced only limited liberalization reforms in wholesale markets without fundamental electricity sector restructuring and politicians in several U.S. states that introduced comprehensive reforms prior to 2001 are now calling for "re-regulation."

During the last 25 years most developed countries have also gone through reasonably comprehensive privatization, restructuring and deregulation programs in sectors that were previously regulated monopolies and/or state-owned: airlines, trucking, telecommunications, natural gas (in the U.S., Canada and the UK anyway), mail and package delivery services, railroads, and other sectors. While these reforms have not always proceeded without controversy or led to precisely the results predicted, the general trend of public policy has continued to support liberalization and to move forward with additional liberalization reforms in sectors that were once dominated by regulated legal monopolies. These reforms are generally widely accepted and "re-regulation" of these sectors is not high on the policy agenda. Electricity sector liberalization (and natural gas sector liberalization in much of Europe) seems to be different from the trends in these other industries. In many countries electricity sector reforms are incomplete, either moving forward slowly with considerable resistance or moving backward, despite the success of these reforms in the UK, the Nordic countries, Argentina (before its macroeconomic collapse), Chile, Texas, portions of Australia and other countries and regions. Why is electricity sector liberalization so difficult and subject to so much opposition? Are there lessons to be learned from the diverse experiences in countries around the world in the last two decades to support renewed liberalization efforts in electricity sectors?