As the debate over restructuring the U.S. electricity industry moves forward, there comes a host of new theoretical models. Two proposals in particular serve well to frame the debate. The PoolCo proposal emphasizes reliable system operation, short-term efficiencies through central dispatch, and a single market price; the bilateral contract model stresses competition, multiple dispatches, and customer choice.
How can policymakers choose intelligently between these two dramatically opposed models? Are there advantages to either or both? If so, should policymakers implement a compromise solution? Might a compromise bring out the worst of both? Or, could they be made to strengthen each other? Consider also that the electric power grid is a large-scale, interrelated system. Serious policymakers simply cannot approve and implement significant change based solely on theoretical proposals and expect them to be instituted immediately.
Nevertheless, there is a way to navigate these waters. Rather than opting now for PoolCo, physical bilateral contracts, or a compromise, policymakers should consider an incremental or bridging approach that can advance the objective of restructuring while also resolving technical, economic, and regulatory uncertainties along the way. In New England, the starting point is the New England Power Pool (NEPOOL), which already meets the short-run objective of minimizing the fuel cost of producing electricity while maintaining a reliable regional system and allowing contract flexibility.
Markets Don't Happen Magically