Organization of bulk power markets: A concept paper

The electricity industry in the US today is at a crossroads. The restructuring debate going on in most regions has made it clear that the traditional model of vertically integrated firms serving defined franchise areas and regulated by state commissions may not be the pattern for the future. The demands of large customers seeking direct access to power markets, the entry of new participants, and proposed reforms of the regulatory process all signify a momentum for fundamental change in the organization of the industry. This paper addresses electricity restructuring from the perspective of bulk power markets. The authors focus attention on the organization of electricity trade and the various ways it has been and might be conducted. Their approach concentrates on conceptual models and empirical case studies, not on specific proposals made by particular utilities or commissions. They review literature in economics and power system engineering that is relevant to the major questions. The objective is to provide conceptual background to industry participants, e.g. utility staff, regulatory staff, new entrants, who are working on specific proposals. While they formulate many questions, they do not provide definitive answers on most issues. They attempt to put the industry restructuring dialogue in a neutral setting, translating the language of economists for engineers and vice versa. Towards this end they begin with a review of the basic economic institutions in the US bulk power markets and a summary of the engineering practices that dominate trade today.