Vertical Integration and the Restructuring of the U.S. Electricity Industry

52 Pages Posted: 27 Sep 2004

See all articles by Robert J. Michaels

Robert J. Michaels

California State University, Fullerton - Department of Economics

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Date Written: September 2004

Abstract

Debates on restructuring of the U.S. electricity industry are often about the degree to which market relationships should replace transactions that formerly took place within regulated, vertically integrated utilities. Markets for the purchase of energy by vertically unintegrated distribution utilities are clearly feasible, but vertical deintegration of existing systems may entail foregoing some operational and reliability benefits that are important in light of electricity's unique characteristics. Research and policy on restructuring have almost totally disregarded a large econometric literature on the savings from vertical integration. At the same time, policy makers have accepted the results of flawed studies that purport to estimate the benefits of switching to a market regime. A review of California's restructuring history shows that vertical integration was viewed primarily as a tool that incumbent utilities might use to perpetuate their market power. The disregard of its benefits led to questionable divestitures that produced superficially competitive market structures, and to the institution of Independent System Operators whose costs have yet to be compared to their benefits.

Keywords: Vertical integration, electric utilities, electricity markets, utility regulation

JEL Classification: D23, L50, L94

Suggested Citation

Michaels, Robert J., Vertical Integration and the Restructuring of the U.S. Electricity Industry (September 2004). Available at SSRN: https://ssrn.com/abstract=595565 or http://dx.doi.org/10.2139/ssrn.595565

Robert J. Michaels (Contact Author)

California State University, Fullerton - Department of Economics ( email )

Fullerton, CA 92834
United States
714-278-2588 (Phone)
714-278-3097 (Fax)

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