Regulating Power: The Economics of Electricity in the Information Age.

• Author: Lyman, R. Ashley

This book is part of the Topics in Regulatory Economics and Policy Series edited by Michael A. Crew, Rutgers University. The author, a staff member of the New York Public Service Commission since the early 1970s, argues that utilities have been able to take advantage of asymmetric information and jurisdictional conflicts between state and federal regulators to gain and exert market power in impeding evolution of the industry toward a more competitive and efficient structure. The book relies on power markets and experience in the State of New York for primary evidence. Its first purpose is to demonstrate a theory of market and information control (cartelization) by electric utilities. The second purpose is to outline a new role for regulation.

The book is organized into ten chapters and an appendix on electrical systems. The first two chapters provide background on the control of information and classes of actors or vested interests involved in electricity markets.

Chapter 3 stands by itself, examining the regulatory process at the state level and in a principal-agent framework. Detail is provided both on the flow and asymmetric nature of information and on utility incentives and options to manipulate that information. The significance of the Public Utility Regulatory Act of 1978 is explored along with application of the prudence standard in regulation and jurisdictional ambiguity with Federal and State Institutions.

Utility cooperation in electric power markets is important in promoting system reliability and efficiency. Chapter 4 reviews the basis and evolution of this cooperation in dispatching generating capacity to meet differing electric loads. One focus is the nature of electric agreements and the use of computer models to set prices and share cost-savings. Evidence is offered that jurisdictional ambiguities between federal and state regulation have allowed utility groups to limit cost-reducing cooperation requested by state authorities.

With asymmetric information and the adversarial nature of the regulatory process, it would be reasonable to expect controversy in the use of models. Chapter 5 asserts that established models have been allowed to influence the nature of subsequent questions without adequate examination of underlying assumptions or applicability. Mr. Pechman describes this as model-limited choice and devotes most of the chapter to an analysis of the loss of load probability model and its application to investment in...