Harvard Economist Cites Organized Electricity Markets As Best Platform for Meeting Climate Change Challenge

Sept. 29, 2008, WASHINGTON, D.C. -- The U.S. electricity sector will play a major role in any national greenhouse gas mitigation plan enacted by Congress, but prolonged regulatory uncertainty threatens the industry's ability to efficiently meet this impending challenge, Paul Joskow, respected Massachusetts Institute of Technology economist and president of the Alfred P. Sloan Foundation, said in an address Friday at the National Press Club in Washington, D.C.

“The absence of a comprehensive national electricity policy makes (enacting a) national greenhouse gas policy more difficult,” Joskow said, noting that “significant investment” will be required to address climate change. “It's very hard to make investment decisions when you don't know the cost of carbon dioxide or the regulatory structure going forward.”

“Without a national policy, progress is not likely,” Joskow warned in his keynote address at “Powering the Future: Key Energy Issues for the Next Administration,” a daylong forum at the National Press Club sponsored by the Technology Policy Institute.

Unlike other formerly monopoly industries restructured to allow competition, “electricity reform is stuck,” Joskow said, citing the natural gas industry as a model of “successful national policy” for electricity sector reform. Joscow criticized so-called “counterfactual” analyses purporting to determine what prices would have been had cost-based regulation been preserved in areas of the country that opened electricity markets to competition.

Estimating what regulated prices would have been is not the “proper way” to measure the benefits of competitive markets, Joskow said. “We need to look at all the efficiencies, not short-run price impacts,” to properly evaluate the effectiveness of electricity competition, he said, noting that with markets prices will rise and fall.

Echoing that criticism was Nancy Rose, director of the National Bureau of Economic Research's program in Industrial Organization and an MIT economist. “It's not about short-term price movement,” said Rose, citing improvements in efficiency, investment and consumption as better barometers of the benefits of competitive electricity markets.

“Do not accept the glib assertions that [organized electricity markets] are not working,” said William Hogan, director of the Harvard Electricity Policy Group and the Raymond Plank Professor of Global Energy Policy at Harvard University's John F. Kennedy School of Government.

These noted economists addressed the Technology Policy Institute forum just days after the group released a “counterfactual” assessment asserting that wholesale power prices in organized markets are higher than the paper's econometric model suggested they would have been absent restructuring.

“It's gratifying that, although it advanced a flawed analysis that only perpetuates lingering regulatory uncertainty, the Technology Policy Institute opened its forum to contrary views,” observed Joel Malina, executive director of COMPETE. “According to an Edison Electric Institute analysis, the U.S. electricity sector will need to invest $1.5 trillion to meet demand over the next two decades, and that doesn't include the cost of addressing climate change. As Professor Joskow observed Friday, these investments involve significant risk, and in competitive markets those risks are borne by investors, not captive ratepayers.”


The COMPETE coalition represents 260 electricity stakeholders, employing over 4.5 million American workers, including customers, suppliers, generators, transmission owners, trade associations, and economic development corporations –- all of whom support well-structured competitive electricity markets for the benefit of consumers. For more information, please visit www.competecoalition.com


Khristyn Brimmeier


[email protected]

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