Richard J. Pierce

Natural gas regulation, deregulation, and contracts

This article shows the ways in which regulation, phased deregulation, and contract provisions can interact to produce anomalous results. Regulation has influenced the process of contracting and the nature of bargains struck. Partial deregulation will change in unanticipated ways the nature of the risks and uncertainties that contracting parties foresaw and allocated in their agreements. This sequence can produce results that are both inequitable and inefficient. The article begins with a brief history of gas producer price regulation and a discussion of the adverse effects of regulation on aggregate social welfare. Then, it discusses the current opeeration of the natural gas industry and the long-term contracts that govern the relationships between suppliers and pipelines. Next, the article discusses the deregulation scheme enacted in the Natural Gas Policy Act of 1978, and the likely effects of the interaction of this scheme with existing long-term supply contracts. The article explores several remedies that would avoid these adverse effects: voluntary contracting behavior, application of contract law doctrines, and several statutory solutions. Finally, the article draws general inferences about the relationship between regulation, deregulation, and long-term contracts. 171 references.

Regional Electricity Market Integration. A Comparative Perspective

Many energy markets are global or at least continental. Oil is traded at a single price in world markets. Natural gas is traded at single prices in continental and increasingly global markets with the growth of liquefi ed natural gas markets. Other commodities like wheat, nickel, copper and steel are traded on international markets. With respect to manufactured goods, such as automobiles, computers, footwear and clothing, postwar trade liberalization has meant that markets for most manufactured goods are increasingly international. International markets enable producers to exploit their comparative advantage; increase returns to scale and specialization and hence total factor productivity; and increase consumer welfare by increasing choices and reducing costs and prices (Trebilcock and Howse 2005, Chapter 1). In contrast, many electricity markets have historically been largely local in nature and have entailed very limited trading of electricity across jurisdictions within federal states or across national borders. Th is paper explores why this has been so and the case for greater regional integration of markets in the future. Our concern in this paper is the integration of wholesale markets for electricity across national or sub-national political boundaries. In Part II, we discuss the eff ects of greater integration of the infrastructure, regulatory institutions and commercial practises that underpin electricity markets. We conclude that greater integration has the potential to increase the benefi ts of electricity markets in many ways. From an economic perspective, greater integration can increase the gains from specialization and exchange; reduce the distortions in the economy created by the exercise of market power in electricity markets; improve economic signals for consumption and invest-

The advantages of de-integrating the electricity industry

Complete de-integration of generation, transmission, and distribution could make available the substantial benefits of competition, reduce potentials for self-dealing and jurisdictional disputes, and provide a relatively simple mechanism for allocating the cost of stranded investments. The article gives an outline of how de-integration could solve these problems and how wholesale competition in a vertically de-integrated marketplace is better than any of the viable alternatives.

Market Manipulation and Market Flaws

Abstract Outside the context of fraud and collusive withholding of capacity, we may be better off discouraging undesirable behavior by structuring gas and electricity markets in ways that discourage undesirable behavior by rendering it unprofitable.

The Past, Present, and Future of Energy Regulation

This essay is a contribution to a symposium at University of Utah. It begins with a summary of the history of energy regulation from 1960 until 2011. It then makes three arguments. First, the essay argues that the US should abandon pursuit of the goal of energy independence and pursue exclusively the goal of global warming mitigation. Second, it argues that the US should replace its present reliance on expensive and ineffective subsidies and mandates to mitigate global warming with a single mechanism to attain that goal – a large carbon tax. Third, the essay recognizes that, while a carbon tax offers the best prospect of mitigating global warming, that task is so difficult that it might not be attainable through any means.

Mergers in the U.S. electric power industry

Professor Pierce provides an overview of the ongoing process through which the Federal Energy Regulatory Commission (FERC) has been attempting to restructure the U.S. electricity industry to create effectively competitive wholesale electricity markets for almost two decades and of the merger policies FERC has adopted and applied during that period. Pierce gives FERC high marks for adopting as its own the general merger guidelines previously developed jointly by the Department of Justice and the Federal Trade Commission and then attempting to apply those guidelines to the unique characteristics of the evolving competitive electricity markets FERC has been attempting to create. He identifies three difficult systemic questions FERC has encountered in that process, however: (1) Whether to evaluate proposed mergers based on the assumption that future markets will resemble present markets when FERC expects that future markets will differ significantly from present markets in the near future? (2) If FERC decides to evaluate proposed mergers based on the assumption that the potentially affected markets will change significantly in the near future, which of several potential future market environments should it use as the basis for its evaluation? (3) Whether to adopt a passive merger policy in which the agency only reacts to structural changes proposed by private market participants or instead to adopt a proactive policy in which the agency attempts to use its power to condition its approval of mergers on the merged firms commitment to make other structural changes that FERC considers essential to the success of its restructuring program. Pierce describes the extreme difficulty FERC has encountered in answering those questions. The basic problem remains the same in 2005 as it was almost twenty years ago when FERC began its efforts to restructure the electricity market. FERC lacks the power to require market participants to restructure in the ways that are essential to create effectively competitive markets, and it lacks the prescience to be able to predict how the restructuring process will evolve. After almost two decades, FERC has only reached about the halfway point in the restructuring process, and it still cannot predict with confidence some of the most important characteristics of the markets in which firms that propose to merge will participate in the future. Pierce concludes that the severe problems FERC has encountered have little to do with its merger policies. They are primarily attributable to Congresss decision to give FERC a mandate to create an effectively competitive wholesale market without giving FERC the regulatory powers required to implement that mandate. He also concludes that, to the extent that merger policy is an important element of the program to restructure the U.S. electricity industry, the situation remains as Professor (now-Justice) Stephen Breyer and Professor Paul MacAvoy found it in their 1974 study of the structure of the industry – we need many more mergers if we want to improve the performance of the electricity market.

Conceptual Issues Raised by the PECO/Enron Dispute

Abstract Enron’s alternative plan for competition in Pennsylvania served notice on the incumbent utility and perceptive regulators that proposals too favorable to incumbents can and will be exposed—potentially with great benefits for consumers and competitors of the incumbent, and to the incumbent’s disadvantage.