Electrifying Economics: The Unexpected Problems of Liberalizing the Electricity Sector.

This paper suggests that economic theory should be modified to accommodate the realities of regulation of the electricity sector. Electricity has at least three characteristics that set it apart: it cannot be stored, demands on the system must be consistently balanced with supply, and it is - in the modern world - a necessary infrastructure for many other activities. However, economists managing regulation do not always adjust economic theory to the sectors realities. This paper addresses two problems not sufficiently addressed by the economists driving the liberalizing of the electricity sector in Europe. One is a "compliance assumpiton" in which agencies assumed changing law on the book will be enough to change reality. That is analyzed in the context of preventing incumbents and new entrants from undermining competition by sabotaging consumer transfer. The other is an "efficiency assumption" - assuming efficinecy gains are always positive - analyzed in relation to potential tensions between economic efficiency and security of supply protected through redundancy. The paper draws on the experience of the UK, France and Sweden to suggest possible ways of coping with these two problems, and concludes that they can and should be anticipated by economists and prepared for. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]