Thursday, April 12, 2012

Retail Wheeling in the Electricity Industry

By Natasha Akpoti

The purpose of wheeling is to benefit the end-consumer. This means for the system to be implemented there has to be a realistic indication that the consumer will benefit. This is the fundamental basis of the competition, or “anti-trust” law. One can infer, although wheeling may be conceivable in a state or region it may not be in the “best interests” of the consumer to liberalise the market. Rather, there needs to be consideration of the wider impact. This is especially so in a developing country, where the government may have the only capability to provide the lines of transmission and the provision of electricity. As this analysis will illustrate there are greater problems when the suppliers, distributers and transmitters are the same organisation (especially after a rash liberalisation), because there is no incentive to allow other players on the grid. Thus, proper consideration of the whole model has to be undertaken; whereby a slow period of liberalisation and the development of separate, distinct organisations may be necessary. Even so, it will be highlighted if the only player to provide the service effectively and efficiently is the government (during a period of development); then liberalisation is not the best approach. Also, in the limited circumstances that wheeling will increase the cost of electricity to the end-consumer, the act of wheeling has no conceivable benefit, which means it should be avoided. 

In short, this research will illustrate that retail wheeling of the energy markets, as opposed to other liberalisation of the markets, is complex. This is because it centres on a core need – energy. Therefore, if the justification of retail wheeling is in the precepts of competition law, the core concept of benefiting the customer must prevail.

Overview of Issues
The concept of “retail wheeling” is a controversial subject, especially in certain states of the United States (US); however it is grounded in the liberalisation of the route that electricity is transmitted to the end-user[1]. The rationale is- if there are greater ways for the individual to access power then the system will become more competitive, than national utility grids[2]. Albers identifies it is purely on liberalisation grounds, i.e. the competition and free market principles, that the European Union (EU) countries were forced to engage with retail wheeling[3]. This meant there was a wider application of liberalisation in the EU, which instead of being nationally-based they were regionally based. In a sense, wheeling is concerned with the economic aspects; rather than infrastructure of the industry. However, there is an important infrastructure element, because the electricity cannot be transported without lines to the end-user[4]. Hence, in the event of liberalisation: the question is how to liberalise these lines, which will be in the hands of the “national grid”[5]

The owner of these lines in the United Kingdom (UK) is a monopoly—the National Grid – but they are neither a supplier, or a distributor, which means the traditional obstacle of competition is not there. Rather, the system is based on three distinct layers; however, this may not be the initial case in all countries. This is especially so, if prior to de-regulation there was a wholly national system in place[6]. Also, the production of electricity can play a distinguishing role, in how beneficial “wheeling” will be for the consumer. It is important to remember the justification is that the “consumer will benefit”[7]; as opposed to some “infrastructure”, or “accountability” regime. Therefore, the question to ask is if wheeling and liberalisation of the electricity markets will always ensure the “consumer wins”. There are some significant questions to be asked, especially in countries where there is a not a complete set of infrastructure[8]; or the electricity is already “competitive” to international rates[9]

The following analysis is going to consider two key factors in relation to wheeling, which are: 1) the legal developments and obstacles to instituting the system; and 2) the justifications for wheeling. It is important to note, the act of wheeling has been developed to encourage competition in the electricity industry, which means that to be justified the consumer must benefit. Thus, if a state has a “cheap” industry market there are significant questions to be asked about the benefits of wheeling, except for international norms of “free enterprise”. 

The Approach
The approach this subject is to explore the legal, technical and economic considerations, which can to some extent be separated. However, the nature of competition law indicates there will be overlap, which can be observed in the jurisprudence of antitrust law in the USA[10]. In the case of Continental T.V. Inc. v. GTE Sylvania Inc.[11] identified a balanced approach, between a case to case basis and the application of analytical rules, in regards to an act was anti-trust (against competition), or not. This indicates the approach considers a model of inclusion, i.e. both the “real-world” effects and if the action was considered to be “anti-competitive”. This approach was confirmed in one of the initial cases of Standard Oil Co. v. United States[12]. The most recent and approved approach to determining if an act breaches competition laws was set in the case of United States v. AT&T Co. This case asks the following key questions: 

1) Has the market been harmed? 

2) Does the purpose of the actions still fall within the principles of a free and competitive market? 

3) Is the end consumer harmed? 

In the view of the Oregon legislature it was argued that there was no need for retail wheeling, because unlike California, it had very cheap, renewable energy. Hence, the Energy Policy Act (EPA) 1992 would be a detriment[13]. The implication that is raised is- to what extent wheeling is actually benefiting the “end consumer”; as opposed to economic ideologies. These may be of little concern in the developed states, which have embarked on the approach; but may have significant impact in developing countries that wish to liberalise their electricity (and energy) markets[14]

Electricity as an Infrastructure Industry
Here, I will briefly identify, the infrastructure of the electricity industry in order to provide the groundwork in understanding how wheeling liberalises the markets. There is a four-stage distribution in electricity as follows: 

1) Power Supply, i.e. those companies/organisations that “create” electricity 

2) Power Transmitters, i.e. those companies/organisations that own the lines (infrastructure) to connect the supply to the infrastructure of the producer to the end-consumer 

3) Power distributors, i.e. those companies/organisations who sell the supply of electricity to the end-consumer. This is where the retail wheelers are, because they are selling a product that the infrastructure already supplies, i.e. in liberalised countries there is no need for the wheeler to own any of the other elements[15]. Rather, their supply is regulated through a meter; rather they are renting the lines. The implication of this is there is a higher cost when the traffic, on these lines, is congested. In response, the supplier may provide a dual meter[16]

One may argue the best approach would be direct sales to the consumer, which would essentially be the approach of the nationalised system (if all three stages are owned by the company). The problem is this would create a situation; whereby the suppliers prevent others engaging in the market[17]. In order to prevent this, states may not allow the ownership in all three stages[18]. This was the case of the UK Electricity Act 1989 (EA 1989), which separated suppliers, transmitters and distributers. It is important to note, there could be a number of approaches, taken in regards to liberalisation (or even nationalisation). For example, prior to the Energy Policy Act 1992 (EPA 1992) only the grid and distribution was nationalised. Therefore, it is clear a case-by-case approach to deregulation is necessary; however, if it is beneficial to the consumer then it seems the separation as in the EA 1989, may be the fairest and most effective route. 

This is the first of a 3-part analysis on Legal, Technical and Economic issues and effects of Retail Wheeling in the Electricity Industry. In this instalment Natasha has given an expose on the necessary questions and issues that readily arise over the need for Retail Wheeling or otherwise; for example do we focus on the benefit to the end user or do we focus on the constraints of infrastructure. Is Liberalization necessary for every market; even for the developing economies? In the next instalments we shall examine the legal, technical and economic issues in detail. For more information about this article and to view Natasha's professional profile, click here --> . Natasha is Regional Development Executive for the team at The Mix: Oil and Water.

[1] Kevin Kelly (1987). Some Economic Principles for Pricing Wheeled Power The National Regulatory Research Institute, pg. 270.
[2] Albers, M (2001)  Energy Liberalisation and EC Competition Law, at, pg. 1
[3] European Parliament and Council Directive 96/92/EC (19 December 1996) OJ L27/20 (30.1.1997)(.Electricity Directive.); European Parliament and Council Directive 98/30/EC (22 June 1998) OJ L204/1 (21.7.1998) (Gas Directive.)
[4] Bier, C (1999) “Network Access in the Deregulated European Electricity Market: Negotiated Third-Party Access vs Single Buyer” CSLE Discussion Paper 9906, pg. 2
[5] National Grid (2011) “Electricity Homepage” available at: 
[6] Glbert, RJ, Kahn, EP and Newberry, DM (1996) “Introduction: International Comparisons of Electricity Regulation” in Gilbert, RJ and Kahn, EP (1996): International Comparisons of Electricity Regulation, Cambridge University Press, pg. 13
[7] Faull and Nikpay (2007) The EC Law of Competition 2nd Edition OUP, para 14.428; Cameron, (2007) Competition in Energy Markets: Law and Regulation in the European Union 2nd Edition OUP, pg. 26
[8] Domah, P, Pollitt, MG and Stern, J (2002) “Modelling the Costs of Electricity Regulation: Evidence of Human Resource Constraints in Developing Countries” Conference Paper available at:, pg. 3
[9] Cudahy, RD (1994) “Retailing Wheeling: Is this Revolution Necessary” Energy Law Journal 15(351), pg. 356
[10] Kovac and Shapiro (1999) “Antitrust Policy: A Century of Economic and Legal Thinking” CPR UC Berkeley 10-02-1999, pg.8
[11] Continental T.V. Inc. v. GTE Sylvania Inc. (1977) 433 U.S. 36
[12] Standard Oil Co. v. United States (1911) 211 US 1
[13] Neburka, J (1997) “Basics about Electricity: Retail Wheeling” Oregon Legislative Policy and Research Office Paper November 1997, pg. 1
[14] Ferry, S and Cabraal, A (2006) “Power Purchase Agreements for Small Power Producers” ESMAP Knowledge Exchange Series 7(November 2006), pg 1
[15] Christensen, PC (1996) Retail Wheeling: A Guide for End-Users Penwell, pg. 32-33
[16] National Grid, above n5,online
[17] Bier above n 4, pg. 2-3
[18] Christensen, above n15, pg. 32

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