Mesi Dilemma: A Workable Competitive Solution?

Posted by Social Science Research Network

Mesi Dilemma: A Workable Competitive Solution? Wan Fahmy (University of Wisconsin)

Abstract: Today, there is tremendous uncertainty about this industry’s future, and that itself holds this industry back. Developments in the electricity industry in recent years have brought the industry to a cross-road. While the move to competitive markets has fostered enormous benefits, some serious problems have given rise to a significant policy debate, especially over the past two years. We have three basic policy choices:

• First, go back to comprehensive rate-regulation for wholesale power sales. Have the federal government set regulation for TNB power prices. Abandon reliance on market forces and competition as the underpinning of federal electricity policy.

• Second, maintain the status quo with a single buyer. Defer making decisions on major policy issues. Continue to straddle the fence.

• And third, complete the transition to effective competition in wholesale power markets.

Going back to comprehensive rate regulation is not really an option. Too much has happened, and too much has changed. The process of change introduced into electricity markets by federal policies is probably irreversible. Legislation before the Parliament today will need to put this country on a forward path toward a better electricity markets. It should further the transition to more-effective markets.

In reference to all four options, regardless, of the structure chosen there should be an emphasis on the importance of the legal system that would define rights and responsibilities of each market participant under any of these options. The legal system should be a combination of structural remedies of a workable competitive organization, behavioral remedies to govern the market participants conducts in the markets. These should include:

• Increase of antitrust enforcement commensurate with the pace of deregulation

• Prohibit stranded cost recovery mechanisms that act as barriers to competition and

• Mitigate discriminatory and other anticompetitive behaviors with “codes of conduct”.

Before any conclusion on these ultimate questions can be reached, it is important to understand how electricity deregulation has been carried out thus far. Indeed, the Malaysian experience represents a failure in design rather than the concept; this may lead to an understanding of more realistic designs that can avoid the deficiencies of the traditional regulatory approach, even if it cannot completely embrace the purity of free markets. The analysis will focus on the Malaysian electricity sector, deregulation, and the evolution of the reform policy. The paper will identify regulatory failures which are inherent in the existing restructured electric sector and will demonstrate the potential impacts of a reform policy that will sustain a workable competitive electric sector. Lastly, it will propose an array of recommendations as an alternative regulatory future for Malaysia’s utility sector.