I attended last week's Town Hall Meeting on Demand Response (kudos to Dan Delurey of Demand Response and Advanced Metering Coalition) and read President Bush's recent speech to the 16th Annual Energy Efficiency Forum and his statement at a nuclear power plant that "It's time for this country to start building nuclear power plants again."

I am struggling with the question of what to say about these events from the perspective of promoting competitive markets for energy, especially electricity. Two incidents sprang to mind. Is energy competition like Justice Powell's famous statement about pornography, "I know it when I see it?" Or had I fallen into Alice in Wonderland. "'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean -- neither more nor less.'"

Let's start with demand response (DR). Looked at a certain way, the discussion at the DR Town Hall Meeting sounded like we needed to send good price signals to customers so they could demand less energy during peak periods or in times of reliability emergencies. Looked at another way, however, it was the government and utility micromanaging the consumption of customers with incentives to achieve some bureaucrat's definition of reliability or energy efficiency, rather than relying on markets for that function.

Now President Bush's Speech. President Bush is a Republican who, one would expect, would support market policies for energy. Yet as I read his speech. it does not mention the words "competition," "deregulation," or "market" as a policy and it includes a lot of government-imposed distortions to the market. Does President Bush support markets for energy?

Lately I have also been struggling with whether to support or oppose provisions in the energy legislation: renewable portfolio standards, installed capacity payments, nodal pricing, allocation of authority between the states and the feds, price caps, wholesale auctions, Oregon-style virtual choice, affiliates, and on and on.

I realized several things. The world is not black or white. We are in a massive transition from the monopoly model to the competitive model and it will not be accomplished in one fell swoop. There are many steps that get us closer to the goal. You might support something because it is the best you can do under the circumstances and it moves us closer to the goal, but which nonetheless contains anti-market elements. So how does a market pundit punditize?

Then I remembered an exercise that Charles Teclaw, the most insightful policy strategist in natural gas reform, did when I worked for him at FERC. He had the economists (I was not an economist) analyze the gas industry purely within an economic and physics framework, i.e., do a clean-slate analysis. Don't assume any laws, or politics, or practicality, or ease of implementation, or cost. If we were God starting from scratch, how would we organize the gas industry? Once we had the so-called Foundation Study (never made public by the way!), then we could start to make compromises to that model by judging how much the compromise did fundamental damage to the model. As Yogi said "You got to be careful if you don't know where you're going, because you might not get there." We first had to know where we wanted to go.

In order to evaluate whether something is good, we need a litmus test. We need to be able to compare the proposed policy to a model of how we want the electric industry to operate under conditions that accommodate only the economics and physics of electricity. Then we can judge whether we are moving toward or away from the model. We can then more accurately classify something as a transition mechanism that is inconsistent with the model but moves us in the right direction. But this tells us to make sure it is recognized as such and does not become a permanent part of our thinking about the end game.

So first I have to describe a simple strawman model of the end game of a competitive electric industry that we can use as a litmus test. Here goes:

1. Customers can freely choose technologies that do not use the incumbent transmission or distribution system.

2. All customers are served by deregulated suppliers.

3. Deregulated suppliers (generation and marketing) are not affiliated with the company providing either transmission or distribution services.

4. Generation decisions (building and producing) are driven purely by market forces, which include the cost of externalities in the prices to customers.

5. Consumption decisions are driven purely by market forces in which customers have access to relevant data and information and prices include the cost of externalities.

6. The generation and marketing sectors have competitive market characteristics such as freedom of entry and exit, large number of sellers dealing directly with a large number of buyers, low barriers to entry, product and service differentiation etc.

7. Transmission and distribution services are regulated but regulatory policies allow customers to react to scarcity and encourage efficient investment in new infrastructure.

8. Market participants (suppliers, marketers, and customers) can do business seamlessly on any transmission and distribution system in North America under standardized practices.

9. Energy affordability for low income consumers is treated as a welfare function like medical care, housing, and food, and does not encumber energy policy.

So want do you think? Are any of these elements wrong? Do I need to add others?

Once we have a reasonable model, then we can begin to evaluate DR, energy legislation, President Bush's speech, and a host of other things from the perspective of whether they are consistent with the competitive model.