NCPA Study: Electricity Deregulation Could Benefit Consumers

Dallas (October 15 , 1999) - Small businesses and residential customers could save millions from deregulation of the electric power industry - or see their electric bills instead go higher, a study released by the National Center for Policy Analysis says.

"The danger is that instead of being deregulated, the industry will be re-regulated," eliminating the potential benefits of the market competition, the study said. The study was written by two electric power experts Vernon Smith and Stephen Rassenti, research director and associate director respectively, of the Economic Science Laboratory at the University of Arizona.

The study points to California as an example of how not to deregulate. An important consideration in California was what to do about "stranded costs" - utility investments such as nuclear power plants that appeared justified under regulation, but uneconomical under competition. California's retail competition plan lowered existing rates by 10 percent and then capped them for four years so utilities could recoup their stranded costs. The rate rollback was financed with some $6 billion in state bonds to be paid off by charges on all electric bills. The effect was disastrous for competition.

  • A typical family using 500 kWh a month saw its bill reduced from $60.99 to $54.89 before taxes.
  • But a customer with close to that electric usage saw added charges of $7.13 to pay off bonds.
  • Plus, that same customer was charged $14.78 to cover the stranded costs - making the bill more than before deregulation

To assure an orderly transition to a deregulated, competitive industry the study suggests that electric utilities divest themselves of power generation facilities. Divestiture would create two distinct kinds of industries: "Supply" companies involved in power generation which would be completely open to competition nationwide, and "wires" companies involved in transmission and distribution, which during a transition period to competitive markets would remain regulated.

"If states took the divestiture route, most - or even all - of the stranded costs utilities claim would disappear," said Smith. "If done correctly, competition could save the average household more than $200 a year, in the first two years alone."

The study notes that economists at Clemson University found that competition in the electricity market such as the type described above could lower electricity prices on average by 6 percent to as much as 26 percent within two years.