Turning On The Lights: Deregulating The Market for Electricity

Policy Reports | Regulations

No. 228
Friday, October 01, 1999
by Vernon L. Smith and Stephen Rassenti

Benefits of Deregulation

Figure I - The Effect of Competition on Monthly Electric Bills

Two types of evidence suggest the potential benefits of electric power deregulation: (1) the experiences of other recently deregulated industries and (2) direct estimates based on the economics of electric power.

Evidence from Other Deregulated Industries. Like electric power, the five industries that have been deregulated - natural gas, trucking, long-distance phone service, railroads and air travel - were once considered "natural monopolies" or essential public services. In exchange for restrictions on new competitors, they surrendered their pricing freedom and met some public service requirements. The lessened competition and price controls impeded new investment and productivity measures, raising prices and lowering the quality of service. However, after 10 years of deregulation in these industries, the total annual benefits to consumers from price reductions and service quality improvements exceeded $50 billion. According to economists Robert Crandall and Jerry Ellig:5

  • Consumer prices for natural gas have declined between 27 percent and 57 percent after inflation since deregulation of that industry began in 1978, and without the threat of artificially created shortages caused by price controls the quality of service improved.
  • In the trucking industry, prices have plunged between 28 percent and 56 percent since deregulation in 1980 - while the number of carriers doubled in the first six years and consumers benefited from such innovations as tracking and monitoring services.
  • Since the 1984 breakup of AT&T Corporation, long-distance prices have been cut 40 percent to 47 percent, and the building of nationwide fiber optic networks has speeded up due to competition.
  • Following deregulation, railroad shipping prices declined 44 percent, while increased productivity allowed the railroads to ship more goods with about half as many employees.
  • Air fares have fallen by 33 percent since 1976, and service has improved with more frequent flights and fewer trips that require changing airlines.

"The benefits to consumers of deregulating other industries exceed $50 billion over 10 years."

Crandall and Ellig conclude, "Given the history of natural gas, telecommunications, airline, railroad, and trucking regulation, is it reasonable to expect that customer choice in electricity could generate consumer benefits? The experience of all these industries suggests that the answer is a resounding 'Yes.'"

Direct Estimates of the Benefits of Competitive Electric Power. The Department of Energy's Energy Information Administration has estimated that competition in the industry could lower electricity prices on average by as much as 6 percent to 13 percent within two years. A Clemson University study estimates that competition would lower electricity prices by at least 13 percent and perhaps as much as 26 percent.6 Figure I shows this implies:

  • A typical household would see its monthly electric bill fall $18, from $69 to $51.
  • The average monthly bill for a business would drop $109, from $415 to $306.
  • The average monthly bill for an industrial customer would drop $1,793, from $6,860 to $5,067.

When residential and business customers alike can buy their electricity from more than one source, experience with competition in other industries suggests that electricity prices will fall and service quality will improve. Also, the prices of other goods and services will fall as overhead costs from electricity decrease.7

"Under competition, a typical household would see its monthly electric bill fall $18."

Additional retail price reductions will become possible because of rapid technological improvements that have cut the potential cost of electricity production in half. Today, gas-fired combined cycle plants can generate electricity for baseload operations (where the turbines run continuously) at around 3 cents per kwh. Natural gas microturbines can produce from 500 watts to several hundred kilowatts for as little as 4.5 cents per kwh when the generated steam is also utilized. Moderate usage without cogeneration doubles the nominal cost to about 9 cents.8

By comparison, electricity can be generated by state-of-the-art scrubbed-coal plants for around 4.5 cents per kwh, by combined cycle plants run on liquefied natural gas for around 5 cents per kwh and by advanced light-water nuclear reactors for about 7.5 cents per kwh.9 [See the sidebar on Gas Turbine Technology.]

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