NCPA - National Center for Policy Analysis

Deregulation -- Not Reregulation -- Of Electric Power

October 15, 1999

Currently, state legislatures and the U.S. Congress are debating deregulation of the largest, most highly regulated monopolistic industry: electric power. Commercial and residential customers spend more than $200 billion a year for electricity. Of that amount $20 billion to $50 billion is unnecessary spending caused by regulatory inefficiencies.

The Energy Information Administration has estimated that just allowing competition in retail sales to consumers -- without eliminating the costly inefficiencies of federal regulations -- could lower electricity prices on average by as much as 6 percent to 13 percent within two years.

Although most states are moving toward retail competition, experts say it will not be effective if consumers are required to pay arbitrary fees to reimburse utilities for their so-called stranded costs. (Stranded costs are utility investments that, while apparently justified under regulation, are uneconomical under competition.) Nor is there much consumer choice if there are price controls on power transmission or if local distributors are able to exercise monopoly power.

In California, the first state to allow all residential customers to buy competitive retail electric power, many consumers saw their electricity bills increase after reform, due to fees for utilities' stranded costs, subsidies for green power and more regulators to manage competition.

A solution to these difficulties is divestiture. Today's electric utilities should divest themselves of power generation facilities, creating two discrete kinds of businesses: "supply" companies involved in power generation and "wires" companies involved in transmission and distribution.

States could require utilities to separate into wires and supply companies in order to get compensation for stranded assets. And since divestiture would allow the market to determine the value of utilities' generating and transmission assets separately, most -- or even all -- of the stranded costs utilities claim would disappear. Nor is expansion of state or federal regulatory powers necessary to manage competition -- it will occur naturally -- and consumers can realize the full benefits of market competition: better service at lower cost.

Source: Vernon L. Smith and Stephen Rassenti, "Turning on the Lights: Deregulating the Market for Electricity," NCPA Policy Report No. 228, October 1999, National Center for Policy Analysis 12655 N. Central Expwy, Suite 720, Dallas, Texas 75251 (972) 386-6272.


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