NCPA - National Center for Policy Analysis

The Consumer Benefits of Electric Power Competition

April 29, 2011

For most of the 20th century, electric power was generated by utilities with legally protected monopolies in geographically defined service territories and sold to captive consumers at state-regulated rates.  Meanwhile, in the 1970s and 1980s, deregulation of other network or utility-type industries -- including natural gas, telecommunications, airlines, trucking and railroads -- reduced prices at least 25 percent below prereform levels.  This experience led to expectations that electric power competition would provide similar consumer benefits.  Thus, beginning in the late 1990s, a number of states restructured their retail power markets, say Carl Johnston, a senior fellow with the National Center for Policy Analysis, and Lynne Kiesling, a senior lecturer in the Department of Economics at Northwestern University.

  • Restructuring generally means that prices are set competitively, utilities shed generating plants and transmission lines, and consumers have a choice of providers.
  • Two-thirds of the U.S. population lives in states that have introduced competition and choice.
  • Electricity prices in these states reflect the actual cost of production better than politically determined rates.

Overall, electricity prices have adjusted more quickly in restructured states to changes in fuel costs and demand than in unrestructured states.

  • As a result, in response to market demand as indicated by price, restructured states have added efficiency improvements, plant upgrades, additional generation and transmission capacity at a faster pace than nonrestructured states.
  • In competitive markets, consumers may pay less for electricity than they once did under monopoly -- for example, Texas retail customers in some competitive markets paid up to one-third less in 2010 than in 2001, after adjusting for inflation.

However, many states are not ready for the revolution.  Among the steps necessary to realize the potential of the new technologies and markets:

  • Continue the process of state restructuring.
  • Allow retail market competition.
  • Devolve or divest federal power generating and transmission assets.
  • Build a national transmission grid.
  • Give the Federal Energy Regulatory Commission the authority to site long-distance transmission lines.
  • Implement smart technologies.
  • Avoid preferential subsidies or mandates for particular forms of energy.

Source: Carl Johnston and Lynne Kiesling, "Turning on the Lights 2011: The Consumer Benefits of Electric Power Competition," National Center for Policy Analysis, April 29, 2011.

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