NCPA - National Center for Policy Analysis


August 22, 2005

Electricity deregulation would benefit consumers if both power suppliers and distributors were allowed to compete for customers, says economist Vernon L. Smith.

Experiments in energy deregulation in the United States have not been successful. Why? Regulators have not recognized that the wires through which electricity is transmitted must be distinct and separate business from the sale and provision of energy to retail customers. As a result, a legal monopoly exists over transmission wires, which impedes local competition, says Smith:

  • The Federal Energy Regulatory Commission (FERC) requires generation companies to be separated from the transmission grid at the wholesale level, but the FERC must extend the requirement to wires and energy purchased by retail customers.
  • Since energy used during peak times is more costly than off-peak energy, regulation must address how the wires infrastructure is priced; competition should lower off-peak prices while raising peak energy prices.

In other words, those who consume energy during peak demand hours should be charged the wires capacity cost for those hours. This would provide proper incentives for capital utilization.

Electricity markets have been successfully deregulated in other countries, says Smith. For example,

  • Australia, New Zealand, the United Kingdom and Chile have all liberalized their electricity through severing the tie between the energy business and the wires monopoly.
  • In New Zealand, exclusive energy supply obligations were removed from existing wire companies to allow free entry of competitors.

In the United States, Georgia has applied competition to its natural gas industry by separating the supply of gas from the distribution pipes; the pipes are still under a monopoly, but now a dozen or so companies are competing to supply customers with natural gas. The same model could apply to electricity as well, says Smith.

Source: Vernon L. Smith, "Power to the People," Wall Street Journal, August 12, 2005.

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