Electric Deregulation Essay Research Paper In the

Electric Deregulation Essay, Research Paper

In the past electricity pricing was controlled by regulation. The roots of modern day regulation can be traced all the way back to the late 1800’s and found in the form of antitrust. By the beginning of the 20th century, the U.S. government had formed many regulatory commissions. The main goal of these regulatory commissions was to create a reasonable rate structure that would be appealing to both producers and consumers. While this system has worked for many years, it eventually came under heavy criticism. Many people wanted open competition among electric power producers. Although this was once believed to be an impossible proposal many states have accomplish it. Massachusetts is just one state where legislation applied to create competition among electric power producers is not only favored by the people of the state, but has also provided significant rate reductions as well.

The term regulation refers to government restrictions on firms. decisions over price, quantity, and entry and exit. Each factor of an industry must be regulated for producers and consumers to truly benefit. The control of price does not mean setting one fixed price, but involves the creation of a price structure for purchasing electricity during peak and non-peak times. The control of quantity refers to the government’s attempt to control the amount produced. For example, in the electric industry, it does not make sense to have a lot of small power plants produce electricity. However, at the same time one company cannot be allowed to monopolize the industry and set prices at its own discretion. Another factor in this problem is the control of entry and exit in the electric industry. By controlling who can enter the industry, the government can control who produces the electricity and how much of it they produce. The attempt at regulating price in the electric industry is a complex one. The idea is not only to minimize the cost to consumers, but also to create a rate structure that will entice the electric company to remain in the industry. The regulatory commission wants the electric company to have a reason to innovate so that they will be able to provide cheaper power in the future. However, if the commission captures all gains from innovation in the form of lower prices, then the electric company has less incentive to undertake any type of innovation. Therefore, a compromise must be reached which would provide adequate incentives for firms to undertake cost-reducing actions while at the same time ensuring that the price for consumers is not excessive.

When the effectiveness of regulation started to be questioned there began an evolution to a more competitive market. Ever since the Public Utility Act of 1935, which created the Federal Power Commission was passed into legislation, the question has always remained: has electric regulation made a difference. Major studies conducted throughout the 20th century found conflicting results. A study published in 1962 conducted by Stigler and Friedland compared the price of electricity in states with regulation to the price in states without regulation. However, at the time all states had electric regulation, so Stigler and Friedland had to go back to the 1920’s and 1930’s to find states without regulation. They found what they had expected. In 1922, the average price of electricity was 2.44 cents per kilowatt-hour in states with regulation. However, in states without regulation, the average price increased to 3.87 cents per kilowatt-hour. Stigler and Friedland controlled the analysis of other variables to make sure that prices did not vary for reasons other than regulation and found that they didn.t. Some disagreeing critics felt that this study was done in a time when regulation was just getting started, and that regulators in the present day are more effective. Two other studies, which found different results were those conducted by Meyer and Leland and another done by Greene and Smiley. In Meyer and Leland.s study, which used data from 1969 and 1974 they utilized econometric estimates of demand and costs to find hypothetical unregulated prices. Their conclusion was that the regulated prices were significantly lower, but that even lower prices were demanded. In a similar study conducted by Greene and Smiley, they found that unregulated prices were 20-50% higher than actual regulated prices. Although these studies seem to reach conclusions that support regulation, the alternative finding by Leland and Meyer that even lower prices were demanded seems to be an indication towards open competition among electric producers.

Soon thereafter, the trend toward competition between electric producers began to emerge. The passage of the Energy Policy Act in 1992 created the first means of competition among electric companies by giving the government power to order companies to “wheel” power from one company, over their own lines, to another company. In 1990, there were over 3,000 electric systems in the U.S. alone, and most of them were publicly owned. However, the 267 privately owned utilities accounted for 71% of the sale of electricity. Also, most of these privately owned utilities own the power plants, the substations, the transmission lines, and the distribution systems. Having in most places only one local company controlling generation, transmission and distribution created local monopolies. This