Electric Power Industry Deregulation

Section: Economics Essays

While many would say that prices could vary for reasons other than regulation, Stigler and Friedland controlled the analysis of other variables and found that no significant difference in price existed. Other 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 their study, which used data from 1969 and 1974, Meyer and Leland 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 have been vertically integrated, meaning they own the power plants, the substations, the transmission lines, and the distribution systems. The different utilities are then linked through a national grid, meaning it is possible for the sale of power, or wholesale wheeling, from one utility to the other. The Federal Energy Regulatory Commission is responsible for the regulation of these wholesale transactions, and has done so through market based transactions.

As wholesale wheeling has become more important, large industrial buyers have begun to demand participation. Instead of only being able to buy power through their local utility, they want the choice to purchase it from other companies, thereby creating some type of open market competition. As this has occurred, the trend has trickled down to the individual consumer level, thereby creating legislation such as the Massachusetts Electric Utility Industry Restructuring Act that was signed into law on November 25, 1997, and upheld with the passage of Issue 4 in the general election on November 4, 1998. This piece of legislation has allowed consumers to choose their power supplier, and has led to decreased prices without regulation. The Massachusetts Electricity Law, passed by legislature and signed into law on November 25, 1997, was developed over three years with input and support from consumer advocates, small businesses and large employers, energy providers and experts, labor and environmental groups.

The main objective of the new law was to allow Massachusetts consumers to choose their electricity supplier by breaking up the utility monopolies, and creating competition that will lead to lower rates in the future. Under the new law, local electric companies still own and maintain the wires that bring the electricity to homes and businesses, but consumers are now able to choose the company that provides the electricity they use. The distribution of electricity remains regulated to ensure reliable service to all consumers and to set distribution rates based on cost and performance, not at market prices. However, competitive power suppliers whose prices for electricity are not regulated now provide the generation of electricity. In addition to breaking up the utility monopolies, the new law also provides electricity rate cuts to consumers while they choose which company to buy their electricity from.

The rates are guaranteed to drop 15%, with 10% coming by March 1, 1998 and another 5% occurring by September 1, 1999, as the law provides a rate cap to lock these lower rates in for years to come. The law also provides the opportunity to eliminate sales tax on electricity transmission costs for non-industrial businesses, saving this sector an estimated $30 million a year. The law also created a 10% rate discount for farmers and others in the agricultural industry. Therefore, under the new system, your local electric company still delivers electricity to your home or business. However, you can purchase the electricity from the local company at the guaranteed minimum rate reduction, or you can choose to buy your electricity from another competing supplier if you decide that company offers better rates. In addition to lowering rates and allowing consumers to choose their power suppliers, the new law also provides many other provisions designed to protect the consumer. The law requires all competitive power suppliers to be registered with the state Department of Telecommunications and Energy, and also requires the suppliers to continue to provide reliable service. The law also prohibits suppliers from switching a customer to a different supplier without the customer´s consent. The law also creates rate reductions for low-income consumers, such as senior citizens on a fixed income.

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