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Impact of Deregulation on Electric Utilities

In 200-250 words please answer the 5 questions below. (total word for all questions)

Deregulating Electric Utilities-A Good Idea?

In May 1996, two Clemson University economists came out with a report that argued that by removing legal restraints on competition between electricity producers, federal and state governments could expand market share for "efficient" utilities, shrink less-productive companies, and cut the average consumer's electric bill by 43 percent.

All hell broke loose. Two months later, the Republican chairman of a House subcommittee introduced legislation that would give all consumers the right to choose their own electricity. That thunderbolt hit squarely the tightly regulated, $200 billion electricity industry, splitting its normal alliances. It would require an odd coalition of some larger utilities, some natural-gas producers, and some big manufacturers. They would also need -- no small task -- to win over such longtime opponents as consumer groups and environmental groups.

Six states (California, Pennsylvania, New York, New Hampshire, Massachusetts, Rhode Island) began to tear down the regulatory walls, while 38 others considered it.

In the winter of 2001, California's deregulation plan exploded in its face. Although passed with no dissenting votes in the State Assembly and signed into law by Republican Governor Pete Wilson, the "deregulation" plan allowed demand to grow at the retail level without providing for the incentives and the mechanisms for supply to also grow. Potential suppliers found unappealing the fixed rates at the retail level, the impossibly strict environmental laws, and restrictive regulations for building new plants. While demand increased by 25 percent in the 1990s, supply increased only 6 percent. So the state was vulnerable to the least disturbance: weather too hot, weather too cold, big storms, dry periods, power generating plants shut down for maintenance, etc.

After a spike in utility costs in San Diego County were promptly ignored by Democratic Governor Gray Davis, firms such as Enron began manipulating short-term market prices and driving up costs so high Pacific Gas & Electric filed for bankruptcy, and the state was forced to enter the market and buy long-term contracts at bloated prices that will saddle California rate-payers with high electric bills for years to come.

It could have been different, as the following three cases show.

· Pennsylvania. The state began to deregulate in 1997, the same year California did. Unlike California, the state focused on increasing supply. They did this first by setting rates high enough to make new suppliers interested. Then they changed the governance of the grid to include New Jersey, Maryland, Delaware, and the District of Columbia so that the power grid got much larger and easier to tap into in high peak times.

· Texas. Signed into law in 1999 by Governor George W. Bush, Texas also focused on increasing supply ahead of full retail deregulation. It also simplified its regulatory process down to two or three years versus the seven years in California. Since 1995, 22 new plants have been built, increasing capacity by 10 percent. There are 15 plants under construction and scheduled to come on line in 2002, and plans for 35 more.

· Wisconsin. This state also decided to focus on supply before moving to full retail deregulation. Large price spikes in 1998 revealed the weakness in its transmission grid. So in a short time, Wisconsin doubled its transmission capacity allowing it to access potential supply sources. The state also plans to build two huge coal-fired power plants.

Sources: Peter Nulty, "Utilities Go to War, Fortune, November 13, 1995, pp. 200-206; John J. Fialka, "Fight Looms Over Electric Power Industry Competition, The Wall Street Journal, December 17, 1996, p. A24; Vernon Russenti, "Electricity Deregulation Could Benefit Consumers," National Center for Policy Analysis, October 15, 1999, http://www.ncpa.org/press/urdereg99.html; "California's Dim Bulbs," The Wall Street Journal, January 16, 2001, p. A26; Scott Thurm et al, "As California Starved for Energy, U.S. Businesses Had a Feast," The Wall Street Journal, September 16, 2002, p. A1; and Dan Walters, "Enron and Others May Have Gamed California, But We Asked for It," Sacramento Bee, September 23, 2002, p. A3.

In 200-250 words please answer the 5 questions below.(total word for all questions)

1. According to the text, before deregulation what were electric power utilities an example of?
2. After deregulation what will electric power utilities be called?
3. Does technology play a role in deregulating electric power utilities?
4. Before deregulation, would it be fair to call electric power utilities "lazy monopolists?"
5. After deregulation, would it be fair to call them that?

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Solution Preview

Before deregulation electric power utilities were an example of MONOPOLIES. The complete process from generation to transmission to retail distribution in any area was run by monopolies. So you had one company producing power, one transmitting it, and one distributing it in any city or metro area. The idea there was that since electric power utilities required a lot of initial investment it will be a good idea to distribute that high fixed cost across as large a swathe of consumers as possible thus driving down prices. To ensure that the monopolies didn't charge more than what a normal profit would require governments regulated the price. But this regulation was based ...

Solution Summary

Examines whether deregulation has been good for the electric utilities. Also explains how different states have handled the deregulation and what the impact has been on the deregulated industries.