Deregul;Ation Of The Electrical Industry Essay Example For Students

Deregul;Ation Of The Electrical Industry Essay Deregulation of the Electrical IndustryThe roots of modern day regulation can be traced all the way back to thelate 1800s and found in the form of antitrust. By the beginning of the 20th century, the U.S. government had formed the interstate Commerce Commission to regulate the railroad industry, and shortly thereafter, many other regulatory commissions were founded in the transportation, communication, and securities fields. 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 has recently come under heavy criticism, with many people pushing for open competition among electric power producers. Although once believed to be an impossible proposal, competition among electric power producers is finally a reality in a few areas. Massachusetts is just one state where legislation implemented 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 attempt at regulating price in the electric industry is a troublesome one. The objective 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 pric es, then the electric company has no 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 exorbitant. The term regulation refers to government controlled restrictions on firm 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 rather entails the creation of a price structure for purchasing electricity during peak and non-peak times. The control of quantity refers to the governments attempt to control the amount produced or in this case the amount of electricity 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 can not 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. However, the effectiveness of regulation has begun to be questioned, and created the evolution of a more competitive market. Ever since the Public Utility Act of 1935, which in turn created the Federal Power Commission, the role of electric utility regulation and its effectiveness has been questioned. Since that act was passed into legislation, the question has always remained: has electric regulation made a difference? Major studies done throughout the 20th century found conflicting results. A study published in 1962 and 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 re gulation, so Stigler and Friedland had to go back to the 1920s and 1930s to find states without regulationTheir finding was as 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. 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 concl usion 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. Life And Times Of Alexander The Great EssayHowever, even though the law seems to have many more benefits than it does negatives, it has come under recent criticism. Many opponents of the law feel it is not doing its designed purpose, and consumer backlash was so great that Issue 4 asking whether or not the law should be repealed. An organization called The Campaign for Fair Electric Rates, backed by failed congressional candidate John OConnor and consumer advocate Ralph Nader, led the effort to repeal the law, calling it the biggest consumer rip-off in Massachusetts history. The big issue involved in the attempted repeal was lawmaker reneging on their promise to protect consumers by allowing utilities to recover 100% of their bad investments. Because deregulation will cause some utilities to lose money on investments in power plants or on contracts they made when they expected to keep selling power at a regulated price, the question becomes do they deserve compensation for these st randed costs, which may approach $200 billion nationally? For instance, utilities spent more than $5 billion building the Seabrook nuclear plant in New Hampshire, which produces 1,150 megawatts. In contrast, private developers have proposed more than 50 new plants, which combined would produce 30,000 megawatts, and the cost of these projects is estimated at slightly more than $15 billion. The utilities argue that public regulators approved those expenses and that the state can not back out on them now, stating that many plants have already begun to implement the new law, including selling most of their power plants. Repealing the law now, they argue, would create utter chaos. Therefore, a provision was written into the law allowing for utilities to recover all of their stranded costs over a 10-year transition period. While proponents of the law were hoping for a 30% rate reduction, of which two-thirds would have come from consumers not having to pay for most of the utilities strande d investments, they will now have to settle for a guaranteed 15% rate cut, hopefully with more to come through competition. The question now on everyones mind is: has the law served its purpose and reduced electric rates? In a study done by Standard and Poors DRI entitled Economic and Environmental Analysis of the New Massachusetts Electricity Law, and released on September 2, 1998, it found that the new has triggered substantial economic and environmental benefits. According to the study, electric rates will decline by almost 28% by the year 2010 as a direct result of retail competition and industry restructuring. The DRI, a conservative report when compared to others, predicts that consumers will save $470 million in 1998 alone, and increases that estimate to at least $550 million per year in future years as a result of the new law. Also, the study predicts the Commonwealth to achieve higher economic output and employment growth triggered by the estimated $10 billion consumers and businesses will save on electricity costs. By 2010, there will be over 60,000 more jobs, a $19.6 billion gain in consumers cumulative real discretionary income, and lower price inflation. All of this forecasting appears to put the law in a favorable light, but many want to know how its working now. According to the Massachusetts Electric Company, its 970,000 customers have saved a total of $67 million on their electricity bills in the first six months of the new electricity law. On September 1, savings for the companys customers increased to more than 15%, or a total savings of $25 million per month, one full year ahead of the required rate cut. This was due to the companys affiliates selling their power plants. SummaryBy examining the early results of the Massachusetts Electricity Law, along with projections such as the ones provided by Standard and Poor, one can determine that the deregulation of the electric industry has been long overdue. The deregulation of the electrical industry proves that any industry can and should be deregulated. It also proves that competition of the utility companys is in the best interest of society as a whole and that no industry should be allowed to exist without it. Economics Essays