Electricity `Dereg': How Much Will You Save?

By McQuillan, Lawrence J. | Consumers' Research Magazine, August 1999 | Go to article overview

Electricity `Dereg': How Much Will You Save?


McQuillan, Lawrence J., Consumers' Research Magazine


Thanks to state deregulation, consumers in seven states can now shop for electricity as they do for insurance or long-distance phone service. Massachusetts and Rhode Island permit full competition and customer choice, California allows choice for most consumers, while Arizona, Montana, New York, and Pennsylvania offer choice to select groups. Consumers in 14 other states (Arkansas, Connecticut, Delaware, Illinois, Maine, Maryland, Michigan, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Vermont, and Virginia) are awaiting implementation of already approved electricity-market restructuring agreements. In the remaining 29 states, officials are studying reforms that would bring competition to their retail electricity markets.

R. Charles Moyer, dean of the Babcock Graduate School of Management at Wake Forest University, argues that "the big winner from the deregulation process will be electric utility customers, who should reap the benefits of substantially lower costs of electric power over the next five to 10 years." But how much will consumers save?

The electric industry is the last of the traditionally regulated industries to be targeted for reform. States have only recently begun to deregulate retail electric markets. In January 1998, Rhode Island became the first state to allow consumers to choose an electricity supplier other than their local monopoly. Since competition is too recent to measure consumer savings reliably, the best estimates of the potential benefits to electricity consumers come from research that examines the experience of other "network" industries that have previously undergone deregulation: airlines, trucking, railroads, long-distance telecommunications, and natural gas. In each of these five industries, as in electricity, customers are connected to suppliers through a vast network of routes, roads, rails, wires, or pipelines. Although calculations of the total consumer benefits from deregulation of one industry are not directly comparable to another due to differences in demand, the percentage change in prices provides the best prediction of the likely effect of competition on electricity rates, absent studies of the industry itself. Investigations of these five network industries indicate that consumer savings from deregulation of the $219 billion-a-year U.S. electric utility industry would be substantial--most likely, annual price reductions of 11% and consumer savings of at least $24 billion a year.

Airlines. Before the Airline Deregulation Act of 1978, airfares were set according to a fare formula administered by the U.S. Civil Aeronautics Board (CAB). In The Economic Effects of Airline Deregulation (1986), Steven Morrison of Northeastern University and Clifford Winston of the Brookings Institution in Washington, D.C., calculate what airfares would have been in 1977 if airlines had been allowed to engage in price competition rather than abide by the CAB fare formula. After controlling for factors that influence fares such as fuel prices, wage rates, flight distances, and service quality, Morrison and Winston report that deregulation would have lowered 1977 airfares by 29%. In their latest book, The Evolution of the Airline Industry (1995), Morrison and Winston use a different statistical approach and examine data over a longer time period. They conclude that airfares were 22% lower, on average, between 1978 and 1993, i.e., following deregulation and price competition, than they would have been under continued CAB control. Despite occasional complaints (mostly about crowded planes as a result of the lower fares) consumers have benefited greatly from the competitive air travel market.

Trucking. The Motor Carrier Act of 1980 virtually eliminated the authority of the U.S. Interstate Commerce Commission (ICC) to set freight rates and restrict entry in the interstate trucking industry. John Ying of the University of Delaware and Theodore Keeler of the University of California at Berkeley examine the response of freight rates to trucking deregulation in their study "Pricing in a Deregulated Environment: The Motor Carrier Experience" (RAND Journal of Economics, Summer 1991). …

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