Impact of Macro Shocks and Utility Restructuring on Energy Markets. (Focus on Industries and Markets)

By Cuomo, Robert J. | Business Economics, January 2003 | Go to article overview

Impact of Macro Shocks and Utility Restructuring on Energy Markets. (Focus on Industries and Markets)


Cuomo, Robert J., Business Economics


Over the past two years external shocks have had a significant impact on electricity markets. Electric utility restructuring was proceeding at a very rapid pace in the late 1990s, and there was every expectation that this pace would accelerate in the early 2000s. The process of utility restructuring was moving toward complete restructuring of power generation and significant regulatory reform of transmission and distribution. However, a series of external shocks have taken their toll, largely thwarting existing trends. Utility restructuring was already under intense scrutiny and generating considerable debate, with many stakeholders questioning the benefits of restructuring. Today, there is considerable rethinking about how--even if--electricity markets should be structured.

Status of Utility Restructuring

What is the current state of restructuring? In the power industry, power generation is competitive in many states while transmission and distribution activities remain regulated in all states, albeit under revised rules. Table 1 depicts the current status of utility restructuring in the United States.

Utility restructuring legislation was first passed in Rhode Island, Massachusetts, and California. Thus far, some form of electric utility restructuring has been implemented in eighteen states. Future restructuring dates have also been established in four states.

However, utility reform implementation has been delayed in two states that had established dates, and the shocks of recent years have retarded the spread of restructuring to the remaining states.

External Shocks

There are a number of external shocks that have recently had a substantial effect on utility restructuring and ultimately on energy markets. Within the last two years, one can identify at least five such shocks. These are:

* Terrorist Attacks of September 11, 2001

* Recession in 2001

* Erosion of Stock Market Wealth

* California 2000-2001 Experience

* Collapse of Confidence in Key Electricity Market Players

Terrorist Attacks of September 11

The events of September 11 had a very significant impact on expenditure patterns. Consumer spending fell precipitously on travel and tourism, and this led to significant reductions in airline and hotel employment. It is likely that families are spending more time at home, tending to increase growth rates of demand for electricity-using appliances and residential electricity. However, because of increased business uncertainty, business spending has languished, causing a decline in the growth rate of commercial and industrial electricity demand. Moreover, concerns with security and terrorism in the wake of September 11 has pre-empted electricity restructuring as a priority issue.

Recession in 2001

The nine-month recession in 2001 resulted in a slowdown in the rate of growth of electricity demand in the short-run. The slump in industrial output and the derived demand for electricity was one factor. Moreover, as the economy faltered, the financial ability of competitive suppliers to enter markets decreased. This has contributed to utility restructuring being delayed in some states and tabled in others.

Erosion of Stock Market Wealth

It has been estimated that approximately $7 trillion in stock market wealth has been lost since the stock market peaked in March of 2000. In addition, corporate misreporting and malfeasance have seriously eroded investor confidence in corporate reporting and have heightened the sense of market risk. Together these dynamics have made it more difficult for electricity companies--particularly independent power producers--to raise funds in capital markets. As capitalization becomes more difficult, there is increasing concern as to whether competitive markets will produce profits for investors and lower prices for consumers.

California 2000-2001 Experience

The California electricity experience in the summer of 2000 and winter of 2000-2001 had a profound effect on the utility restructuring movement in the United States. …

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