Economic Impact of Electric Power Industry Deregulation on the State of Washington: A General Equilibrium Analysis

By Coupal, Roger H.; Holland, David | Journal of Agricultural and Resource Economics, July 2002 | Go to article overview
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Economic Impact of Electric Power Industry Deregulation on the State of Washington: A General Equilibrium Analysis


Coupal, Roger H., Holland, David, Journal of Agricultural and Resource Economics


Electric power markets are being deregulated nationwide with different impacts depending upon current policies and historical circumstances from region to region. The Pacific Northwest, with its historic abundance of low-cost hydropower and dependence on public power, will experience deregulation as conditioned by this legacy. This analysis focuses on the economic impacts of deregulation on the State of Washington. A31-sector computable general equilibrium model is used to evaluate the impacts on Washington's economy. In a most likely scenario, electricity exports expand to high-priced regions. The impact on the state economy is a reduction in gross state product as a result of higher electricity prices. Returns to capital increase, but returns to private capital and to labor decrease because much of the financial gain accrues to public power.

Key words: computable general equilibrium model, economic impacts, electricity deregulation

Introduction

The electric power industry across the nation is being deregulated at the wholesale price level. The policy change, in whatever form it finally takes, will have far-reaching impacts on electricity production and consumption by private and public utilities. Consumers and the environment will also be affected by deregulation. Moreover, the impacts will vary from state to state, and region to region. The objective of this study is to evaluate the likely impact of electric power deregulation on the economy of the State of Washington.

Electric power markets in the Pacific Northwest have a history that is distinct from electric power development in most other parts of the country, except for parts of the southeast where the Tennessee Valley Authority was created. Central to the development of electricity markets in the Pacific Northwest is the role of state and federal power-producing agencies.

Electricity pricing has been as much a political decision as an economic decision since the creation of the Bonneville Power Administration (BPA) in the early part of this century. An important motivation for creation of BPA in 1935 was to expand economic development by marketing power from federal hydropower projects, and also to counteract potential monopoly control of abundant hydropower resources in the Northwest which might stifle economic growth. BPA's original mandate was to "provide the most power at the lowest cost" through marketing federal hydropower to the regions' population centers (Tollefson).

Although BPA began as a low-cost competitor, BPA's relationship with the region's private power industry has evolved into one of accommodation and support to investorowned utilities (IOUs). Over the years, IOUs, the aluminum industry, and other large energy-intensive industries,' public utilities, and cooperatives all forged special relationships with BPA, allowing preferential access to BPA's low-cost power and federal transmission lines. Subsequently, the agency saw its mandate broaden to include wheeling power to the Southwest (sending power on the western intertie), a disastrous experiment with nuclear power in underwriting the development of the Washington Public Power Supply System (WPPSS), wildlife conservation, and energy conservation mandates2 (Myhra).

Electricity prices in the Pacific Northwest have traditionally been substantially lower than those in the rest of the nation, and have been an important factor in shaping economic development, especially in the eastern Washington economy. These price differences have come about through subsidized development financing and BPA's mandate to provide to the Pacific Northwest the most power at the lowest cost. As seen from figure 1, average retail revenues per kilowatt-hour (kwh) in Washington ranged from 40% of the national average in 1970 to just over 50% in 1994. For a more detailed comparison, a U.S. map is provided in figure 2 showing average revenue per kwh by state for 1994.

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