It was thought that an effort to deregulate the electric utility sector would increase competition, resulting in tremendous innovation, improved efficiency, and decreasing prices. However, deregulated states saw an average price increase of 36 percent between 2002 and 2006, while average prices in regulated states rose 21 percent. Major factors cited in driving up the cost of electricity were the rising cost of fossil fuel and significant equipment changes to meet environmental requirements; yet, they do not account for the staggering increases seen in some markets, especially in California.
There are arguments that deregulation and true market competition were not allowed to work since rate caps remain in many markets helping to keep prices artificially low. Others look to the fact that electricity providers were unable to obtain the financing necessary to build new power plants or more transmission lines; therefore power supply to any one region is not diversified or competitive. Some even believe that the failure is due to price manipulation by many wholesale suppliers (Enron is a key example).
While these explanations do not necessarily tell the whole story, they reflect the mistrust that has developed as a result of deregulation efforts and, in response, some states have returned to regulation once again. Yet, given different circumstances and adequate oversight, it is not thought to be impossible that deregulation can actually bring about true competition at some time in the future.
Shocking Electricity Prices Follow Deregulation
This August 2007 USA Today article outlines the experiences of a variety of deregulated energy markets between 2002 and 2006. It also features tables of comparative electricity rates and rate changes among deregulated and regulated markets.
Laws & Treaties
Energy Information Administration: California Electric Energy Crisis—Provisions of AB 1890
AB 1890, The Electric Utility Industry Restructuring Act, passed in 1996 and was designed to make the generation of electricity competitive in California. This site provides a summary of the key concepts within the restructuring legislation.
Progress Energy: About Deregulation
Progress Energy, a major energy company serving markets in Florida and the Carolinas (still regulated markets as of this writing), describes their view of deregulation as they adopt a ?wait-and-see? approach to the issue.
For the Classroom
EconEdLink: Deregulation and the California Utilities
This lesson is designed to teach key economic concepts through California’s experiment with energy deregulation, including supply and demand, scarcity of goods, price ceilings, shifting demand curves, and government regulation. [Grades 9-12]