The issue
A shift toward a more competitive U.S. electricity market has occurred over the course of the past two decades. States believed that by moving to a more competitive model, consumers would receive lower priced electricity than under the traditional regulated model. By 2000, 23 states along with the District of Columbia started down the path toward deregulation. As depicted on the adjacent maps, not all of these states went through with the conversion, while others re-regulated after public backlash when price caps were lifted.
Status of State Electric Industry Restructuring as of February 2003
www.eia.doe.gov
Status of State Electric Industry Restructuring as of May 2010
www.eia.doe.gov
How we got to this point
In an effort to increase competition in the industry, Congress passed several laws to lower the barriers of entering the market and to increase access to transmission. Among the most significant are the Public Utility Regulatory Policies Act of 1978 (PURPA) and the Energy Policy Act of 1992, as well as EPAct 2005. Additionally, in 1996 FERC adopted Order 888 which opened access to transmission to third parties.
Regulated vs. Deregulated
In a regulated market, customers do not have an option as to which utility company will provide their service. Rates and tariffs under this type of market structure are set periodically and include a fair rate of return for the company and the recovery of prudent costs. Though the prices are sometimes higher than in deregulated markets, the prices are less susceptible to market volatility.
Overview of National Power Markets
SOURCE: www.ferc.gov
A deregulated market allows consumers to essentially “shop” for a generation service provider. Proponents of this model believe that by encouraging competition among electric generators, rates will naturally become lower. However, many states are experiencing “rate shock” as previously frozen price caps left-over from the days of regulation are lifted. According to a study conducted at the Institute of Public Utilities at Michigan State University, rates in deregulated states rose 36% between 2002-2006, compared to 21% in regulated states.
Benefits and challenges
As with most major issues, a list of pros and cons can be drawn to illustrate the benefits and challenges of a competitive electricity market. Proponents of competition argue that by having more choices available, consumers can shop for the best rate. Different suppliers offer consumers different options to tailor their electricity service to their particular lifestyle, for example some consumers may opt for a community aggregation plan. However, in a competitive market, consumers may be more likely to experience price volatility as demand waxes and wanes. On the flipside, such standards will make it difficult for new players to enter the market as a large initial investment will be required to become a competitive player. This list of benefits v. challenges can continue on and touch on a seemingly endless array of topics.
