The Energy Project

Restructuring in Retrospect

By Matthew Brown
October 2001
ISBN 1-58024-159-X

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Introduction

It is unusual to hear anyone in the United States say that competition and free markets are bad or unproductive.  Indeed, the U.S. economy is based on the idea that competition can deliver a great variety of products, services and innovations at reasonable prices for many types of consumers.  Therefore, it seemed to make sense to many observers when the federal government and many state legislators and regulators began the process of dismantling the regulations and monopoly structures that had long governed the trucking, airline, securities, cable and telephone industries.  The idea was that deregulation would produce competition, and that competition would, in turn, bring a wide variety of new products and services to the consuming public.  Furthermore, these new products and services would be available at prices lower than were available under regulation.  Reduced regulation and increased competition have arguably brought an array of new products and services to many consumers.  However, in the electric industry, it is still too early to determine the success of efforts to restructure the market.

This report reviews the history of the 1990s movement to restructure the nation's electric industry and pinpoints some of the pitfalls and the potential savings that could result from the effort.  It concludes the following.

1. The rationale for retail electricity restructuring rested on a combination of factors-including, in part, overcapacity and steadily declining wholesale prices-that do not currently exist but that may recur in the next two to five years.
2. The initial attraction of restructuring was that it would provide relief from high retail rates and allow customers to pay prices closer to the inexpensive wholesale market rates.  For the most part, that has not happened in any sustained way.
3. Under retail restructuring, customers have switched to new providers slowly.  Large commercial and industrial customers switched at a much faster pave than residential customers.
4. In some areas, restructuring appears to have resulted in lower electricity prices for some customers.  Many legislated rate reductions that occurred as a result of negotiated restructuring laws likely would have happened even the market had remained regulated.
5. The potential for future savings relies on the proper structure and functioning of wholesale markets.  Such functioning wholesale markets promote adequate generation and transmission system investments, greater efficiency and investments in new technologies, and the resolution of market power issues.

This report first reviews the rationale for and history of the U.S. electricity industry restructuring effort, then discusses the early results of these initiatives.