Deregul;Ation Of The Electrical Industry Essays - Economy

Deregul;Ation Of The Electrical Industry Deregulation of the Electrical Industry The roots of modern day regulation can be traced all the way back to the late 1800's and found in the form of antitrust. By the beginning of the 20th century, the U.S. government had formed the interstate Commerce Commission to regulate the railroad industry, and shortly thereafter, many other regulatory commissions were founded in the transportation, communication, and securities fields. The main goal of these regulatory commissions was to create a reasonable rate structure that would be appealing to both producers and consumers. While this system has worked for many years, it has recently come under heavy criticism, with many people pushing for open competition among electric power producers. Although once believed to be an impossible proposal, competition among electric power producers is finally a reality in a few areas. Massachusetts is just one state where legislation implemented to create competition among electric power producers is not only favored by the people of the state, but has also provided significant rate reductions as well. The attempt at regulating price in the electric industry is a troublesome one. The objective is not only to minimize the cost to consumers, but also to create a rate structure that will entice the electric company to remain in the industry. The regulatory commission wants the electric company to have a reason to innovate so that they will be able to provide cheaper power in the future. However, if the commission captures all gains from innovation in the form of lower prices, then the electric company has no incentive to undertake any type of innovation. Therefore, a compromise must be reached which would provide adequate incentives for firms to undertake cost-reducing actions while at the same time ensuring that the price for consumers is not exorbitant. The term regulation refers to government controlled restrictions on firm decisions over price, quantity, and entry and exit. Each factor of an industry must be regulated for producers and consumers to truly benefit. The control of price does not mean setting one fixed price, but rather entails the creation of a price structure for purchasing electricity during peak and non-peak times. The control of quantity refers to the government's attempt to control the amount produced or in this case the amount of electricity produced. For example, in the electric industry, it does not make sense to have a lot of small power plants produce electricity. However, at the same time one company can not be allowed to monopolize the industry and set prices at its own discretion. Another factor in this problem is the control of entry and exit in the electric industry. By controlling who can enter the industry, the government can control who produces the electricity and how much of it they produce. However, the effectiveness of regulation has begun to be questioned, and created the evolution of a more competitive market. Ever since the Public Utility Act of 1935, which in turn created the Federal Power Commission, the role of electric utility regulation and its effectiveness has been questioned. Since that act was passed into legislation, the question has always remained: has electric regulation made a difference? Major studies done throughout the 20th century found conflicting results. A study published in 1962 and conducted by Stigler and Friedland compared the price of electricity in states with regulation to the price in states without regulation. However, at the time all states had electric regulation, so Stigler and Friedland had to go back to the 1920's and 1930's to find states without regulation Their finding was as expected. In 1922, the average price of electricity was 2.44 cents per kilowatt-hour in states with regulation. However, in states without regulation, the average price increased to 3.87 cents per kilowatt- hour. While many would say that prices could vary for reasons other than regulation, Stigler and Friedland controlled the analysis of other variables and found that no significant difference in price existed. Other critics felt that this study was done in a time when regulation was just getting started, and that regulators in the present day are more effective. Two other studies which found different results were those conducted by Meyer and Leland and another done