March 30, 2001

Public Interest Comment on the FTC's Comment Request for Retail Electricity Competition Plans

  • Jerry Ellig

    Research Professor, George Washington University Regulatory Studies Center
Key materials
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The FTC is seeking comments that will assist them in assessing the advantages and disadvantages of different approaches to restructuring the retail electictricy industry and whether further federal action is desirable.

Summary

Retail competition in electricity has the potential to produce significant price and nonprice benefits for consumers. Experience in a variety of other deregulated industries shows that competition and deregulation tend to produce price reductions of between 10 percent and 25 percent, along with service quality improvements whose value to consumers sometimes exceeds the value of the price reductions. These consumer benefits reflect both the static efficiency that results from the elimination of market power and the dynamic efficiency that results from innovation.

The consumer benefits arise not just because prices are likely to be lower, but because deregulated, competitive markets tend to produce prices that are more accurate signals of real resource scarcities. Retail competition would facilitate innovative price structures that would reward customers for shifting consumption away from peak times. If regulation holds prices below the levels that would exist in a competitive market, then short-term price increases induced by deregulation would actually benefit consumers by channeling scarce resources to their most highly-valued uses in the short run and providing incentives to increase capacity in the long run.

Electric restructuring has the potential to create net benefits, but not all restructuring plans are equally effective at moving from monopoly to competition. In particular, California's restructuring plan has hampered the development of a competitive retail market, while Pennsylvania's restructuring plan has been the most successful at promoting competition and producing consumer savings.