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Electric Deregulation

Uploaded by KPOSTHRTSS on Aug 16, 2001

In the past electricity pricing was controlled by regulation. 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 many regulatory commissions. 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 eventually came under heavy criticism. Many people wanted open competition among electric power producers. Although this was once believed to be an impossible proposal many states have accomplish it. Massachusetts is just one state where legislation applied 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 term regulation refers to government restrictions on firms’ 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 involves 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. 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 cannot 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. The attempt at regulating price in the electric industry is a complex one. The idea 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 less incentive to undertake any type of innovation. Therefore, a compromise must be reached which would...

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Uploaded by:   KPOSTHRTSS

Date:   08/16/2001

Category:   Miscellaneous

Length:   9 pages (2,127 words)

Views:   1933

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