PowerFacts
A New Report Confirms that Competition is Best Equipped to Address Electricity Industry Challenges
A recently released report argues that competition is best equipped to handle the challenges faced by the electricity industry. The study, entitled, "Embrace Electric Competition or its Deja Vu All Over Again," was conducted by the NorthBridge Group for EPSA member Reliant Energy. Given the challenges of environmental uncertainties and the rising cost of energy, the report finds that it would be a mistake for the electricity industry to repeat the costly resource mistakes made three decades ago. Instead, it finds that competition has been and continues to be best suited to improve efficiency, promote environmentally friendly policies, and reduce costs for consumers. The full report can be found at www.nbgroup.com/publications.
COMPETITION PROVIDES THE BEST PATH FORWARD WITH DEMONSTRATED BENEFITS
- "To successfully navigate the confluence of an increasing public desire for environmentally-friendly resources with the rising cost of energy globally, participants in the electric industry must confront tough decisions and make difficult technological choices Decades of experience in the electric industry suggest that regulation is not well-equipped to meet such challenges. But recent experience in restructured electricity markets and significant experience in other competitive industries suggests that competitive markets are. We should learn from this history rather than repeat the regulatory mistakes of the past." (p. 5)
- The decision to support regulation or competition should not depend on the effects of external shocks (such as the recent rise in natural gas prices) or whether regulated average cost prices are below or above market-based marginal cost prices at any particular point in time, but instead on whether a competitive or regulated model will foster more efficient decisions and ultimately better price and reliability outcomes over a sustained period of time and varying market conditions." (p. 3)
- Since 1999, nuclear plants operated by competitive generators have realized an average capacity factor that is close to 2 percent higher than that of regulated plants, producing savings of about $350 million per year at current market prices Controlling for output level, deregulated [coal] plants used 2 percent less fuel per megawatt hour of electricity produced, averaged across different fuel types than regulated plants, producing savings of about $550 million per year." (p. 46 & 48)
- RTO and ISO regions with organized wholesale markets lowered system peaks by over 8,300 megawatts on peak days during the summer of 2006 [which] could avoid roughly $3.7 to $5.8 billion of capacity costs." (p. 56)
LESSONS WE SHOULD LEARN FROM THE 1970S
- "Overall, the regulatory response to the events of the 1970s and 1980s probably amounted to a mistake on the order of $200 billion or more in today's dollars" (p. 17-18)
- "A careful examination reveals four inherent flaws of regulation behind much of the industry's response to the external shocks and uncertainty of the 1970s: 1) a lack of clear market price signals for both suppliers and consumers of electricity, 2) perverse capital incentives for regulated utilities to favor capital and consider sunk costs in investment and abandonment decisions, 3) improper allocation of risks that encourage regulated utilities to underestimate the risks of large capital-intensive investments that are borne by ratepayers, and 4) the tendency for political and regulatory "fixes" that overcompensate with unintended consequences. These flaws ultimately led to higher costs for consumers and a less efficient resource allocation than likely would have occurred in a competitive framework."(p. 18)
- "Ultimately, over the course of the 1970s and early 1980s, electric utilities built a generation supply portfolio that was far too big in absolute terms, and too heavily-weighted towards capital-intensive coal and nuclear generation. The lack of clear market price signals was a significant culprit in this misallocation of resources." (p. 21)
- "The problems with regulation are inherent: decisions are administratively-determined versus market-driven, and the dollars at risk are highest and the potential for damage greatest during times of high capital investment."(p. 29)
CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660
EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.