ELECTRIC UTILITY DEREGULATION - ANALYZING THE PROSPECTS FOR COMPETITIVE GENERATION

There are two basic reasons for considering the deregulation of electric power. First, the regulatory process that is applied to the electric utilities has not worked well over the past decade. In its present form, this regulatory framework threatens to contribute to significant economic inefficiencies in the industry. Second, deregulation is worth considering because it appears that recent changes in the underlying economic structure of the industry may have made competition more plausible than it was previously. Given these factors, a serious evaluation of the deregulation option is called for. A review of this policy option, undertaken by the author, leads to several conclusions. First, there are large uncertainties related to the feasibility of effective competition in present US power systems. Therefore, caution on the part of policymakers is in order. Second, caution is also called for because a rapid shift to fully deregulated electric generation would be disruptive and would have major distributional impacts. Finally, while it would be unwise to pursue any kind of radical restructuring of this regulated industry, there do appear to be several areas where more limited new increments of competition can promote the efficiency of the industry and create stronger downward pressures on costs and rates over time. Policymakers should seek to revise the current regulatory framework to take advantage of these available increments and thereby enhance the role of competition in electric power.