Electricity Deregulation And The Consumer

8 Pages 2088 Words

Vernon L. Smith, Regent’s Professor of Economics at the University of Arizona, stated “Economists have traditionally argued that the production and distribution of electric power – along with telephone, water and natural gas services – were natural monopolies: economies of scale implied that the natural economic result was for only one company to emerge and for monopoly prices to prevail. Meaning, the marginal cost of production decreased as the plant's operation increased; thus enabling the monopolistic pricing. Consequently efficiency and fairness required that such industries must either be owned and operated by the government or regulated by it,” (Smith, p.1). For the past 100 plus years this was a just representation of the United States electric industry.
However things began to change in the 1970’s and then came the Energy Policy Act of 1992 which required “..transmission line owners to wheel bulk power. Thus, under current federal regulations nonutility power producers can sell electricity to any utility on the grid” (Moorhouse, p.1) In April 1994 the California Public Utility Commission established a policy that opened access to all power producers enabling independent generators to compete and sell electricity directly to large industrial customers instead of having to utilize the traditional utilities. “By 2002, the policy permits all electricity consumers, regardless of size, to purchase electricity from any utility or independent generator on the grid. No longer will the consumer be restricted to buying electricity from the local utility” (Moorhouse, p.1) and hence, deregulation of the electricity industry was created.

Demand/Elasticity

There are two segments affected within the electricity industry; those being residential consumers and large industrial customers. Their economic behavior has distinct differences obviously. Residential requests are “smaller” in regards to the supply of e...