FOR IMMEDIATE RELEASE
Tuesday, March 24, 1998
Contact:
Michael Tebo
(202) 328-5019
[email protected]
FACTORS AFFECTING THE PACE OF STATE-LEVEL ELECTRICITY RESTRUCTURING EXPLORED
WASHINGTON, DC -- A new paper issued by Resources for the Future (RFF) looks at a variety of factors that may influence the rate at which state legislators and regulators move toward establishing retail competition among electricity suppliers. Researchers find that legislators are more likely to have considered adopting retail wheeling if consumers have much to gain from lower prices, or prices differ substantially from those in neighboring states. They also find that substantial price variation among the utilities within a state prompts regulators to consider adopting retail competition. Further, they note that publicly-owned utilities and environmental groups slow decisionmakers' movement toward competition.
In their paper, GETTING ON THE MAP: THE POLITICAL ECONOMY OF STATE-LEVEL ELECTRICITY RESTRUCTURING, RFF's AMY ANDO and KAREN PALMER analyze a variety of factors that may influence the rate at which state legislators and regulators have moved toward putting retail competition in place. Many of the factors that they consider capture the potential gains and losses to different interest groups that play a significant role in state-level debates over retail competition. These interest groups include: consumers, investor-owned utilities, publicly-owned utilities, and environmentalists. Ando and Palmer also include variables that describe the sizes of different interest groups and the characteristics of the two types of decisionmaking bodies.
"Electric utility restructuring may have large economic and environmental impacts, and scholars and policymakers have made efforts to predict the size and nature of those impacts," Ando and Palmer write. "Their efforts are hindered by the fact that no one currently knows how many states will eventually adopt retail wheeling, or what factors influence how long any given state will take to 'get on the map.'"
In their paper, Ando and Palmer define the process of moving toward competition in the electric power market in terms of movement among three stages: legislatures or public utility commissions (PUCs) may have taken no action on the issue; begun formal consideration of retail competition; or made a final decision to implement competition.
They find that, in general, proponents of competition prevail in persuading decisionmakers to move forward more quickly when there are large economic efficiency gains for society as a whole as a result of retail wheeling. In particular, they find that high average prices and high stranded-cost burdens -- both indicators of potentially large efficiency gains as a result of competition -- have positive influences on the propensity of state legislatures to consider competition. If electricity prices were 20 percent lower across the board, Ando and Palmer estimate it would take over seven months longer on average for state legislatures to consider restructuring. Large intra-state price variation and the presence of relatively cheap utilities in neighboring states -- other indicators of potential savings from competition -- join stranded costs in pushing regulators to move toward competition. Cutting the variation in price within each state by half, they suggest, would yield an ! average delay of over six months in regulatory consideration of retail competition.
They also find some evidence that the availability of nearby profitable export markets for power may have a positive influence on both legislative and regulatory decisions to consider or adopt retail competition. Although "domestic" consumers stand to lose if their own rates rise as a result of having their utility sell into neighboring high-price states, those losses are likely to be more than offset by gains to customers who currently pay high prices. Ando and Palmer note that in this case, utility pressure in support of an efficiency-enhancing change seems to overwhelm any opposition from those consumers. This effect, they say, helps to explain early consideration and decisions to adopt retail competition by state legislatures in low-cost states such as Montana and Oklahoma.
Because few states have made final decisions about retail competition, Ando and Palmer's analyses of the processes by which PUCs and legislatures make the last leaps to final decisions are very tentative. However, their preliminary results suggest that, in the absence of a federal policy mandating retail competition in all states, we may expect to see PUCs in states with high prices, large price differentials with neighboring states, or large industrial customer shares to move more quickly toward a final decision to adopt retail competition than states with the opposite characteristics. Appointed PUCs are likely to move less quickly toward competition than elected PUCs, Ando and Palmer find, and legislatures may "drag their heels" in states with powerful environmental constituencies.
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Amy Ando's and Karen Palmer's paper, "Getting on the Map: The Political Economy of State-Level Electricity Restructuring," can be downloaded as a PDF file on the internet at http://www.rff.org/disc_papers/PDF_files/9819.pdf. To order a hard-copy (paper) version, call (202) 328-5000 (reference discussion paper 98-19).
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ABOUT THE RESEARCHERS
KAREN PALMER is a fellow in Resources for the Future's (RFF) Quality of the Environment division. Her research interests include the conservation, regulation, and social costs of energy, and the restructuring of the electricity industry. She coauthored A Shock to the System: Restructuring America's Electricity Industry Published by RFF in1996, the book provides the necessary background for understanding the increasing role of competition in electricity markets. It includes the history of public policy regarding electricity; and, identifies the significant proposals for implementing competition and examines their potential consequences for utility regulation, industry structure, cost recovery, and the environment. Palmer recently (1996-97) spent six months on leave from RFF at the Federal Energy Regulatory Commission's (FERC) Office of Economic Policy. Her focus was on analyzing regulatory proposals to facilitate of "unbundling" -- separating the generation, transmission, a! nd distribution of electricity services traditionally provided by a single electric utility.
AMY ANDO is a fellow in RFF's Quality of the Environment division. Her fields of interest include environmental and natural resource economics, industrial organization, and political economy. She is currently investigating endangered species protection, National Forest timber sales, and motor-vehicle regulation. Recent publications include: Ecosystems, Interest Groups and the Endangered Species Act (Winter 1998 Resources article); Do Interest Groups Compete? (RFF discussion paper 98-14); and, The Price-Elasticity of Stumpage Sales from Federal Forests (RFF discussion paper 98-06). All three can be downloaded at RFF's website at http://www.rff.org.
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