Economics: public utilities

Introduction

Since the 1930s electric utilities have been regulated by the states in which they provide service. Nominal and real electric prices dropped from 1930 to 1960 as power plants became larger and more efficient and fuel costs fell. This changed in the 1970s, as fuel prices, especially oil, soared. The Department of Energy was created in 1977 along with an independent regulatory authority, the Federal Energy Regulatory Commission, that assumed most of the statutory duties of the former Federal Power Commission. The 1978 Public Utility Regulatory Policies Act (PURPA) was passed to deal with these fuel constraints, and subsequently large utilities began facing competition from small independent producers and their own large industrial customers.

Congress formally deregulated the wholesale electric market with the Energy Policy Act of 1992.2 On April 1, 1998, the largest electric power market in the US, California, further pushed competition by allowing utility ratepayers to buy from any supplier they choose. At the time, other states such as Massachusetts, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, and Rhode Island were in various states of restructuring their electricity markets. According to the Department of Energy's (DOE) September 2000 deregulation update, twenty-three states had enacted deregulation legislation, while another twenty had orders pending or ongoing legislative deregulation investigations. However, while by 2005, eighteen states had deregulated, they did so by retaining control of the “wires” or delivery side of the business, but removing restrictions on the generation and sale of electricity .

Recent research on electric-market competition has generally focused on the effects of introducing formal markets for wholesale power and price spikes and supply problems in California in 2000-2001 and elsewhere. These studies raise questions about the effectiveness of these markets. However, there is relatively little evidence on the long-term trends in the market structure of the US electricity industry following the oil shocks of the 1970s. If concentration, strategic interaction, and other market characteristics are affected by technology, firm organization and governance, the legal environment, and similar factors besides the creation of formal wholesale markets, then a broader perspective may be necessary to understand the effects of recent policy changes on market structure and performance(Smith, 2005 ).

Until the mid-1990s, the industry experienced relatively modest new capacity additions as the capacity build up from the 1980s was adequate to serve demand. As the need for new capacity grew in the latter half of the 1990s, the fortunate confluence of low natural gas prices, improving gas turbine technology, and expanding natural gas pipeline networks provided an attractive solution. New, more efficient, larger and competitively priced combined-cycle plants provided a competitively priced generation option with a small environmental footprint. The incremental capital outlays and project lead times were predictable.

Thesis Statement

Over the past 10 years the electric industry has seen a sharp reversal of expectations about new plant investment.

Discussion

Since 1995 the average U.S. capacity margin averaged 16.8 percent. When the margin dropped to 14.3 percent in 1998, the industry embarked on a surge of gas turbine additions. From 1999 ...