Policy Analysis No. 530

Rethinking Electricity Restructuring

Executive Summary

Electric utility restructuring was initiated in the 1990s to remedy the problem of relatively high electricity costs in the Northeast and California. While politicians hoped that reform would allow low-cost electricity to flow to highcost states and that competition would reduce prices, economists wanted reform to eliminate regulatory incentives to overbuild generating capacity and spur the introduction of real-time prices for electricity.

Unfortunately, high-cost states have seen little price relief, and competition has had a negligible impact on prices. Meanwhile, the California crisis of 2000–2001 has led many states to adopt policies that would once again encourage excess capacity. Finally, real-time pricing, although the subject of experiments, has yet to emerge.

Most arresting, however, is the fact that restructuring contributed to the severity of the 2000–2001 California electricity crisis and (some scholars also argue) the August 2003 blackout in the Northeast, without delivering many efficiency gains.

The poor track record of restructuring stems from systemic problems inherent in the reforms themselves. We recommend total abandonment of restructuring and a more thoroughgoing embrace of markets than contemplated in current restructuring initiatives. But we recognize that such reforms are politically difficult to achieve. A second-best alternative would be for those states that have already embraced restructuring to return to an updated version of the old, vertically integrated, regulated status quo. It’s likely that such an arrangement would not be that different from the arrangements that would have developed under laissez faire.

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Peter Van Doren is editor of Regulation magazine and Jerry Taylor is director of natural resource studies at the Cato Institute.