Rethinking Electricity Restructuring

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Electric utility restructuring was initiated in the 1990s to remedy the problem of relativelyhigh electricity costs in the Northeast andCalifornia. While politicians hoped that reformwould allow low‐​cost electricity to flow to highcoststates and that competition would reduceprices, economists wanted reform to eliminateregulatory incentives to overbuild generatingcapacity and spur the introduction of real‐​timeprices for electricity.

Unfortunately, high‐​cost states have seen littleprice relief, and competition has had a negligibleimpact on prices. Meanwhile, the Californiacrisis of 2000 – 2001 has led many states to adoptpolicies that would once again encourage excesscapacity. Finally, real‐​time pricing, although thesubject of experiments, has yet to emerge.

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

The poor track record of restructuring stemsfrom systemic problems inherent in the reformsthemselves. We recommend total abandonmentof restructuring and a more thoroughgoingembrace of markets than contemplated in currentrestructuring initiatives. But we recognizethat such reforms are politically difficult toachieve. A second‐​best alternative would be forthose states that have already embraced restructuringto return to an updated version of the old,vertically integrated, regulated status quo. It’slikely that such an arrangement would not bethat different from the arrangements that wouldhave developed under laissez faire.

Peter Van Doren and Jerry Taylor

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