Policy Study

Getting Electricity Deregulation Right

How Other States and Nations Have Avoided California's Mistakes

Executive Summary

Pennsylvania, which passed deregulation legislation at the same time as California, has fully implemented deregulation for all customers of electricity. Pennsylvania’s customers have seen an average price decrease of 30 percent and an increase in service options, including “green,” or renewable, power. Of the states that have deregulated wholesale and retail electricity markets, Pennsylvania has had the highest rate of customers switching to alternate generation providers, and Pennsylvania’s customers express the highest satisfaction with their electricity services in the United States. Pennsylvania achieved this deregulation success through market-based default (or standard offer) prices, non-mandatory divestiture of generation, accelerated phase-in of all customers, and the use of financial instruments and regional markets. All of which encouraged alternate providers to enter the market and create real competition. Other states with early deregulation, such as Massachusetts and Rhode Island, did not experience Pennsylvania’s success, and recently adopted policies that have succeeded in Pennsylvania, such as higher default prices to encourage entry.

Other nations began experimenting with electricity deregulation before the United States, most notably the United Kingdom, Australia, Argentina, Norway, and New Zealand. The United Kingdom’s process has led to a 26 percent average price decrease and improved satisfaction with electricity service. Australia’s national structure, with states responsible for deregulation decisions, resembles the structure of the United States more than the United Kingdom’s centralized government effort. Since 1991, Australia’s customers have experienced an average price decrease of 24 percent.

Texas also appears poised to succeed in realizing the benefits of electricity deregulation. While its legislation only went into effect in June 1999 and its pilot program to test the process starts in June 2001, many already P view Texas as a blueprint for deregulation success. It has incorporated the negative lessons from California with the successes of Pennsylvania, the United Kingdom, Australia and elsewhere to craft a process that gives new providers real incentives to enter and provide competitive services at lower prices to Texas consumers. The Texas legislation stipulates a “price to beat,” or default price, that is six percent below the January 1999 average price; this price is low enough to generate price decreases for consumers but high enough for market entrants to see profit potential. The “price to beat” then becomes a retail cap that is effective for only five years. Also, Texas has not mandated full generation divestiture, but has followed the Pennsylvania model of restructuring studies, with the incumbent utility retaining no more than 20 percent of the generation capacity in their service area. The full retail market is set to open in January 2002. Finally, but perhaps most importantly, Texas will not establish a centralized electricity market like California’s Power Exchange, but will instead allow buyers and sellers to transact how they see fit through for-profit financial markets. This flexibility will enable all market participants to limit their risk (and their consumers’ risks) of energy price volatility, and to be creative in devising financial instruments to manage that risk.

California’s experience is in no way representative of the consequences of deregulation; in fact, when done well, these success stories of other states show just how much benefit both consumers and innovative sellers can gain from electricity deregulation. Electricity deregulation can deliver consumer choice, consumer savings, and a business climate that encourages entrepreneurship.