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Off Peak

Why do U.S. electric bills continue to climb, when other liberalized Western countries are seeing reductions?
Fortnightly Magazine - October 1 2000

Off Peak

October 1, 2000

Dereg Dilemma

Why do U.S. electric bills continue to climb, when other liberalized Western countries are seeing reductions?

Electric deregulation in the United States isn't slashing consumer bills the way it has in other countries. Despite continuing restructuring, the price of U.S. electricity ranked second-highest in an April survey of 14 major Western economies.

"What we notice is that when [other countries polled] deregulate, prices tend to drop," says David Brown, vice president of National Utility Service Inc., the utility cost-management firm that conducted the annual survey. "In the United States, if there's been a drop, it's because they've mandated tariff reductions. However, when full market-based pricing comes online-and so far the only area in the States that's done that is San Diego-prices increase."

Further, prices continue to be increasing even as deregulation of U.S. markets continues. The average price of U.S. electricity was up 1.3 percent this year, compared to a 0.75 percent decrease from 1998 to 1999.

Higher prices can be attributed, in part, to inadequate supply. But, says Brown, plans to build new generation during the next few years is no guarantee that prices will come down in the foreseeable future, because independent power producers will aim to create a tight balance of power supply and demand.

"[The merchant generator is] just going to be looking to keep things razor-thin, so I see a stabilization of prices occurring and a possible downturn, but I don't see it in the next five to six years, if it happens at all."

Consumer apathy about deregulation is another reason for high prices, according to Brown. Weak customer switching rates in deregulated U.S. markets have hindered true competition.

"You have only a limited number of people switching to third-party supply, so you don't have a very vibrant market," he says. "Therefore, there's not a lot of competition in the area; therefore, prices can be on the upward side."

The survey also found that Consolidated Edison in New York had the highest U.S. rates, at 13.01 cents per kilowatt-hour. Ohio Power had the lowest rates, at 4.47 cents per kilowatt-hour. New York has deregulated its electric market, while Ohio's electric market is slated to open to retail competition in January. The price disparity is a trend we can expect to see more broadly, says Brown.

"[As states] go over to market-based pricing, you're going to see prices increase, I think, and again, that will be for the foreseeable future."


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