CATO Institute Rethinking Electricity Restructuring

The Cato Institute, generally an advocate of less regulation and free markets, has published recent papers questioning the wisdom of electricity industry restructuring as it was done by 16 states, including New York, and the District of Columbia. This comes at a time when a federal task force is completing its report on wholesale and retail electricity competition.

In 2004, Cato published "Rethinking Electricity Restructuring," which states

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.

In 2006, Cato published "Vertical Integration and the Restructuring of the U.S. Electricity Industry," by Robert J. Michaels (July 13, 2006), which states

Politicians and policy analysts have almost totally disregarded a large body of academic literature regarding the efficiencies that are gained through vertical integration in the electricity sector. At the same time, those parties have enthusiastically embraced other studies that purport to estimate the benefits of switching to a so-called restructured regime consisting of independent generation and integrated transmission and distribution. The result has been the passage of electricity utility restructuring laws that may create production inefficiencies that shrink the net benefits of any move toward market provision of power supplies.

This resonates with the experience of the nation's largest industrial customers, once enthusiastic proponents of electricity restructuring, who a decade later are now dissatisfied with the outcome. They recently stated in their comments to the federal task force on electricity competition:

"After at least ten years of effort to reform wholesale electric markets such that workable competition replaces cost-based rate regulation as the primary paradigm for setting the rates, terms and conditions of power sales and services in interstate markets, there is very little evidence that any tangible benefits have accrued to end-use consumers. To the contrary, Industrial Consumers submit that electric restructuring generally has yielded higher prices, reduced reliability and lessened power quality. In short, consumers are worse off under the “current” restructured markets than they were under the traditional regulatory construct.

PULP's comments to the federal electricity competition task force also point out problems with New York's experiment with electric industry restructuring. For more comments, see PULP's web page on the federal interagency task force on electricity competition. The task force is expected to issue its final report in August, 2006.