EIA Reports

U.S. ENERGY INFORMATION ADMINISTRATION
WASHINGTON DC 20585

FOR IMMEDIATE RELEASE
JULY 17, 1998

Electricity Restructuring: Industrial Customers Secure Rate Concessions;
Premiums on Wholesale Prices for Firm Power May Continue to Exist.

For the first time since 1990, the retail price of electricity for industrial consumers in 1996 was significantly lower than the wholesale price that investor-owned utilities paid for noninterruptible power (firm power), according to information released today by the Energy Information Administration (EIA) in The Changing Structure of the Electric Power Industry: Selected Issues, 1998. The average price of firm power purchased by investor-owned utilities in the wholesale market increased to 5.1 cents per kilowatthour in 1996, compared with an average retail price of 4.7 cents per kilowatthour for their industrial customers.

Even as wholesale markets become more competitive, it is not certain how much the premiums now being paid for firm supplies will decline because existing long-term contracts that incorporate premium payments will continue in place for some time.

These and other findings are contained in the EIA analysis report that focuses on how wholesale and retail electricity prices have changed since 1990; the power and ability of the newly formed independent system operators (ISOs) to provide transmission services on a nondiscriminatory basis; and how issues that affect customer choice, including stranded cost recovery and the determination of retail prices, may be handled either by the U.S. Congress or by State legislatures.

Other highlights of the report are:

• Opening generation to competitive forces while retaining the current siting and licensing procedures for new power plants and transmission lines may limit benefits that can result from competition. Under these conditions, it is possible for current facility owners to seek and recover higher prices at times due to congestion on existing transmission lines.

• Significant changes in the management of the power transmission system are taking place. Many electric utilities that own power grids have transferred (or will soon transfer) operating control of their grids to an independent system operator to ensure equal access to the grid for all eligible users. However, not all utilities in each region are participating and this incomplete coverage may limit the gains expected in operating efficiency.

• A number of States have opted to provide an opportunity for the full recovery of stranded costs and successfully negotiated a consensual arrangement with the stakeholders. These States appear to have a reasonable chance of successfully implementing competition at the retail level. In contrast, States that deny utilities an opportunity for full stranded cost recovery appear to be facing delays in implementing competition.

• Performance-based rate plans that encourage efficiency improvements by offering financial incentives to utilities to lower costs and ultimately customer rates are proposed for segments of the utility industry that will continue to be regulated. Properly designed performance-based rate making plans may be preferable to traditional cost of service rate making depending on the adaptability of the plans to external changes.

• Early evaluation of the electric utility pilot programs instituted to gain experience with retail choice shows that more large industrial customers than residential and small business customers are participating in these programs. Perceived insufficient savings, inadequate program promotion, and burdensome participation rules may explain this disparity.

• Legislation introduced in the 105^th Congress covers many aspects of restructuring activity, but some States do not consider Federal legislation as a requirement for promoting retail competition. They concede, however, that a carefully defined Federal framework would be useful in advancing the economic and social benefits of competitive markets. Other States seek Federal legislation in areas where jurisdictional conflicts may be a possibility, or where such legislation would mitigate or eliminate impediments to competition.

The Changing Structure of the Electric Power Industry: Selected Issues, 1998 can be accessed electronically on EIA's Internet site at:

http://www.eia.doe.gov/cneaf/electricity/chg_str_issu/chg_str_issu.pdf.

Printed copies of the report will be available on or before August 10, 1998 from the U.S. Government Printing Office (202) 512-1800 or through EIA’s National Energy Information Center, (202) 586-8800.

EIA Program Contact: Dr. Suraj Kanhouwa, (202) 426-1257, suraj.kanhouwa@eia.doe.gov
EIA Press Contact: National Energy Information Center, (202) 586-8800, infoctr@eia.doe.gov

EIA-98-16

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