The restructuring of the U.S. electricity industry continues to gather momentum, driven in part by the prospect of lower prices. The Energy Information Administration (EIA) describes several possible effects of competition on prices in Electricity Prices in a Competitive Environment: Marginal Cost Pricing of Generation Services and Financial Status of Electric Utilities. The report discusses projections based on a modeling exercise that explored a dozen scenarios under competition and compared them to two regulated-price cases, including the Reference Case from EIA's Annual Energy Outlook 1997 (AEO97). Among the competitive-price cases are:

• Flat Rates. Prices are based on marginal costs rather than average costs as under regulation. Assumes no time-of-use rates.

• Moderate Consumer Response. Assumes that consumers respond moderately to time-of-use price differences by adjusting their demand to take advantage of cheaper, off-peak electricity.

• High Consumer Response. Assumes a stronger consumer response to time-of-use rates.

• High Efficiency. Assumes competition-induced cost savings and efficiency improvements greater than the AEO97 Reference Case.

• Intense Competition. Assumes competitive pressures severe enough to suppress prices to a level barely above fuel costs.

In all cases, it is assumed that competition begins in 1998 and that utilities incur stranded costs (investments that cannot be recovered through prices alone if competition drives electricity prices down). The results of the analysis suggest that average electricity prices could be 8 to 15 percent lower than regulated prices in four of the cases by 2000. In the Intense Competition case, prices could be as much as 24 percent lower (again assuming no stranded cost recovery) but would probably not persist at that level. Long-term (2015) prices are projected to be as much as 16 percent lower than the regulated price. Price reductions could vary from region to region and some areas could even see increases. As a group, utilities would see substantial reductions in profits. Some privately owned utilities would be financially stressed and a few could be forced into bankruptcy.

In five chapters, the report describes the runup to the current deregulatory trend; reviews the analysis assumptions, methodology, and limitations; discusses the results and uses of the projections; and analyzes the cash flow implications for utilities of prices under competition.

Contact:

J. Alan Beamon or James Hewlett, Office of Integrated Analysis and Forecasting

joseph.beamon@eia.doe.gov

Phone: (202) 586-2025

james.hewlett@eia.doe.gov

Phone: (202) 586-9536

URL: http://www.eia.doe.gov/emeu/plugs/plelecpr.html