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U.S. ENERGY INFORMATION ADMINISTRATION EIA Says Competition Likely to Lower Electricity Prices in Most Areas In most regions of the United States, competition in the electricity generation business could reduce average electricity prices for end-use consumers, the Energy Information Administration reported today in Electricity Prices in a Competitive Environment: Marginal Cost Pricing of Generation Services and Financial Status of Electric Utilities; A Preliminary Analysis Through 2015, although many of the short-term savings will be offset if State authorities mandate recovery of stranded costs. Stranded costs, or uneconomic costs, are costs incurred under regulation that cannot be recovered through lower competitive prices. Such costs include investments in expensive generating plants and high-cost contracts for fuel and wholesale electric power. In the absence of mandated stranded cost recovery, electricity prices are expected to fall over the short term relative to where they would have been under traditional cost of service regulation. With 100 percent stranded cost recovery, competitive prices would differ little from regulated prices over the short term. In the long term, prices will be reduced if there are efficiency improvements or other cost reductions that result from competitive pressures. The report does not address the relative competitive prices that could be seen by various customer classes, such as residential, commercial and industrial consumers. EIA's analysis assumes that no supplier or consumer has the ability (market power) to independently influence prices by virtue of size or control over any important aspect of the market, such as access to transmission lines. Prices and Stranded Costs in the Short Term Over the short term, without recovery of stranded costs the effects of full scale competition could reduce electricity prices nationally by as much as 8 to 15 percent (including the price reductions already seen from limited wholesale competition, producers' preparations for retail competition, and actions already taken by regulators). Price changes would vary from region to region. Some regions that have very low power generating costs in the current regulatory environment, such as the Pacific Northwest (Northwest Pool), with its low-cost hydroelectric generating capacity, and the upper Midwest (Mid-Continent Area Power Pool), with its low-cost coal-fired generating capacity, could see short-term price increases. (See attached map.) Without policy mandates for stranded cost recovery through regulatory means, U.S. suppliers could experience a total reduction in market value (stranded assets) of as much as $72 to $169 billion (1995 dollars), and there could be a number of bankruptcies. (These estimates of stranded assets are net of any benefits accruing to low-cost suppliers; if such benefits are excluded from the calculation, the stranded assets for high-cost suppliers could be as much as another 20 percent.) Most restructuring plans to date at the State and Federal levels allow for at least some recovery of stranded costs. If policymakers do not mandate any stranded cost recovery, total Federal tax revenues from utilities could be reduced by as much as $2.5 billion per year on average from 1998 through 2015, under the assumptions of the most likely range of cases in the report. At the same time, government expenditures on electricity would fall, and macroeconomic benefits could result from lower electricity prices -- partially offsetting the reductions in Federal tax revenues. Prices over the Long Term Over the longer term, efficiency improvements and better planning for future generating capacity needs resulting from competitive pressure are likely to cause electricity prices to fall relative to where they would have been under regulation. EIA does not assess the extent to which competitive pressures could reduce costs and prices over the long term, but shows in a sensitivity analysis that reductions in nonfuel operation and maintenance costs, coupled with lower construction costs, could reduce competitive electricity prices by 16 percent in 2015 relative to traditional regulated prices. Conditions of Intense Competition In an intensely competitive environment, where many producers have access to customers and engage in price cutting strategies to win market share, prices could reflect current (short run) operating costs only. In this case, they would fall by as much as 24 percent over the short term (assuming no stranded cost recovery) instead of the 8 to 15 percent cited above. EIA concludes that a price decline of this magnitude would not be sustainable unless utilities are able to reduce their costs substantially from current levels and maintain those cost reductions. Price decreases of this magnitude would require electricity suppliers to reduce a significant portion of the $25 to $30 billion that they incur each year in non-fuel, non-capital-related costs. Copies of the report are available from the U.S. Government Printing Office or through EIA's National Energy Information Center, Room 1F-048, Forrestal Building, Washington, DC 20585, 202/586-8800, or on EIA's Internet Web Site: http://tonto.eia.doe.gov/FTPROOT/electricity/0614.pdf. Copies are also available from EIA's Press Contact.
EIA Press Contact: Thomas Welch, 202/586-1178 EIA-97-19 Contact:
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