The Value of Competition and Markets

Competition is the bedrock of our nation’s economic prosperity and stability.1 Well-structured, competitive electricity markets produce important benefits for consumers: improved price signals; more downward pressure on prices as contrasted with prices charged in fully regulated markets; new infrastructure investment; enhanced reliability; better demand management; more effective conservation and energy efficiency; increased supply options, new market entrants, innovation and technological advancements; and improved environmental performance. Competitive markets result in closer links between supply and demand and between producers and consumers. Such interactions are much less dynamic in monopoly industries. Like other markets, competitive electricity markets must be carefully constructed on the basis of fair and transparent information and enforceable rules.

I. With improved price signals and customer choice, consumers have saved billions in energy costs

Markets that produce robust and reliable price signals provide market participants with the information needed to act in a manner that generates numerous long-term benefits. Competitive markets produce transparent prices that have provided market participants with the information needed to act in a manner that generates long-term benefits for consumers. The evidence is mounting that consumers have saved billions as a result of competition.

An October 2005 report on power industry restructuring from Cambridge Energy Research Associates (CERA), for example, found that “US residential electric customers paid about $34 billion less for the electricity they consumed over the past seven years than they would have [paid] if traditional regulation had continued.”2 As the CERA Special Report pointed out, moreover, these residential savings are net of any additional savings that accrued to commercial or industrial customers, “reflecting the gains from introducing more competitive pressures into the power business -- greater efficiency, more innovation, and cost discipline....”3 In addition, a July 2005 study conducted by Global Energy Decisions found that wholesale electricity competition in the eastern United States delivered more than $15 billion in benefits to consumers during the 1999-2003 period.4

In New England, competition led to a 5.7 percent decline in prices, after adjustment for fuel costs, from 2000-2004; annual wholesale market savings are estimated to be $700 million per year for that period.5 Energy Security Analysis, Inc. found that wholesale electricity customers have saved more than $500 million a year as a result of the expansion of PJM , and that the liquidity and diversity of the expanded PJM will yield savings to electricity consumers of $700 million to $1.4 billion per year.6

II. There has been, and will be, more downward pressure on electricity prices in competitive markets than in fully regulated markets

Despite current concerns over high energy costs, the move toward competitive electricity markets has been marked by the lowest available prices for electricity. Overall, during the past seven years of the electricity restructuring era (1997-2004), “average US real power prices were 16 percent lower [than] during the [previous] seven years of the deregulation era” (1990-1997).7 In 1998-99 the fuel-cost adjusted, load weighted energy prices (LMP) in PJM were about $25 MWh, then declined and remained at about $20 MWh through January 2006.8 The biggest declines have occurred where competition is most robust and extends furthest to reach retail customers.

This is buttressed by a recent PJM analysis. It determined that a review of 1993 and 2004 electricity prices compiled by the Energy Information Administration “suggests that customers in the competitive wholesale energy market administered by PJM were better off economically than customers not served by organized markets.” [footnote omitted]9 The prices that residential customers paid for electricity in 2004 in the PJM states were 1.4% lower on average than 1993, whereas the prices residential customers paid in 2004 in unorganized market states were 11.9% higher on average than in 1993.10

The Texas Public Utility Commission issued a report to the Texas state legislature in February 2006 noting that residential consumers are far better off in the restructured Texas market than they would have been without competition. “A residential customer in the Houston area who switched to a competitive Retail Electric Provider in January 2002 and switched annually thereafter to the lowest-cost provider would have saved $1,450, compared to the estimated regulated rate, over the four- year period retail competition has been in effect.”11 Likewise, a New York State Department of Public Service report found that “[t]he total real (i.e., inflation- adjusted) electric price for a typical residential retail customer in New York, including supply and delivery charges, has dropped by an average of approximately 16% between 1996 and 2004. Most commercial and industrial customers have seen decreases in their real energy bills as well.” [Emphasis in original]12

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