Lowering Electricity Prices through Deregulation

A wave of regulatory reform is now transforming the U.S. electricity industry. As state and federal authorities allow independent power producers to compete with utilities in supplying electricity, consumers are paying close attention to the effects of this change on their energy bills. Although deregulation poses significant structural challenges, the introduction of competitive pressures should ultimately lead to efficiency gains for the industry and cost savings for households and businesses. Last summer, electricity prices surged in states actively engaged in deregulating the electricity industry. Newspaper stories covering the development suggested that deregulation had failed to deliver one of its promised benefits—a cut in the prices paid by consumers. 1 Indeed, many observers concluded that opening the industry to competition was actually driving up electricity rates. 2 In this edition of Current Issues, we consider the