Regulating Electricity Markets

Henry Thompson


The first step in regulated the US electric industry occurred during the 1930s when larger firms successfully lobbied with state governments to create franchise monopolies and eliminate competition in the industry. In return, the state governments received reliable tax revenue as a share of the monopoly profit. Abundant energy resources have kept the price of electricity low since.

The main cost of electricity is fuel. Coal remains the main fuel. Natural gas burns cleaner and has become cheaper. Hydroelectricity is reliable but limited due to environmental limits of building more dams. Nuclear generation will become more important over the coming decades. Alternative energy sources can eventually provide enough power for household consumption.

The price of electricity will depend mostly on fuel costs. Retail competition allows customers to choose suppliers. Customers in high priced states like California, New York, and Florida want to buy from low priced exporting states like West Virginia, Idaho, and Alabama. Retail competition will raise prices in the low priced states, and not lead to much change in the average price.

The best policy to keep the price of electricity low is to rely on competition. Consumers facing higher prices for electricity will economize. The price of electricity ultimately depends on investment by the industry.