A Cautionary Tale: US Electricity Sector Reform

In the 1970s, the US electric utility industry was faced with rising costs and sluggish demand. Efforts at lowering costs and revitalising the industry through competition have largely been disappointing. Consumers have not seen prices fall, except where regulators have intervened. The merchant sector has suffered a financial crisis, hurting competition in both wholesale and retail markets. Advocates for deregulation assert that minor changes to market rules and regulations will yield the benefits promised. We argue that things are not so simple. Successful deregulation requires markets to be competitive and complete, neither of which is true in the US. Creating competitive markets is not impossible, but doing so imposes costs on the system which may outweigh the benefits of deregulation.