DEREGULATION OF ELECTRIC

UTILITY INDUSTRY
Partha Bandopadhyay
Duygu Gunaydin
November 13, 2013

Industry Recap
Distribution of U.S. Electric Utility Sales
by Class of Ownership, 2007

Facility; 0% Federal; 1% Other Energy Providers; 8%

Distribution of Consumers Served by

Class of Ownership, 2007

Facility & Federal; 0% Other Energy Providers; 2%

Cooperative; 13%

Cooperative; 10%
Public; 14%
Public; 15%
Investor-Owned; 66%

Investor-Owned; 71%

3,273 electric utilities

142 million consumers
2011 sales: 2,558 billion kilowatt-hours
2011 revenues: $254 billion

Deregulation of Electric Utility Industry

Generation

Generation
Generation

Wholesale
Wholesale
Trading
Trading

Transmission

Transmission
Transmission

Distribution

Distribution
Distribution

Retail
Retail

Opposing Views on Deregulation

Opponents
Price volatility and speculations
due to free market dynamics
Regulated monopolies ensure
reliable supply
Deregulation destabilizes the
economy due to the inability of
forecasting energy costs

Proponents
Lower prices due to price
competition
Technological advancements
due to competition
More efficient generation
processes

Situation After Deregulation

Retail Electricity Prices
California electricity crisis in

2000-2001
Dramatic increase in wholesale

prices
Shortage of supply
Blackouts
Residential
US Total

Commercial
Texas Total

Industrial

Success story in Texas

Independent grid
Boom in electric generation

plants
Rates under national average

Research Questions
Technological advancements in deregulated markets.

Study the substitution effects between green technologies

and traditional coal based electric power
Explore the effects on monopoly on entry deterrence in
the unregulated markets.
Did large holding companies use their pricing power to
unfair use ?
Feature of the industry : Very localized and oligopolistic in
nature since maximum of 3-4 companies in any given
region

Empirical Strategy
Bresnahan Reiss(1990) and Seim (2006)
Since deregulation, companies can enter at any segment

of the distribution channel. We focus only on the segment

involved in distribution to the end consumer.
Demand side is relatively simple since electricity is a
homogenous product
Supply Side: Complex set of contractual arrangements
between generators and distributors

Potential Improvements
Dynamics (Ericson Pakes (1995)).
Firms make large sunk cost investments with a forward

looking perspective so dynamics are a natural aspect.