Electricity Industry Restructuring: Have Consumers Really Benefitted?

As any reader of Adam Smith knows, markets exist to provide goods and services to consumers at the lowest price within legal limits. However, as we have previously examined, the restructuring of the electricity industry has not delivered significant benefits to consumers. A concerned reader, whom we suspect is a leading restructuring expert, retorted that one cannot prove a negative, but added: "Who said that restructuring was supposed to benefit consumers?"

Regarding the first point, we merely observed that consumer benefits are unclear. The situation might have been worse without restructuring, but evidence of benefits appears limited. As for the second point, we believe it is self-evident that consumers should be the ultimate beneficiaries, not the participating market companies or consultants.

Electricity Price Analysis by Component

To verify whether these conclusions still hold, we periodically examine electricity prices by dividing them into three components: "Fuel and renewable energy," "Electric utility companies," and "Other." We argue that competitive forces should reduce market-influenced cost components, and utility companies will be no more or less productive than before.

Proponents had forecast savings of up to 40% from restructuring. On the other side, a consulting firm concluded that if all electric utilities applied best practices, they could save approximately 10%—not an insignificant amount, but hardly revolutionary.

Electricity Price Trends Across Periods

The data shows that during the 1990-2000 period, as the industry prepared for competition, actual electricity prices decreased by 17%, with fuel costs accounting for 7 percentage points of that reduction. In other words, the industry achieved the forecast savings before full restructuring was complete. Subsequently, prices tended to rise and fall with fuel costs. The "Other" component of prices also showed no significant reduction. If some costs decreased, other costs must have filled that gap.

However, we should not focus too much on year-by-year comparisons. Let's look at the overall trend. There hasn't been much change. Our conclusion remains valid. But we shouldn't complain too much either. Actual prices increased by less than 0.1% annually during the period in question.

The Future of the Electricity Industry: Price Forecasts and Challenges

That's the past—a period of low growth, low inflation, low interest rates, and insufficient capital spending. The electricity industry has had 25 years to eliminate unnecessary costs, so can we expect significant savings in the future to slow price increases?

To look ahead, the Energy Information Administration (EIA) forecasts a slight decrease in real electricity prices for the 2025-2030 period. We tend to think the picture looks less optimistic, to put it euphemistically.

Doing some preliminary calculations, based on what may be too low industry capital expenditure forecasts, we believe the "Electric utility companies" component of real price per KWH could increase by 5% annually. That alone could add 1.5% to real electricity prices annually. Should we assume that all remaining costs will decrease to prevent real price increases for electricity? The likelihood is not high.

Challenges from "Fuel and Renewable Energy"

Consider the "Fuel and renewable energy" component. Much renewable energy can reduce costs, but in about half the country, natural gas sets the price for the electricity market, even for electricity not generated from natural gas. The United States produces enough natural gas, but government policy seems aimed at exporting it as LNG, which would reduce local supply for power generation, just as government policies to build renewable energy projects would reduce natural gas demand.

We bet that the real price of natural gas will increase, in which case wholesale electricity prices in many markets will rise even when total generation costs do not.

Challenges from "Other"

"Other" includes management, marketing, transaction, and union labor costs—essentially fees from established and influential interest groups that know how to protect their share. However, congestion charges could become an uncertain factor. They have been running at 2-4% of the national electricity bill. However, experts say the industry is building less than one-fifth of the transmission lines it needs, and with AI centers demanding energy at breakneck speed, shouldn't we forecast higher congestion charges?

Service Quality and Equity Factors

The price per KWH, of course, tells only part of the story—a story that should include potential service degradation or higher energy affordability costs in some areas for lower-income consumers, or phantom savings achieved by deferring environmental costs to the future—for our children to pay. These factors are not included in our cost calculations, and as far as we know, not in anyone else's either.

Conclusion

In conclusion, if restructuring, liberalization, and competition have truly delivered significant operational savings, they seem to have been lost somewhere before reaching consumers. The latest data does not suggest otherwise. For the near future, without major changes in government policy or market structure, we see a pile of deferred costs in a period of higher interest rates, higher inflation, increased demand, and environmental risk—all pointing to rising real electricity prices and all the consequences that follow.

It seems quite clear, doesn't it? Well, perhaps we're asking the wrong question. Everyone knows prices will rise. The bigger question is, given the current circumstances, can the electricity industry meet demand?

By Leonard Hyman and William Tilles for Oilprice.com