DEREGULATION OF ENERGY1
-
Upload
dylan-potter -
Category
Documents
-
view
198 -
download
0
Transcript of DEREGULATION OF ENERGY1
DEREGULATION OF ENERGY IN
SOUTH CAROLINA
DIRECTED FOR:
SOUTH CAROLINA STATE LEGISLATORS
CREATED BY:
DYLAN L. POTTER
RELEASED ON:
THE THIRD DAY OF DECEMBER, TWO THOUSAND THIRTEEN
LETTER OF TRANSMITTALSince the 1970’s the deregulation of industries has increased overall economic welfare
and sharply reduced prices for consumers- generally by about 30 percent. However, many of the
industries in the United States are choked by federal and state regulation, many for unnecessary
reasons. This proposal is a call for action to deregulate one of the most powerful industries in
the country, the electrical utilities industry, and will provide an in depth explanation of how the
deregulation of energy, specifically in the state of South Carolina, will increase the social benefit
for consumers and increase economic prosperity among all citizens whom currently pay an
electric bill. To deregulate energy is not the complicated task as it may seem. Simply, the
biggest action that needs to be taken is in the legislature, from there citizens are inherently
granted the choice of who to purchase their energy from. The consumer benefits from
deregulation are apparent in numerous sectors including airlines, trucking, railroads,
telecommunications, and banking, all of which will be shown in a series of tables, charts, and
graphs throughout this proposal. It is not a hail mary to consider the positive consumer benefits
attained by the deregulation of the sectors already deregulated will extend to the energy sector, if
deregulated. Topics are organized numerically and with roman numerals to assist in flow.
TABLE OF CONTENTS
Topic Number and Topic……………………………………...……………………..Page Number
1.) Letter of Transmittal…………………………………………………………………..2
2.) List of Illustrations…………..…….…..……………………………………………...4
3&4.) Executive Summary…..…………….……..………...………………………………5, 6
5.) Introduction Pt. I Scope & Purpose……..…...………………………...………………7
6.) Introduction Pt. II Scope & History…..……………………………………………….8
7.) Introduction Pt. III Limitations..…………………..…………………………………..9
8&9) Introduction Pt. IV Assumptions…………...……………………………………10, 11
10.) Body 1 The Problem…………………………………………………………………12
11&12.) Body 2 The Methods………………………………………………………..13, 14, 15
13.) Body 3, The Conclusion………………………..……………………………………16
14.) Body 4, Conclusion and Recommendations………………………………………....17
15.) Appendix Glossary…………………………………………………………………..18
16.) Appendix References………………………………...………………………….19, 20
17.) Appendix Graphs…………………………………………………………………….21
18.) Appendix Charts & Table……………………………………………………...…….22
1. LIST OF ILLUSTRATIONS
I. Figure 1- Graph of the United States showing areas of energy regulation and
deregulation by state
II. Figure 2- Graph of the United States showing average prices of electric per kWh by
state.
III. Chart 1 shows the average prices of electricity in Philadelphia from 2009-2013
IV. Table 1 shows the effects deregulation had on the major sectors which have already
been deregulated.
2. EXECUTIVE SUMMARYI. This report was commissioned to examine the policy history and current state of
the regulation of energy primarily focused in the state of South Carolina while
using charts, facts, and statistics from similar states to prove that the deregulation
of energy in South Carolina is not only beneficial financially to consumers, but
will also lead to growth in the state by birthing new companies, and provide an
ideal perspective on promoting and practicing capitalism.
II. Assumption include
a. All consumers want to pay the lowest price for the best possible good/service.
b. Perfect competition is required to have a perfect market.
c. Capitalism is an economic system consumers support and wish to practice.
d. Capitalism flourishes with perfect competition.
III. Methods of analysis include the analysis of trends of deregulation proactive
states, as well as electrical rates which were lowered across the board after
deregulation. Charts and graphs are used to emphasize points.
IV. The research draws attention to the fact that deregulation of energy has led to
cheaper overall costs to consumers in electricity which is currently charged by
kWh. Further investigations reveal that energy proactive states have already
made strides in freeing the energy market, including 11 of the 50 states which
have deregulated both natural gas and electricity.
V. This report acknowledges South Carolina’s average rate of kWh is indeed below
the national average, and makes apparent that the lowest rate is significantly
lower than South Carolina’s current rate pointing out that states have seen as
much as a 10% drop in electrical costs after deregulation.
3. EXECUTIVE SUMMARY CONTINUED VI. The report determines that all other major sectors, once deregulated, saw a
substantial increase in marginal social benefit and is left with the conclusion:
“South Carolina’s deregulation of the energy sector, similarly to other states,
would decrease the price consumers pay for energy in South Carolina.”
VII. To practice capitalism and preserve low electric prices it is recommended:
a. That South Carolina citizens launch a campaign to deregulate energy
b. That South Carolina legislature makes strong efforts to enforce capitalism.
c. That South Carolina legislatures pass legislation to deregulate energy.
d. That South Carolina legislature enforce the disbandment of natural
monopolies.
e. That new energy firms succeed to enter the market.
f. That South Carolina energy consumers shop around to find the lowest
possible price on their energy prices.
VIII. The report also investigates the fact that the analysis has limitations. These
limitations include:
a. The annual inflation rate is not always adjusted to match the current price of
goods/services.
b. The current state of the national economy compared to previous figures.
c. The current state of each states’ economy compared to previous figures.
d. The anticipated future economic state of the country.
e. The anticipated future economic state of South Carolina.
These limitations are unknown factors due to the inability to predict certain future outcomes.
4. INTRODUCTION, PART I. SCOPE AND PURPOSE
The scope of this proposal will explain similarities of energy-regulated South
Carolina to two energy-deregulated states: Texas and Pennsylvania. Furthermore, the
scope of this call to action is to explain the current energy regulation policy and
interpret the possible effects of deregulating energy by applying accepted economic
theories to the current economic and political situation of South Carolina. The criteria
used in determining what facts to present in this proposal include, the relevance to the
topic, historical accuracy, economic jargon relate to natural monopolies, economic
policies and theories to correct for natural monopolies and deadweight loss.
The report was investigated due to the identification that the problem of regulated
energy cripples the South Carolina energy consumer and has a negative effect on the
practices of capitalism. The investigation took the compilation of many economic
principles, countless policy facts and references (included or excluded in this report),
and the careful application of theories to policies. The maps were chosen to
demonstrate the growing popularity among the country for energy deregulation, and
table 1 shows how deregulation in major sectors has led to substantial consumer
benefit increases to reinforce that deregulation is more beneficial if it is widespread
and universal among all sectors. A solution is crucial for the practices of capitalism
and to sustain a low average of electrical costs in South Carolina.
The South Carolina legislature, in context to other state legislatures, has a history
of the “laissez-faire” economic policy, meaning that it is very “hands-off” and leaves the
consumers with many freedoms. After the 2008 presidential election, in an effort to get
the nation financially rolling again, newly elected president Barack Obama pushed and
succeeded in having the American Recovery and Reinvestment Act of 2009 passed
5. INTRODUCTION, PART II. HISTORY AND POLICY
and implemented. South Carolinas governor of the time, Mark Sanford chose to reject a
portion of this stimulus money earmarked for South Carolina state congress. Knowing
that the acceptance of these funds would only increase the states’ debt to the nation,
Sanford chose to eventually accept the money only on the condition that the state
Legislature provided matching funds to help pay off the state’s debt. When asked about
why he eventually accepted the money Sanford commented, “We’re obviously
disappointed by the White House’s decision, because it cuts against the notion of
federalism and the idea of each state having the flexibility to act in a manner that best
suits its needs”. A key element to the punch line lies in what governor Sanford said about
‘each state having the flexibility to act in a manner which best suits its needs’. The
national government leaves the states with the freedom of decision to regulate or
deregulate energy according to how it ‘best suits its needs’. Currently in South Carolina
the electrical suppliers have what is referred to as a ‘natural monopoly’. To protect the
financial best interests of citizens, this natural monopoly, is regulated by the state
government concerning the prices they can charge consumers. However, a monopoly is
a market inefficiency and does not best suit the needs of the South Carolina energy
consumers or the state economy as a whole. Deregulation of any sector is in the best
interest of South Carolina consumers and this will be proven using historical facts,
current statistics among other deregulated states, and charts showing comparisons of
regulated and deregulated states.
6. INTRODUCTION, PART III. LIMITATIONSThis report accepts the fact that the analysis conducted has natural limitations which are
due mostly to the facts of an unforeseeable certain future. Although Texas’ current inflation rate
is compared to the inflation rate from 10 years ago, the annual inflation rate and every states’
inflation rate is not always given to the reader to provide an exact measure of the increase or
decrease of the United States average kWh or a specific states’ kWh. The annual inflation rate
was not given and would not provide an accurate account due to the year of Two-Thousand Nine
where the inflation rate was negative. The current financial state of each states economy of any
given year to show the possible externalities on the effects of post-deregulation is omitted.
Lastly, professional anticipations and predictions based on upcoming economical states among
the nation are unavailable due to the indefinite future of the state of the United States’ social,
political, and economic status.
7. INTRODUCTION, PART IV. ASSUMPTIONSBefore diving into the problems and arguments of the current regulation of energy, it
is essential to comprehend the current state of regulated energy in addition to the economical
standpoints of having regulations and monopolies. Almost all economists are strong
supporters of capitalism and with supporting capitalism come the natural support of private
economic competition. It is widely accepted by economists that a perfect economic market
provides the best possible outcomes for producers and consumers. A perfect economic
market has a few essential prerequisites:
1. The market sets its own prices by finding economic equilibrium between
supply and demand.
2. There is no intervention, required or presented, by government of any kind.
3. There are no barriers to entry or exit, producers can enter and exit freely.
4. Profit maximization is achieved by the firm determining the price and output
level which returns the largest amount of profit after subtracting costs from
revenue.
5. There are no externalities which may affect price, supply, or demand.
6. Every supplier has equal access to factors of production.
The natural monopolies violate most- if not all- of these prerequisites of a perfect economy in
one way or another, but most directly break the first rule. The natural monopoly chooses to
operate at the price of the lowest average long-run cost of production, giving the largest
supplier an economical cost advantage over potential competitors. This cost advantage will
8. INTRODUCTION, ASSUMPTIONS CONTINUED
drive the competitors out of the market sector leaving the original firm the only firm for
consumers to buy from, in turn the only firm left can, in theory, set their prices as high as
they desire.
Consumers don’t want to pay a higher than necessary price for any good, especially if
supply of that good is in abundance. Currently, electric companies charge electricity in a unit
called kilowatts/hour (kWh). The national average of residential kWh for 2013 is $00.1254 per
kWh with South Carolina falling just below at $00.1202 per kWh.
In context, South Carolina has cheap electrical costs, which is why movements for energy
deregulation take a backseat to other issues, such as firearm deregulation. Steps to deregulate
energy in South Carolina have already begun. South Carolinians are free to choose who to
purchase natural gas from, but not electricity.
SCANA Inc. is South Carolinas largest energy supplier with approximately 661,000
electrical customers and over a million natural gas customers in South Carolina, North Carolina,
and Georgia. SCANA is a fortune 500 company founded in 1924 and headquartered in Cayce,
South Carolina. SCANA employs over 5,800 people. Deriving most of their power from one of
the largest manmade lakes in the world- Lake Murray, SCANA covers over 17,000 square miles
in the central, southern, and southwestern portions of South Carolina. SCANA is South
Carolinas poster-child of a natural monopoly. The South Carolina legislature allows this natural
monopoly to sustain by regulating prices SCANA charges their customers. If SCANA wants to
increase their prices, they must submit a formal request to South Carolina legislature explaining
why the price increase is necessary and how it will eventually benefit all consumers.
9. BODY, 1. THE PROBLEMCaused by short supply and an unmet demand, the problem of regulated energy in the United
States mostly originated in the northeast however, it was Texas who would pioneer the
movement of deregulating energy. Around the turn of the millennium Texas’ power industry
had become stagnant, few companies were creating infrastructure- and the infrastructure already
in place was inefficient. With Texas consumers demanding more and more electrical supply this
grew as a problem for the second largest growing population in the country. With this current
knowledge of “old Texas’” situation, South Carolina can observe similarities between
themselves and Texas. South Carolina also has a per-capita electricity usage rate that is higher
than average touching 600 trillion BTU’s as of 2011 and with a net interstate flow of electricity
at -150 BTU. South Carolina is similar to Texas in that the demand for electricity is growing
rapidly, and with one fortune 500 company, SCANA, contributing to much majority of the
supply, there is sufficient room for other companies to enter if capitalism and competition are
encouraged by the government and consumers.
The culture of the American people has forever been to spread and support capitalism as one
of the utmost important principles in not only American culture, but spread it globally. Market
arrangements such as natural monopolies are directly in violation of capitalism because it forces
the consumer to purchase a product or service from a single producer.
South Carolina’s average kWh rate is lower than the national average. However, it is not the
lowest in the nation. Washington charges $00.0882 per residential kWh, and surprisingly has not
deregulated their gas or electrical energy.
These problems were investigated through research and compared to every states’ current
charged rate of kWh. There is a needed solution to provide South Carolinians with true
freedoms in the market place and to insure that consumers’ electrical rates will remain lower
than the national average.
10. BODY, 2. THE METHODSThe methods of analysis include analysis of trends of proactive states, as well as
electrical rates which were lowered across the board after deregulation. Basic economic
principles are applied to the trends and policies to better predict the effects deregulation
will have on the economy. Charts and graphs are used to emphasize key points.
The history of deregulation in the United States has greatly improved economic
welfare, as well as the improvements that follow over extended periods of time. Major
sectors that have been deregulated include but are not limited to: airlines, trucking,
railroads, natural gas, telecommunications, and banking. Table 1 shows these sectors and
the effects deregulation had on prices for consumers. The pattern shows as deregulation
came to these sectors huge price drops resulted for the consumer and, leaves the
consumer with a greater social benefit. Applying microeconomic policy here is
essential. As the sectors were deregulated, more firms entered these industries- which
increases economic competition and drives the price down because consumers are left
with more choice of who to buy from. With this principle, Texas and South Carolina
have a key similarity worth noting.
Old Texas energy policy and current South Carolina energy policy both have
regulated natural monopolies. The government regulates the price they charge to operate
11. BODY, 2. THE METHODS CONTINUEDand make small profit. This price is determined by the operating cost of the firm and the
estimated economic equilibrium if other firms were in the market. Often this estimate is
inaccurate. Secondly, in addition to regulating the price the firm charges the government
provides subsidies to the firm. If the energy firm cuts costs to make a higher profit then
either government taxes the firm or chooses to reduce their subsidy. The result is that the
firm has no incentive to cut costs because it makes the same profit regardless. In the
United States, Texas pioneered deregulated energy around the turn of the millennium.
With over 10 years of deregulated energy experience under their belt, Texas’ electricity
rates are unchanged after adjusted for inflation, according to the Energy Information
Administration (EIA). Since Texas’ deregulation, eleven other states have followed.
Figure 1, below, shows states which have deregulated energy and which have
yet to deregulate energy. Relatively a new concept, deregulation of energy has caught on
to 11 states in just a decade and twenty two are in the stages of deregulation.
Pennsylvania is one of the more recent states who have decided to deregulate their
energy. Before Pennsylvania deregulated their energy, Philadelphia had one of the
highest averages of electrical cost in the country. Chart 1 shows the rate of kWh in
Philadelphia in 2010 to be $00.174 per kWh – $00.050 higher than todays’ national
average. Today Philadelphia’s average rate per kWh is down to $00.164 saving some
consumers hundreds of dollars a year.
The deregulated energy isn’t only providing Pennsylvanians with lower energy
cost, but a freedom to choose who they purchase from. Everything equal, if an energy
company doesn’t have the lowest price the consumer won’t buy. More importantly, if a
consumer socially or morally disproves of an action or stand an energy company has,
they now have the option to move to a different supplier. Within the first two years of
being deregulated almost 25% of residential consumers in Pennsylvania switched
electrical suppliers, which is numerically miniscule compared to Texas’ percentage of
55%.
12. BODY, 3. The CONCLUSIONThe effects of energy deregulation not only in South Carolina but nationwide could be the
sector to have the greatest gains of any sector that has already been deregulated, although there is
no for sure consensus about the potential price drops and potential number of new firms to enter
the market. However history and current statistics point out that there is potentially much to gain
economically from this deregulation.
The deregulation of energy is just like shopping for a new car- in a sense that you can shop for
your own electricity. Instead firms naming their price and having it approved by the state legislature,
firms would get to economically compete for consumers business. This leaves electric companies
scrambling to keep customers and fighting to gain business from other potential customers. The current
price caps that protect the consumers will disappear and competition among the companies heats up.
Guaranteeing consumers get a better price after energy deregulation is simply based off of the economic
premise that true competition sets a better price than economic price floors or ceilings because there is no
economic deadweight loss. The deadweight loss is created due to some inefficiency in the market, in this
case the monopoly, where price is not determined by suppliers and consumers at equilibrium, but the
price is set by the monopoly and regulated by the government.
Natural monopolies have no incentive to cut their costs because the government will tax them or
retract their subsidy. In a competitive market these high cost firms would not be able to earn substantial
revenues to cover their capital costs- whether this include only fixed costs, marginal costs or a
combination of both. Competition promotes economic freedoms, indirectly promotes capitalism, and
encourages consumers and producers to negotiate a price based on the product or service supplied and the
consumers’ willingness to pay.
13. BODY, 4. CONCLUSION & RECOMMENDATIONSTurn South Carolinas’ power and transmission lines from privately owned and up kept
items of capital to a public good. All energy firms would be free to utilize the lines and
deliver their service to the customers’ residence. To keep South Carolinas’ average kWh rate
below the national average while promoting competition and capitalism, the deregulation of
energy is essential. With the current rates being below the national average most South
Carolina consumers are neglectful that rates could be much lower or rise substantially if they
remain regulated. The deregulation of energy in South Carolina will only come with a strong
movement from the citizens directed at state law makers. This is a call to action that South
Carolina consumers peacefully demand the legislatures to enforce the disbandment of natural
monopolies and to enforce and practice the core principles of capitalism by allowing new
firms the opportunity to enter the market, consumers the ability to freely choose their energy
provider, and shop around for the best price through energy deregulation.
14. APPDENIX, I. GLOSSARY
Deregulate- To remove government regulatory controls from an industry
sector
Deadweight Loss- In economics, a loss of economic efficiency that can occur
when equilibrium for a good or service is not optimal. Causes of deadweight
loss can include monopoly pricing, externalities, taxes or subsidies, and
binding economic price ceilings or economic price floors.
Economic Competition- the effort of two or more parties acting independently
to secure the business of a third party by offering the most favorable terms.
Economic Equilibrium- in economics, a state where economic forces such as
supply and demand are balanced and in the absence of external influences the
values of economic variables will not change
Externality- a side effect or consequence of an industrial or commercial
activity that affects other parties without this being reflected in the cost of the
goods or services involved.
Marginal Social Benefit- in economics, the gain from an increase or loss from
a decrease in the consumption of that good or service.
Natural Monopoly- monopoly in an industry in which it is most efficient
(involving the lowest long-run average cost) for production to be concentrated
in a single firm.
Public Good- in economics, a commodity or service that is provided without
profit to all members of society either by the government or a private
organization or individual.
15. APPENDIX, II. REFERENCES
Crandall, Robert W. "Extending Deregulation." Brookings.edu. Opportunity 08, n.d. Web. 1
Dec. 2013.
<http://www.brookings.edu/~/media/research/files/papers/2007/2/28useconomics%20cra
ndall%20opp08/pb_deregulation_crandall.pdf>.
Davies, Jessica C. "Are You Paying More Than The Average Electric Rate?"
Electricity Prices by State. Electric Choice, 15 Nov. 2013. Web. 02 Dec. 2013.
<http://www.electricchoice.com/electricity-prices-by-state.php>.
Energy, Vault. "Texas Electricity Rates 2012: Same As 2002." Texas Electricity.
VaultElectricity, 20 Nov. 2013. Web. 02 Dec. 2013.
<http://www.vaultelectricity.com/texas-electricity/texas-electricity-rates-2012-same-as-
2002/>.
Hertzog, Christine. "Electricity Deregulation in Pennsylvania – What Consumers Don't
Know Can Hurt Them and Derail Objectives." Smart Grid Library. Blogsite, 02 Jan.
2012. Web. 01 Dec. 2013. <http://www.smartgridlibrary.com/2012/01/02/electricity-
deregulation-in-pennsylvania-–-what-consumers-don’t-know-can-hurt-them-and-derail-
objectives/>.
Labor, U.S. Dept. "Average Energy Prices, Philadelphia-Wilmington-Atlantic City." U.S.
Bureau of Labor Statistics. U.S. Bureau of Labor Statistics, Sept. 2013. Web. 02 Dec.
2013. <http://www.bls.gov/ro3/apphl.htm>.
"SCANA Corporation - Welcome to SCANA." SCANA Corporation - Welcome to
SCANA. SCANA, n.d. Web. 02 Dec. 2013. <http://www.scana.com/>.
Trollinger, Vernon. "How Texas Energy Deregulation Leads the Way For Innovation."
Ezine Articles. Ezine Articles, 25 May 2010. Web. 1 Dec. 2013.
<http://ezinearticles.com/?How-Texas-Energy-Deregulation-Leads-the-Way-For-
Innovation-%28Part-1%29&id=4358557>.
Unknown, Author. "Energy Deregulation." Energy Deregulation. Energy Power of Choice,
n.d. Web. 01 Dec. 2013. <http://www.deregulationofenergy.org/>.
"U.S. EIA - Independent Statistics and Analysis." U.S. Energy Information Administration
(EIA). EIA, n.d. Web. 02 Dec. 2013. <http://www.eia.gov/state/?sid=SC>.
VanDoren, Peter M. "The Deregulation of The Electricity Industry." CATO. Object Cato
Sites, 06 Oct. 1998. Web. 27 Nov. 2013.
<http://object.cato.org/sites/cato.org/files/pubs/pdf/pa-320.pdf>.
16. APPENDIX, III. GRAPHS
Figure 1
http://www.brookings.edu/~/media/research/files/papers/2007/2/28useconomics%20crandall%20opp08/pb_deregulation_crandall.pdf
Figure 2
http://www.electricchoice.com/electricity-prices-by-state.php
17. APPENDIX, IV. CHART AND TABLE
TABLE 1- EFFECTS OF DEREGULATION IN THE UNITED STATESSECTOR NATURE OF
DEREGULATIONAIRLINES
RAILROADS Partial; Rate ceiling and floors
on “monopoly” routes.TRUCKING
NATURAL GAS Partial, distribution still regulated
BANKING Consumer rates deregulated, entry liberalized
TELECOMMUNICATIONS Partial, local rates and interstate access still regulated
Sources: Winston (1993) and (1998); Crandall and Ellig (1997)