COMPETITIVE ELECTRICITY MARKETS IN NEW YORK STATE: EMPIRICAL IMPACTS OF INDUSTRY RESTRUCTURING

The analysis finds that if high industrial prices for electricity induce industrial customers to leave the regulated grid for self-generation or contracts with IPPs, this raises rates for those remaining on the system and reduces quantities purchased. It is assumed that lower industrial sector rates, such as those associated with a competitive electricity industry, will effectively eliminate defections. A switch to a more efficient two-part tariff, which can be expected to occur in a competitive electricity market, has the effect of increasing sales of electricity in all sectors while still raising needed revenues. Such a price structure is also found to lower the average price of electricity in each sector. An efficient two-part tariff is also likely to shift revenue responsibilities to immobile residential and commercial customers. This would occur because industrial customers shift demand by defection in response to average price changes, but residential and commercial demand is inelastic to customer charges. If prices are efficient, strandable cost allocations only have a minor effect on electricity demand because strandable cost payments are raised via a customer charge. If strandable costs are recovered by a wires charge (e.g. higher prices),however, there will be negative demand effects. Strandable costs significantly affect the average price of electricity and the average monthly bill in either case. Their allocation is important for equity reasons, as is the method of collection in determining the levels of sales. Removing strandable costs lowers the average price of electricity in each sector and increases demand. Lowering strandable costs is the only option which clearly benefits all sectors.