Possible effects of competition on electricity consumers in the Pacific Northwest

In part, the impetus for restructuring the U.S. electricity industry stems from the large regional disparities in electricity prices. Indeed, industry reforms are moving most rapidly in high-cost states, such as California and those in the Northeast. Legislators, regulators, and many others in states that enjoy low electricity prices, on the other hand, ask whether increased competition will benefit consumers in their states. This report quantifies the effects of increased competition on electricity consumers and producers in two regions, the Pacific Northwest and California. California`s generating costs are roughly double those of the Northwest. We use a new strategic-planning model called Oak Ridge Competitive Electricity Dispatch (ORCED) to conduct these analyses. Specifically, we analyzed four cases: a pre-competition base case intended to represent conditions as they might exist under current regulation in the year 2000, a post-competition case in which customer loads and load shapes respond to real-time electricity pricing, a sensitivity case in which natural-gas prices are 20% higher than in the base case, and a sensitivity case in which the hydroelectric output in the Northwest is 20% less than in the base case. The ORCED analyses suggest that, absent regulatory intervention, retail competition would increase profits for producers in the Northwest and lower prices for consumers in California at the expense of consumers in the Northwest and producers in California. However, state regulators may be able to capture some or all of the increased profits and use them to lower electricity prices in the low-cost region. Perhaps the most straightforward way to allocate the costs and benefits to retail customers is through development of transition-cost charges or credits. With this option, the consumers in both regions can benefit from competition. The magnitude and even direction of bulk-power trading between regions depends strongly on the amount of hydroelectric power and energy available in the Northwest. Market prices respond much more strongly to changes in natural-gas prices and hydro output than do regulated prices. Indeed, market prices are intended to closely track changes in marginal costs, while regulated prices typically track changes in average cost. The bottom line from this analysis is that increased competition can benefit retail customers in high-cost regions without harming customers in low-cost regions. Such a desirable outcome, however, is not automatic. State regulators may have to intervene to be sure that what would otherwise be additional profits for the producers in the low-cost region are used to lower prices to retail customers