Deregulation will cause significant fluctuations in electricity prices, new study reveals

nt a year during the next decade, instead of the expected 1.6 percent annual increase forecast by many energy experts. However, electricity prices will be 7 to 15 percent lower if natural gas rates drop between 13 to 19 percent in 10 years.

Regional price adjustments will be sharper, according to EMF projections. In one model, prices in the Midwest will increase 27 percent if the demand for electricity there grows faster than expected. Another model shows that prices in New York state will be 22 percent lower if natural gas prices decline.

Early warning

In 1998, EMF published a report titled ``A Competitive Electricity Industry,`` which offered an early warning about California`s now-failed deregulation plan. The report concluded that California could face a sharp electricity rate hike of 65 percent during certain times of the year when hydroelectric capacity is limited in the state and throughout the Pacific Northwest. The report warned that under these conditions, companies that generate electricity could drive prices higher if they each owned a significant share of the California market, if utilities in the state were not allowed to sign fixed-price contracts on their wholesale electricity purchases, and if there was a limited demand response to price.

``Those are precisely the conditions that face California today,`` comments Huntington. ``The response of demand to wholesale prices is low because California consumers pay a retail price that is not linked to increases in the wholesale cost of power.``

The May EMF study does not seek to explain the factors contributing to the recent electricity crisis in California and other Western states. Instead, participants in the new study assume that all states will adopt policies that encourage competition and allow flexible prices. So far, 24 states have legislated restructuring programs, including New York, Pennsylvania and Texas. England, Wales, Norway, Australia and other countries also have implemen

Contact: Mark Shwartz
Stanford University

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