"If Arizona doesn't restructure its electricity system, it will have lasting consequences on the economy. Having access to relatively inexpensive energy to power businesses and homes is a key component to future economic growth," said Nick Dranias, constitutional policy analyst with the Goldwater Institute. "Fortunately, there are no constitutional impediments to restructuring Arizona's electricity market for free and open competition."
"Opening the Grid" was written by Stanley S. Reynolds, professor of economics and the SRP Professor of Technology, Public Policy and Markets at the University of Arizona and Andrew N. Kleit, professor of energy and environmental economics at Pennsylvania State University.
The report explains how electricity restructuring has worked in Britain, Texas and Pennsylvania and how it can work in Arizona. As a result of restructuring, Texas increased generation capacity by 35 percent between 1998 and 2006 with much of that increased capacity coming from renewable sources that consumers are choosing to purchase. In Britain, restructuring lowered utility rates by 30 percent.
The report also explains how to avoid the pitfalls of failed restructuring efforts that have taken place around the country. California's experience in particular raised questions about the viability of competitive electricity markets. The primary cause of the California's failed effort at restructuring can be avoided in Arizona. California's effort failed because long-term contracts between power generators, suppliers, and consumers were prohibited or discouraged, allowing for vast changes in prices.
To restructure Arizona's power system, this report recommends:
· Eliminating the monopolies on retail electricity where consumers are assigned an electricity company based on their address and opening up the market to competition. This would allow consumers to choose their utility company.
· Breaking electricity bills out into separate charges for transmission, generation, distribution and system operations. This would provide consumers with the information they need to make an informed decision about how they buy and consume electricity.
· Lifting price controls on wholesale electricity and stopping cost guarantees to generating companies. Instead generating companies should operate like other non-monopoly companies and keep the profits they make and be responsible for losses they incur. The paper also recommends lifting price controls on retail electricity after a transition period.
The report details the interim steps that would have to be taken to protect consumers while the transition away from an electricity monopoly is occurring. "Restructuring isn't something that will happen overnight, but it must happen if Arizona's electricity industry intends to meet the demands of the 21st-century consumer," said Mr. Dranias.
"Opening the Grid" is available online or by calling (602) 462-5000. The Goldwater Institute is a nonprofit public policy research and litigation organization whose work is made possible by the generosity of its supporters.