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)