Lesson for States Restructuring Their Energy Markets: Gas Competition Has Lowered Costs to Consumers by $6,000 per Household

CAEM Says States Trying to Avoid California's Electricity Problems Should Heed Study's Findings

DENVER, Aug. 9 – To the tune of $5,938 per household since implementing natural gas competition, consumers are big winners largely due to policy choices that have enabled market forces to foster competition for natural gas suppliers, according to a study released here today by the Center for the Advancement of Energy Markets (CAEM). 

“The results are in,” said CAEM CEO Ken Malloy. “The nearly 20 years of competition we’ve experienced in the natural gas industry proves that the right conditions can foster lower costs for consumers and motivate the industry to make investments that benefit the environment, our economy and our national security.”

The study, conducted by Rodney Lemon, a CAEM scholar and Professor of Political Economy and Commerce at Monmouth College in Illinois, explains how giving both producers and consumers greater freedom from regulation has created enough supply to help drive down the delivered prices paid by consumers. And because it has become the fuel of choice for new electric generating plants, environmental dividends are part of the payback.

The study was released at the annual meeting of the Colorado Oil and Gas Association in Denver. It is available on CAEM’s web site at www.caem.org. Entitled “California Here We Come: The Lessons Learned from Natural Gas Deregulation,” the study contrasted the consensus predictions of both the pro-market and pro-regulation camps during the policy debates of the late 1970s and 1980s. In a vivid lesson for the electric debate, the skeptics were wrong by a long shot.

• Lower natural gas prices led to significant savings: $600 billion in fact, or $6,000 per household;
• Supplies of natural gas have risen in response to higher value-added applications at the wholesale and retail sectors of the industry;
• Deregulation has reduced long-term price fluctuations, albeit triggered more short-term price volatility;
• Light-handed regulation of gas pipelines have been a big factor in passing through lower commodity costs to consumers;
• Buyers seeking energy-efficient investments that benefit the environment have flocked to natural gas as their fuel of choice; and
• The certainty of freer markets has motivated industry to improve how it buys, sells and trades natural gas supplies thereby rooting out numerous industry inefficiencies.

“What we also need to recognize,” Malloy added, “is that we’ve witnessed a redistribution of wealth from foreign oil producers to domestic natural gas producers and that these lower prices have contributed measurably to a more stable inflation rate, lower greenhouse gas emissions and improved our natural security due to a reduced reliance on imported oil.”

The lessons for California are profound:

• First, put the right regulatory framework in place. Half measures are more dangerous than doing nothing.
• Second, don’t expect results overnight; stay the course. Reform of network industries is complex and will take multiple episodes of change. Some of the gas benefits took 5 or more years to become manifest.
• Third, markets work. Consumers and the environment will be winners under properly executed reform.
• Fourth, the costs of change are easier to calculate than the benefits. Creativity and innovation by definition are surprises and cannot be precisely predicted. All studies underestimated benefits. Wisdom and courage are essential to meaningful reform.
• Fifth, organized consumer advocates are often very wrong about the impact change will have on consumers.

CAEM is an independent, nonprofit, think tank based in Washington, DC whose mission is to promote an effective transition from the monopoly to the competitive model of regulation. It was founded by Ken Malloy, a former FERC and U.S. Department of Energy official, and Jamie Wimberly, formerly Vice President at the Consumer Energy Council of America.

For more information, please contact:
Rodney Lemon, (309) 457-2181
Ken Malloy, 703-250-1580