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Tuesday, February 28, 2006

WSJ.com - States Seek Ways to Curb Surging Electricity Bills

WSJ.com - States Seek Ways to Curb Surging Electricity Bills

Some states are seeking ways to slow price increases in electric utility bills for consumers. The governments are seeking a methods to keep costs reduced for consumers. Natural gas costs are rising causing a higher input cost for natural gas power. There has been price freezes in many of the states that are concerned with the increase. The polices being discussed are extensions of the freezes, price caps, and a percentage increase limit on prices.

Looking at the electric market as perfect competition the price cap became a price ceiling causing inefficiency in the market. The Price freezes in the market have some influence in the large percentage increases in areas. Because companies are unable to adjust to the market they charge the highest amount possible. Because of the ceiling the price charged became increasingly smaller than the market price. Companies have been unable to keep up and now that the freezes have ended or close to being over there is the possibility of large increases in price for areas using natural gas.

Although there are quite a few competitors of electricity the companies are restricted to location of their power sources and can only sell within a certain radius. This means the producers have some monopoly power. This is a cause of inefficiency and creates a need for government involvement. The best policy in the current situation is the percentage increase limit on price. This allows the market to have flexing room to keep up with costs of natural gas while limiting monopoly power.

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