Federal Electricity:

Retail Competition Could Create Government Savings

RCED-97-244: Published: Sep 30, 1997. Publicly Released: Oct 30, 1997.

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Pursuant to a congressional request, GAO evaluated whether the federal government could realize savings if, as expected, lower prices result from retail competition in the electricity market, focusing on the estimated quantities of electricity the federal government would have purchased without retail competition and the prices it would have paid during 1998 through 2015.

GAO noted that: (1) retail competition in the electricity industry would create savings for the government; however, the actual amount of savings is highly uncertain; (2) using published forecasts of electricity prices under competition, GAO modeled the federal government's electricity purchases and estimates that the government could cumulatively save from $1 billion to slightly over $8 billion during the 18-year period from 1998 through 2015 if it purchased the baseline quantities of electricity--that is, the quantities of electricity it would have purchased without retail competition; (3) GAO's wide range of estimates reflects, among other things, the substantial uncertainty surrounding the future pace of the implementation of retail competition in the United States and the prices paid and quantities purchased by the government; (4) GAO notes that its estimated baseline quantities reflect the effects of uncertainty over non-price factors, such as federal mandates for energy efficiency, on the government's electricity purchases; (5) nevertheless, holding these other factors constant, GAO believes that falling electricity prices would likely cause the government to buy more electricity than the baseline quantities simply because the price would have declined more under competition; (6) when this happens, the government could be thought of as "spending" some of its savings (when purchasing the baseline quantities) to buy more electricity; (7) as a result, the government's spending on electricity might not fall by as much as its savings if purchases were held at the baseline quantities; and (8) adjusting its savings estimate to reflect this case, GAO estimates that federal spending on electricity could cumulatively decrease by $0.6 billion to $6.5 billion during the same 18-year period--that is, 1998 through 2015--because of the decline in prices resulting from retail competition.

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