On several occasions, EPSA has faulted PPI’s studies for failing to include Illinois, Ohio, Pennsylvania, and Virginia (and sometimes Arizona) in the group of “restructured” or “deregulated” states, for purposes of comparing prices with “regulated” states. I have responded that because these states had price caps or price credits for virtually all of the study period, their prices do not reflect market prices, which is what I am comparing to regulated prices.

Recently, in a story on industrial prices, the New York Times described EPSA’s rationale: “John Shelk, president of the supply association, said that but for efforts to create competitive markets, government would not have ordered lower prices during a transition from regulation to market pricing. Therefore, he reasoned, government-mandated savings should be included in calculating the benefits of market pricing.”

This is curious logic, indeed: Legislated price caps are a benefit of market prices because they are constraining what would be higher market prices in the absence of the price caps, but these market prices are not yet in place and may never be.

Readers can ponder this brain twister for themselves, but even EPSA’s selection of states does not compare well with the rest of the states.

I had categorized as “deregulated,” for purposes of industrial electricity prices, the states of California, Connecticut, District of Columbia, Delaware, Maryland, Massachusetts, Maine, Michigan, Montana, New Hampshire, New Jersey, New York, Rhode Island & Texas. I reported that the gap in industrial prices between regulated and these deregulated states tripled since 1999. I also reported that the cumulative value of this gap from 2000 through 2007 is $55 billion in 2006 dollars if invested at a real return of 5%.

However, adding in the five states EPSA wants included, the gap doubles and the cumulative value of the gap from 2000 through 2007 rises to $70 billion. Not much to crow about, there. (The rise in value is due to the large size and relatively high prices of the five states added into the “deregulated” groups and subtracted from the regulated group.)

Perhaps readers would like to make their own categories. Here are the incremental price increases since 1999 for all 50 states, ranked by size of increase. Go ahead! Color-code it for yourself! Of the top ten states, how many are deregulated, in your view?

PPI issued the following press release today:

Power in the Public Interest Says Consumers “Deeply Disappointed” in Electricity Restructuring and Price Deregulation

FERC Urged to Compare Prices in RTO Regions with Traditional Cost-Based Systems

Olympia, WA—Emphasizing the Federal Energy Regulatory Commission’s obligation under the Federal Power Act to produce “just and reasonable” rates, Power in the Public Interest (PPI) urged FERC to compare consumer prices in Regional Transmission Organization (RTO) areas with prices in traditional cost-based systems and bilateral markets.

 

In its response to FERC’s Advance Notice of Proposed Rulemaking on Wholesale Competition in Regions with Organized Electric Markets, PPI said it supported the commission’s efforts to determine how RTO operations might be improved because consumers so far have been “deeply disappointed” in electricity restructuring and price deregulation.

 

“RTOs are corporations with no stockholders, no citizen voters, and no end-use ratepayers to hold them accountable for costs in the usual way that these groups exercise cost and profit pressures on traditional utilities, whether investor-owned, municipal or cooperative,” said PPI.

 

At issue is whether RTOs produce net consumer value over the long term, PPI said. Using Energy Department data, PPI noted in its comments that, on average, consumers in price-deregulated states pay 4 cents/kwh more for electricity today than do consumers in states with regulated prices, including price caps—up from a 2 cents/kwh differential in 2000.

 

“This is not to say that deregulation/restructuring is responsible for the whole gap, or that the gap can be closed. The gap does, however, reveal the significant economic disadvantage suffered by customers in the price-deregulated states, and the imperative for the Commission and the regions—whatever their resource mix—to ensure they are pursuing the most effective form of economic regulation of electricity,” PPI told FERC.

 

In addition, PPI said, the widening gap is “strongly consistent with the proposition—which should be more thoroughly considered—that RTO marginal pricing policies, market power, and open-access markets are driving up prices for ultimate consumers on a sustained basis. The Commission should pursue this question rigorously.” PPI noted that all states that have deregulated retail prices for a significant portion of their electricity customers are also participating in RTOs. Retail prices are thus a combination of the effects of wholesale and retail pricing policies.

For more on how this graph was constructed go to http://www.ppinet.org/graph_construction.php

 

 

Excerpts from Power in the Public Interest Sept 13 filing with FERC

 

“These comments focus on some of the fundamental elements at issue:

• The neither-fish-nor-foul nature of RTOs. The lines of public accountability in RTOs are inherently weak, placing an extra-heavy burden on the Commission to regulate them in the public interest.

• The Commission’s obligation under the Federal Power Act to ensure that RTOs produce just and reasonable rates. As part of this obligation, the Commission should engage in an on-going and rigorous review of prices in RTO regions, and their effect on end-use consumer prices—compared to more traditional cost-based systems and bilateral markets.

• The consequences of marginal pricing and single-clearing-price auctions. This central feature of RTO day-ahead markets guarantees that all plants needed in a given time period are paid the highest price bid by any participating plant. Many plant owners are paid amounts far above their incremental costs to supply power into these day-ahead (and hourly) markets. Not surprisingly, the owners of these plants find that supplying power through long-term, fixed-priced contracts is a comparatively less attractive business opportunity. Consumers, of course, pay the consequences. The best way to encourage long-term contracting, a goal with which PPI agrees, is to constrict or remove opportunities for unwarranted profits in the day-ahead market.”

 

 

“Some advocates claim we haven’t waited long enough for the inevitable cycling of marginal prices to below average price, at which time consumers in competitive markets will make up for what they lost, and consumers in cost-based systems will suffer. This crystal ball is unreliable, given the growing demand for resources worldwide and renewable energy requirements legislated by many states. On September 12, 2007, world oil prices topped $80 per barrel for the first time. Absent a collapse in the economy (that drops demand for electricity), the marginal bid—whether based on natural gas, renewable resources, or collective market behavior—is likely to stay above average system costs for some time come. Nor is it clear that lower organized wholesale prices, should they occur, would flow through to end-use consumers. Moreover, time is no friend to consumers and businesses paying high prices now. It is unfair to expect them to foot the bill for a promised benefit they may not survive to see, if it ever comes at all.”

 

David DeRamus, PhD, on behalf of EPSA, has criticized my blog post, “A Billion Here. A Billion There. Price Matters,” calling it “nonsense.”

For the most part, EPSA is beating a horse that never stepped out of the barn.

 [This post has been updated to include the latest EIA data, through May 2007.]

The gap in retail electricity prices between the deregulated and regulated states continues to widen. As the accompanying graph shows, the difference has roughly doubled, from around 2 cents/kwh in 2000 to about 4 cents/kwh in 2007. (All figures reflect rolling 12-month averages—currently, through May 2007—for total delivered electricity to all customers in a state.)

The comparative economic disadvantage to consumers in the deregulated states is enormous. Of course, most of these states began with higher prices, motivating them to experiment with deregulation. (Two exceptions, Maryland and Texas, began with modest rates, and have experienced immodest increases.) Collectively, in 2000, consumers in the now-deregulated states paid $26 billion more (in 2006 dollars) for their power than they would have, had they purchased their power at the average rate of the states that have remained regulated.

 

Today, consumers in the deregulated states pay $48 billion more for their power (in 2006 dollars) than they would pay if they were able to enjoy the average rate of the regulated states. The 7-year cumulative value of the gap, compounded at 5%, is $294 billion.

 

This is not to say that deregulation is responsible for the whole gap, or that the gap can be closed. It is to emphasize the significant economic value of lower-cost electricity systems, and the importance to any region—whatever its resource base—of pursuing the most effective form of economic regulation of electricity.

 

If, since 2000, the average price in the deregulated states had simply risen at the same rate of increase as the average price in the regulated states (roughly paralleling historical trends prior to 2000), consumers in the deregulated states today would have $60 billion more ($66 billion if compounded at 5%) to spend on other things—on their families, their businesses, or the coming costs of addressing global warming.

Some studies purport to show that prices in the deregulated states would have been even higher had they not deregulated. These studies have been discredited. Moreover, the wholesale market designs that drive retail prices in the deregulated states fairly explain the high prices. By design, the most expensive needed resource, often natural gas, sets the price for all needed resources, regardless of their underlying cost. So if the price of natural gas increases, as it has, or if an even more expensive renewable resource becomes the marginal resource, prices for all resources will increase as a result.

 

By contrast, in regulated cost-based systems, a higher-cost resource will not affect the amount consumers must pay for a lower-cost resource. In any event, as a group, electricity consumers in the regulated states have lot more buying power—buying power that is becoming more and more precious as pressures mount on the electric industry to meet new environmental requirements.

To see more price-trend graphs, and how they were created, go here.

Feel free to comment. Name and address are optional.

Updated electricity-price-trend graphs (using EIA data through April 07) are now posted at www.ppinet.org.  Look for further analysis on this blog by Monday, August 6.

Updated price-trend graphs, reflecting electricity prices through March 2007, are now posted on PPI’s website, www.pppinet.org. The graphs use a rolling 12-month average, which mutes the appearance of some recent dramatic increases. Nonetheless, the gap between deregulated and regulated states has continued to widen. Here are a couple of samples:

Feel free to comment. Name and email address are optional.

Repeating the theme that everyone’s rates are going up, so don’t bother making distinctions between regulated and deregulated states, EPSA has provided some desperate examples. “Recent rate cases prove what EPSA has been saying for months – electricity rates are rising in all regions of the country, whether restructured or vertically-integrated,” says EPSA, citing pending rate cases in the regulated states of Georgia, Virginia, and Idaho.

Ignoring the point that these are rate-increase requests, not decisions of a regulatory body, EPSA’s spins percentage increases in low-cost states as somehow comparable to increases in restructured states. Take, for example, Idaho, whose rates have recently decreased and which now has the lowest rates in the country. Citing Idaho for an anticipated increase is like faulting a marathon winner for adding a few seconds to her new time, and implying it is “equal” to the couch potato’s addition of several minutes to an already sluggish performance.

Here are Idaho’s rates, compared to rates in the deregulated states:

And here are Georgia’s:

And Virginia’s:

In for a penny; in for a pound? As a consumer, I’d rather pay the penny.

Feel free to comment. Name and email address are optional.

Urging the U.S. to “mature” on its inevitable path toward less regulation, Utilipoint author Ethan L. Cohen asserts:

Retail competition in the electric and gas markets is ipso facto the acknowledged driver behind wide-scale utility attention to customers, customer service, and improvement of service delivery.

Well, ipso facto (“by the fact itself”), consumer satisfaction has “fallen off substantially,” according to the most recent J.D. Power survey of residential users (July 2006).

Restructuring enthusiasts like to say “You can’t put the toothpaste back in the tube,” “You can’t put the genie back in the bottle,” or “There’s no going back,” usually in an attempt to preclude as futile any discussion of re-regulation. But how should these metaphors apply?

An article in the June Public Utilities Fortnightly (subscription required) spews a river of invective against any and all critics of electricity deregulation. They are denounced as “a motley assortment of anti-market naysayers,” driven by “the preservation of entrenched privilege,” often found “protesting the latest meeting of the World Trade Organization,” “recalcitrants,” “afraid they are on the wrong side of this evolutionary bell curve,” “socialist ‘true believers’ and corporate monopolists,” “anti-marketeers” who use the “frequent red-herring” of “guilt by association through some form of ad hominem reference to Enron,” and so on, but I won’t go on. The authors are Todd Bessemer of Market Reform and Francis Shields of Accenture.

Holding up two Shields as I picked my way through this screed, I pondered a couple of sentences: