Posted by: marilynshowalter | August 6, 2007

A Billion Here. A Billion There. Price Matters

 [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.)

regderegmay07.jpg

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.

gapvaluemay07blogsize.jpg

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.

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Responses

  1. Interesting to see that the New York Times FINALLY picked up on this (Sept. 4, 2007, page C1).

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