Posted by: marilynshowalter | September 10, 2007

OF NUMBERS and “Nonsense” –a reply to an EPSA critique

 

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. EPSA implies that I have attributed to deregulation the entire gap between prices in deregulated states and prices in regulated states. But as I said in the fourth paragraph of a seven-paragraph article:

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.

Of the states that deregulated, I also said:

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.)

Thus, I never claimed that the difference in prices was wholly due to regulatory policy, but I did point out the very significant disadvantage in purchasing power that consumers in high-cost states suffer. Those states are also, overwhelmingly, the states that participate in organized wholesale markets and that do not have regulated, cost-based retail rates. And the gap has increased.

A more substantive disagreement rests in the choice of states to compare as “deregulated” or “regulated.” EPSA faults me for not including Illinois, Ohio, Pennsylvania, and Virginia as deregulated, because they have been “restructured.” All of these states, however, had prices caps in place for all or nearly all times periods for which prices were shown. (A small part of Pennsylvania and few months of Illinois prices were not capped.) Prices in these four states reflect legislated price caps, not market prices, and would mask price trends in the states that actually do allow markets to set prices. This masking effect is one reason some of the studies purporting to show benefits in “restructured” states are misleading.

To show how misleading, here are the prices for Illinois, Ohio, Pennsylvania and Virginia, compared to prices for the states that have deregulated prices:

ohetcvdereg.jpg

 

Obviously, merging the two lines would dampen the appearance of the price increases in the deregulated states and obscure the actual dynamics in both sets of states. For further explanation of the choice of states, which does involve some judgment, please go here. (Note: New York has always been included in my calculations of prices in “deregulated” states. The inadvertent omission of “NY” in a label in the original article has been corrected.)

Meanwhile, EPSA doesn’t want us to watch the horse that’s running away—all the way to the bank. The “dark spread” is no longer a dark horse so I’ll call her Margie, and she is making billions. Misapplied marginal pricing theory is forcing consumers to fund huge profits for companies with low-cost plants or plants in fortuitous locations. This is not a matter of a time-lag, in which the regulated states will “catch up” to prices in the deregulated states. It is a matter of structure.

In an organized market, as long as the clearing (marginal) price—whether set by a natural gas plant, an even pricier renewable plant, or market-player behavior—is above the average cost-based price, consumers will be paying more for their power than they would under a regulated, cost-based system. While it is difficult to quantify this effect with precision, because of the problem of “proving the counter-factual,” it is not difficult to see, qualitatively, that high marginal prices will drive prices up for all participating resources. Price trends in the deregulated states are consistent with this dynamic. And absent an imploding economy, there is reason to think that high marginal prices will persist for some time.

Finally, EPSA does not challenge the actual prices reflected in my graphs—nor could it, since they are drawn from EIA data. The dispute is over how to aggregate, compare, and interpret the price-trends. EPSA has both overstated my position and understated real differences in price-trends in regulated versus deregulated states.

To see a broad array of price-trends, go to PPI’s website and click on the map.

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Responses

  1. fo069.txt;3;6

  2. cheers
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  3. I’m the only one in this world. Can please someone join me in this life? Or maybe death…

  4. Although U.S. health care spending growth has slowed in recent years, health spending continues to outpace growth of the overall economy and workers’ wages. There are clear signs that rising prices paid to medical providers—especially for hospital care—play a significant role in rising premiums for privately insured people. Over the last decade, some hospitals and systems have gained significant negotiating clout with private insurers. These so-called “must-have” hospitals can and do demand payment rate increases well in excess of growth in their cost of doing business. During the 1970s and ’80s, some states used rate-setting systems to constrain hospital prices. Two states—Maryland and West Virginia—continue to regulate hospital rates. State policy makers considering rate setting as an option to help constrain health care spending growth face a number of design choices, including which payers to include, which services to include, and how to set payment rates or regulate payment methods. To succeed, an authority charged with regulating rates will need a governance structure that helps insulate regulators from inevitable political pressures. Policy makers also will need to consider how a rate-setting system can accommodate broader payment reforms that promote efficiency and improve quality of care, such as episode bundling and rewards for quality.


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