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Letters to the Editor

Fortnightly Magazine - January 2007

data shows1998-2005 average rate increases of 9 percent for Arkansas, 12.3 percent for Tennessee, and 11.5 percent for North Carolina. Similarly, numerous restructured states experienced much higher rate increases than the 7.8 percent average for the four states chosen by Axelrod: 1998-2005 average rate increases were 27 percent for Massachusetts, 24.9 percent for Rhode Island, 30.3 percent for New York, and 23.9 percent for the District of Columbia.

In addition, the authors performed an econometric analysis using 1980 through 2004 average rates for all states east of the Mississippi to estimate the effects of wholesale competition and state restructuring on the retail cost of electricity. The analysis found a positive benefit from the introduction of wholesale competition, but the few details provided raise serious questions as to whether the results are at all meaningful. The very time frame analyzed is of concern, as few would peg 1980 as the beginning of restructuring, and prices in restructured states in 2004 were to a great degree still subject to rate freezes.

Thus, it appears that the analysis contains several of the serious errors found in similar studies reviewed by John Kwoka in his recent paper, Restructuring the U.S. Electric Power Sector: A Review of Recent Studies. These include oversimplifying what is meant by restructuring and thus failing to isolate its effects; failing to take account of the fact that post-restructuring prices in many states are the result of rate reductions and freezes, stranded cost adjustments, and excess capacity; and failing to control for other factors that affect prices.

The Axelrod article also refers to a separate study, Electricity and Underlying Fuel Costs, by the Analysis Group as evidence of large cost increases in Louisiana and Oklahoma. However, the numbers that the Axelrod article cites as cost increases reported in the Analysis Group’s study—47 percent in Louisiana and 38 percent in Oklahoma—do not reflect cost increases; rather, they represent the percentage of power generated by natural gas in each state. This carelessness in reading the Analysis Group’s study makes it clear that the authors neither examined the Analysis Group’s study closely nor understood the results well enough to discover the study’s significant methodological problems.

Finally, the article references other analyses that were conducted by Howard Axelrod, but does not provide sufficient detail to allow the reader to assess whether the results are at all meaningful. Given the lack of precision and selective use of data shown in the article, it would be unwise to rely on these analyses without further clarification and detail.

Diane Moody, Director, Statistical Analysis, American Public Power Association

 

The Authors Respond:

• Diane Moody’s critique focused on my co-authors’ results, for which they will be best equipped to respond. My analysis investigated a sample set of investor-owned electric utilities representing both structured and restructured states. Using FERC Form 1 data for years 1996-2005, I found that the standard deviation of total production costs in competitive markets, ( i.e., a portfolio of self-owned generation, competitively bid bilateral contracts, and real-time transactions, as well as financial instruments to hedge price uncertainty),