Chris King and Dan Delurey provide additional analysis for their recent paper, “Energy Efficiency and Demand Response: Twins, Siblings, or Cousins?” Fortnightly, March 2005.
Letters to the Editor
declined by 30 percent over the pre- versus post-restructuring period. I used 2000 as the transition year. While others may have been focusing on the volatility of ISO day-ahead and real-time prices, I found that a well-managed portfolio produced tangible benefits to utilities within restructured markets.
Furthermore, my comparison of total average costs found that while utilities in traditionally structured states, principally in the South, continued to be lower, there was a narrow convergence. Given the far greater dependence on natural gas in the restructured markets, I thought that was pretty significant.
As a final point, the states I used for my sample set included Massachusetts, Connecticut, New York, Delaware, and New Jersey, representing the NY/NE/PJM competitive wholesale markets, and North and South Carolina, Georgia, and Florida for traditional markets. I would hope that would satisfy Moody’s other concern. –Howard J. Axelrod
• Diane Moody’s critique is erroneous in several ways.
Regarding the comparison of PJM states to the five Southeastern states, these comparison groups were hardly cherry-picked. Our intention was to examine groups of states that often are contrasted as “high-cost” restructured states and “low-cost” unrestructured ones. The Southeastern states were chosen because they are contiguous and span the multiple utilities of two companies, Southern Co. and Entergy, that promote the supposed advantages of integrated utilities, and resist restructuring in their territories. PJM, meanwhile, long has been used as a model and benchmark for centralized electricity markets, and the constituent “PJM Classic” states were at the forefront of restructuring efforts and have been targets recently of anti-restructuring rhetoric. These are, thus, sensible and representative comparison groups for our purpose.
It is not clear to us why Moody, the director of statistical analysis at APPA, takes issue with the time period of 1980 through 2004 we used for our econometric analysis. To draw any statistically meaningful conclusions regarding the impact of restructuring over time, it is important to include a period in which none of the sample states had restructured in order to reliably estimate the parameters for other cost drivers. This approach clearly and unequivocally is supported by econometric theory and practice. In fact, our analysis adopts an approach applied by Professor Paul Joskow, which was reviewed in the APPA-sponsored paper referenced by Moody. John Kwoka’s assessment is that “Joskow’s study in many ways represents a good effort at evaluating the price impacts of electricity restructuring.” Our conclusions are consistent with those of Joskow.
We note that Moody does not take issue with our analysis of declining PJM price trends once an appropriate adjustment for fuel costs has been made, yet we believe this is a critical part of the restructuring story. Those who advocate a return to utility owned and operated generation in states that previously restructured seem to believe that restructuring and the benefits of competitive wholesale markets are separable. We do not. New investment in competitive generation has been driven substantially by restructuring and has contributed to robust wholesale power markets. Those benefits are not isolated in restructured states, but are enjoyed in unrestructured states as well,