(November 2008)Economic uncertainties are raising doubts over utility returns. Will regulators feel the need to consider broader economic effects when engaging in ratemaking? While...
States of Denial
Three challenges to federal authority from those unhappy with the status quo.
First the news. The latest spin on electric restructuring came on “cyber Monday”—that first Monday after Thanksgiving, when America’s silicon nation goes online to shop for Christmas.
That’s when the American Public Power Association (APPA) released a study by economics professor Dr. John E. Kwoka, of Northeastern University, that reviewed a dozen other recent studies on the subject and found so many deficient statistical techniques as to question whether utility restructuring had made consumers any better off. (John Kwoka, Northeastern Univ., “ Restructuring the U.S. Electric Power Sector: A Review of Recent Studies ,” APPA, November 2006.)
“Too little is known,” added APPA President and CEO Alan Richardson, “to conclude that our industry is on a path that can or will produce customer savings.”
The study (funded by APPA) gained notice almost immediately from bloggers and pundits. Only a week earlier, LECG Consulting had released an opposing report finding modest retail rate reductions (from $0.50/MWh to $1.80/MWh) in the mid-Atlantic region for the years 1998-2004. (Scott M. Harvey, Bruce M. McConihe, Susan L. Pope, LECG, Nov. 20, 2006.)
The media frenzy continued on through December, with each side (pro and con) finding something to like. Yet each study contained its own infirmities, making it essential to pay strict attention to what, exactly, was being measured in each case.
The LECG study, sponsored by the PJM Interconnection, focused on centralized wholesale power markets in the mid-Atlantic states during the 1998-2004 period (in New York and the PJM footprint), and by all accounts did a masterful job of weeding out any distortions due to regional differences in power-plant fuel use or capacity shortages or surpluses, or caused by state-by-state differences in retail choice programs, such as transition charges, stranded cost recovery, or temporary rates freezes.
To do so, the LECG study had focused only on municipal and other governmental utility entities operating largely outside the jurisdiction of state public utility commissions (PUCs) or the Federal Energy Regulatory Commission (FERC). These munis and other utilities also tended not to own power plants, so they had always purchased their full power requirements from wholesale suppliers, both before and after restructuring. That made it possible for LECG to conduct a true apples-to-apples analysis with minimal distortion from extraneous statistical factors. But it does not tell us a whit about utilities involved directly in restructuring.
By contrast, some other studies have chosen to focus on objective and directly observable measures of productive efficiency, such as generating plant availability factors, or heat rates. This tactic avoids the potential pitfalls of econometrics, such as failing to control for all relevant and significant variables, or the guesswork of contra-factual price estimation—trying to calculate what prices would have been if this or that had occurred. Nevertheless, the APPA study dismisses such attempts rather conveniently as redundant:
“Several of the studies examine other outcome measures besides price or cost, for example generator heat rates or market liquidity.