Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Restructuring Revisited

What we can learn from retail-rate increases in restructured and non-restructured states.

Fortnightly Magazine - June 2007

mix in restructured and non-restructured states, our preliminary analysis indicates that the 2005 average cost of fuel delivered to generators ( i.e., the weighted average costs of coal, natural gas, petroleum, and nuclear fuels on a $/MMBtu basis) increased approximately 90 percent in the more natural-gas-dependent restructured states, compared with “only” 62 percent in non-restructured states. (By 2006, the differential in fuel-cost increases appears to have narrowed to approximately 80 and 70 percent, but not all 2006 fuel-cost data is available and 2006 fuel costs probably are not reflected fully in 2006 electricity rates due to regulatory and procurement-related lags). 3 Given these higher cost increases in restructured states, the similar trend in average retail rates suggests potentially significant restructuring-related benefits that go beyond any temporary saving enjoyed while rates were frozen.

The extent to which restructuring might or might not have benefited customers has been analyzed more closely by more than a dozen studies over the last few years. 4 Some of these studies specifically evaluate the impact of retail choice, some assess only the benefits of centralized wholesale markets, and others attempt to quantify the combined benefits of wholesale and retail restructuring. The majority of these studies found that restructuring—either retail competition, centralized wholesale power markets, or the combination of retail and wholesale restructuring—have produced significant benefits for consumers. However, some reviewers of these studies contend that due to poor study designs, the quantified benefits cannot be relied upon. Only a few studies find that the impact of restructuring is either unclear or may have resulted in more quickly increasing customer rates.

To be sure, it is inherently difficult to quantify the benefits associated with restructuring because one must compare actual rates or industry efficiency to the hypothetical rates or industry efficiency that would have existed but for restructuring. With respect to retail competition, the analysis is complicated further by the fact that most customers have become exposed to market-based retail rates only very recently when transition-related rate freezes expired. Given this very limited experience with market-based retail pricing, it likely is too early to quantify reliably the benefits or harms from retail restructuring. But it is clear that restructuring has failed to produce the massive hoped-for benefits, the basis on which restructuring was sold politically.

Time to Re-Regulate?

The large price adjustments coming out of rate freezes have triggered legislative calls for suspension of retail access (in particular for small customers) and the re-regulation of the utility industry in several states, including Virginia, Michigan, Connecticut, and Montana. However, despite the failure to meet high expectations and the rate hikes triggered by abruptly ending rate freezes, the available facts do not support a conclusion that customers in restructured states actually would have been better off under traditional cost-of-service regulation. It is even less clear that re-regulation would provide net benefits. Thus, despite the superficial appeal of re-regulation as a means of addressing the sharp recent rate increases, such initiatives must be viewed with significant caution and skepticism. After all, one must recall that the gap in rates between restructured