He was quite literally the toast of last year’s EEI Finance conference. Using his bank’s diverse resources (Rothschild vineyards in France), he arranged an unforgettable wine tasting that was a...
What we can learn from retail-rate increases in restructured and non-restructured states.
effects of fuel-price shocks that drive up power prices (such as the 2005 hurricane-related disruption of natural-gas supply and coal-transportation-related spikes of coal prices).
The Bottom Line
Since restructuring started in 1997, average retail rates in both restructured and non-restructured states have increased by approximately 31 percent. This is surprising for two reasons. First, based on the public outcry over the sharp recent increases in retail-access states, one would have expected higher overall rate increases in restructured states. As it turns out, the sharp recent increases are mostly an artifact of abruptly ending restructuring-related rate freezes. Second, the fact that rates in restructured states have increased approximately the same as rates in non-restructured states appears to be good news, considering the more pronounced increases in average fuel and labor costs. While it is correct that average rates in restructured states significantly are above the rates in non-restructured states, that was already the case in the mid-1990s, before these states were restructured—which helped cement support for restructuring efforts.
Although retail restructuring has failed to live up to its high expectations, the available facts do not support a conclusion that customers in restructured states would have been better off under traditional cost-of-service regulation, nor that customers would likely benefit from re-regulation. But our skepticism about the effectiveness of re-regulation options does not mean that the recent rate hikes should not be addressed, as our suggestions on mitigating rate hikes and reducing rate pressures going forward indicate. Rather, despite the superficial appeal of re-regulation in light of the sharp recent rate increases, we are concerned that such initiatives carry a substantial risk of being ineffective and more costly in the long-run.
1. Our discussion focuses only on average retail rates as the bellweather in many of the currently ongoing discussions about the success or failure of retail access. We are not specifically addressing the other hoped-for benefits of retail access, nor the extent to which restructuring of transmission access and wholesale generation markets affected market efficiency, plant availability, transmission utilization, infrastructure investment, and reliability.
2. Average rates are calculated as the ratio of total retail revenues in restructured and non-restructured states to total kWh retail sales as reported by the Energy Information Administration. We define “restructured states” as the 20 states plus D.C. that implemented retail access for some or all customers, including Connecticut, D.C., Delaware, Illinois, Massachusetts, Maryland, Maine, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Texas, and Virginia as well as Arizona, California, Montana, Nevada, and O regon (the five states that have already limited, suspended, or reversed some of their restructuring effort). For an overview of restructuring and resource procurement in these states, see Pfeifenberger, Schumacher and Wharton, “Keeping Up with Retail Access? Developments in U.S. Restructuring and Resource Procurement for Regulated Retail Service,” The Electricity Journal, December 2004, pp. 50-64.
3. Note again that these cost increases are based on a fixed 1997-2005 fuel mix. If the actual fuel mix for 1997 and 2005 is used, the 1997-2005/06 average percentage cost increases are quite similar