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Restructuring Revisited

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

Fortnightly Magazine - June 2007

more. While this number does not represent an estimate of restructuring-related savings to date, it does suggest that the temporary restructuring-related rate reductions and rate freezes likely benefited customers—at least while they lasted.

Simply based on press coverage, one would have expected that the rate increases in restructured states far exceeded rate increases in traditionally regulated states. But that is not the case. The rate increases in traditionally regulated states may have happened more gradually ( e.g., through fuel-cost adjustment clauses), with similarly large overall increases but less public outcry and fewer political repercussions. For example, since 1997, average rates in Hawaii increased 68 percent, 57 percent in Wisconsin, 53 percent in Washington, 45 percent in Florida, and 42 percent in Louisiana.

Yet the public uproar and political repercussions over such rate increases in non-restructured states tend to pale in comparison. Even the very significant recent rate increases caused by the 2005 spikes in fuel and power costs appear to have attracted less public and political attention in restructured states, such as New Jersey and Massachusetts, where utilities already had supplied customers at market-based rates for a number of years. States in which these sharp recent increases coincided with the expiration of transition-related rate freezes—such as Maryland, Delaware, Connecticut, and now Illinois—seem to have experienced much more substantial political fallout.

How will the 2006 decline in fuel and power prices affect retail rates in restructured and non-restructured states going forward? Considering that the 2001 spike in natural-gas prices affected rates in restructured states more strongly ( i.e., with larger increases and subsequent decreases), it will be interesting to see if that pattern repeats itself with respect to the 2005-2006 spike in natural gas, coal, and power prices. Just as fuel-adjustment clauses should lead to rate reductions in non-restructured states, lower wholesale power prices should lower rates in restructured states. Recent procurement results in some of the restructured states suggest that this may in fact be happening. For example, with the decline in wholesale market prices in New Hampshire, rates for Unitil’s commercial and industrial customers dropped by about one-third in 2006 while rates for residential customers dropped by 10 percent earlier this year.

Are There Any Restructuring Benefits?

Although this rate comparison does not offer conclusive proof as to either the benefits or harms associated with restructuring, it does provide an important indication of how consumers in restructured states have fared relative to those in non-restructured states. Assuming costs increased similarly, it would appear restructuring did about as well as traditional regulation. If restructuring truly was a failure, one would have expected to see larger average rate increases in restructured states than in non-restructured states. This is not the case. In fact, utilities in restructured states on average not only face costs that tend to be higher than in non-restructured states, but these costs have also been increasing faster.

For example, since 1997 wages in restructured states are up 35 percent compared with 33 percent in non-restructured states. The differential is even larger for fuel. Considering the average 1997-2005 fuel