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Restructuring Revisited

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

Fortnightly Magazine - June 2007

retail rates? Based on a nationwide analysis of retail-rate trends in restructured and non-restructured states, we find that the large rate hikes primarily are a function of expiring retail-rate freezes at a time of significantly higher fuel and wholesale power prices. As part of the negotiated transition from regulated to restructured markets, retail rates often were reduced and then frozen at those levels for a number of years. In several states, the recent expiration of these rate freezes coincided with significantly higher fuel costs and wholesale power prices. Hence, once the rate freezes expired, rates increased considerably to reflect the higher costs and new market fundamentals. However, despite these significant increases from frozen-rate levels, some of the new rates still compare favorably to regulated rates prior to restructuring. For example, despite the recent increase, 2007 residential rates for Commonwealth Edison are still 3 percent below their 1997 level ( i.e., in actual dollar terms, without even accounting for inflation).

Figure 1 shows average retail rates in the now restructured and non-restructured states since 1985. 2 The figure shows that rates in restructured states on average are approximately 35 percent higher than in non-restructured states. However, the chart also shows that this discrepancy already existed in the mid-1990s, several years before restructuring was implemented. Thus, while it is correct that rates in restructured states are much higher than in non-restructured states, this difference already existed prior to restructuring. In fact, these rate trends show that significant rate increases in restructured states relative to non-restructured states happened between 1988 and 1993, when the gap in rates approximately doubled. These pre-restructuring rate trends helped cement support for restructuring efforts. Since then, as also shown in Figure 1, rates in both types of states have trended very similarly.

Figure 2 compares retail rates relative to their 1997 level—the last year before any state had implemented customer choice. The chart shows that from 1997 through 2006, average rates in both restructured and non-restructured states increased by 31 percent. This compares to a 26-percent increase in the consumer price index, a 34-percent increase in wages, a 93-percent increase in the average retail price of natural gas, and a 108-percent increase in gasoline prices.

Figure 2 also shows that until 2006, rate increases in restructured states for the most part lagged those in non-restructured states. This “lag” may have been largely a function of restructuring-related rate freezes under which rates could not reflect the underlying cost trends. Nevertheless, such lagged rate increases in restructured states also mean there may have been significant savings for customers (albeit possibly only temporary). From 1998 through 2006, electricity sales totaled $1.3 trillion in the restructured states, which means the approximately 2-percent gap between the rate trends of restructured states (blue line) and non-restructured states (purple line) cumulatively amounts to $24 billion. In other words, had rates in restructured states trended exactly like rates in non-restructured states ( i.e., had the blue line in Figure 2 moved in lockstep with the purple line), customers in restructured states would have paid $24 billion