Changes in regulatory requirements, market structures, and operational technologies have introduced complexities that traditional ratemaking approaches can’t address. Poorly designed rates lead to...
Can higher electricity prices be more affordable?
Four years ago we documented that retail rates in both restructured and non-restructured states increased by approximately 31 percent since restructuring started in 1997. 1 While 2006 rates in restructured states were significantly higher than rates in non-restructured states, this was already the case in the mid-1990s prior to restructuring.
This article updates these rate comparisons through 2010, a four-year time span that includes significant initial increases in power prices, substantial economy-wide adjustments, and striking changes in electricity markets triggered by a sharp decline in natural gas prices and continued increases in the cost of coal. In addition to updating the analyses, we explore three questions: 1) how much have rates in restructured and non-restructured states adjusted to the change in economy-wide and energy market conditions?; 2) do higher electricity rates in restructured states also correspond to higher residential electricity bills?; and 3) what portion of household income is spent on these electricity bills?
We find that electricity rates in fully restructured states have increased by slightly more than rates in non-restructured states through 2008, but this increase has reversed itself in the last two years with rate reductions in restructured states and continued increases in non-restructured states. As a result, the percentage increase in restructured states’ retail rates since restructuring in the mid 1990s has been slightly less than the rate increases in non-restructured states or states that suspended restructuring.
The level of electricity rates (cents per kilowatt hour) in fully restructured states continues to exceed rate levels in non-restructured states by 37 percent—slightly less than the 42 percent premium that existed prior to restructuring. However, despite these higher rates, average residential electricity bills (dollars per month) in fully restructured states are only 5 percent above average bills in non-restructured states due to lower electricity usage. Considering that median household income in restructured states exceeds the income in non-restructured states, this means that electricity bills account for a lower share of household income for the average residential customers in restructured states.
This unexpected combination of higher average rates but similar residential bills that are more affordable is even more pronounced in high-rate states like California, where the combination of energy conservation, smaller residences, milder climate, and higher household income means that a significantly lower proportion of total household income is spent on electricity bills than in either restructured or non-restructured states on average.
Retail Rates Since 2007
We have updated the 2007 study to reflect the latest state-level data on electricity rates. 2 Since 2006, the last year covered in the previous study, restructuring related rate freezes have expired in states such as Illinois and Pennsylvania, while other states, such as Virginia and Michigan, have suspended restructuring activities and retail access. These new data allow us to compare rates in non-restructured states 3 with rates in fully restructured (full retail access) states 4 and states with