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?
suspended restructuring activities. 5 As a case study to illustrate the relationship between average rates, average bills, and electricity spending as a percent of total household income, we also report results separately for California, a large state with suspended restructuring that would dwarf the other states in the suspended restructuring subcategory. Finally, we report trends in average residential bills per customer and the percentage of median household income spent on electricity bills.
Figure 1 shows average electricity rates (across all customer classes) in non-restructured states, full retail access states, California and other states with suspended restructuring. The figure shows that rate levels in restructured states continue to exceed those in non-restructured rates: 2010 rates in full retail access states were 37 percent above rates in non-restructured states, compared to 42 percent in 1997; California rate levels were 62 percent above those of the non-restructured states; and rates in other suspended restructuring states were 7 percent higher. As Figure 1 also shows, these rate differentials already existed in the 1990s, prior to restructuring.
Figure 2 shows the increases in average retail rates within each of these groups of states since restructuring was implemented in 1997. This update through 2010 shows that average retail rates in full retail access states are now 42 percent above their 1997 level, compared to increases of 45 percent in California, 46 percent in other suspended restructuring states, and 48 percent in non-restructured states. Figure 2 also shows that rates in fully restructured states have decreased 5 percent since 2008, while rates in non-restructured and suspended restructuring states, including California, have continued to increase. These comparisons show that retail rates in fully restructured states more closely follow prices in wholesale power markets, which sharply increased between 2004 and 2008, but have since declined.
These types of rate comparisons can be subject to misinterpretation. First, while it is correct that rates in restructured states are significantly higher than in non-restructured states, this difference already existed prior to restructuring. While the study results show that rate increases have been similar in restructured and non-restructured states since 1997, the gap in rate levels hasn’t been reduced. As already noted in the earlier paper, it’s clear that restructuring has failed to produce the massive hoped-for benefits, the basis on which restructuring was sold politically in the 1990s. However, it’s also clear that rates in restructured states haven’t increased any faster than rates in non-restructured states.
Second, simple rate comparisons don’t control for the many reasons why rate differentials exist with or without restructuring. These reasons include differences in fuel mix and fuel costs, differences in the costs of labor and other local inputs, differences in load shapes and weather, and differences in demand response and energy efficiency investments. This analysis only documents rate trends and how consumers in restructured states have fared relative to those in non-restructured states—without attempting to estimate the perhaps larger rate increases that restructured states might have experienced absent the restructuring effort.
Residential Customer Bills
So what do these differences in rate levels and rate increases between restructured and