FERC’s new rule on compensation for demand resources tips the market balance toward negawatts. Arguably the commission’s economic analysis is flawed, and the rule represents a covert policy...
Can higher electricity prices be more affordable?
non-restructured states mean for the average residential consumer? As Figures 1 and 2 show for the average across all customer classes, the price of electricity in restructured states remains above prices in non-restructured states. The same pattern holds true for average residential rates: those rate levels in fully restructured states are 36 percent above the residential rates in non-restructured states.
Figure 3 sheds light on this “rates versus bill” question, showing average monthly electricity bills for residential customers ( i.e., dollars per customer per month). 6 These differences in bills are much smaller than the differences in rates. For example, the 2010 average monthly residential bills in full retail access states are only 5 percent higher than average residential bills in non-restructured states. Figure 3 also shows that monthly residential bills in suspended restructuring states are 7 percent lower than in non-restructured states. This means that the impact of higher rates in fully restructured states is mostly offset by lower consumption, yielding fairly similar monthly residential bills.
The effect of lower usage is particularly striking for California, where despite the fact that residential retail rates are 50 percent above those in non-restructured states, California residential bills are 25 percent lower. This surprising result likely is driven by a variety of factors: smaller average size of residences in many urban areas, milder climates in the coastal metropolitan areas, stricter building codes, increased spending on energy efficient appliances, substantial utility-sponsored energy efficiency efforts (which tend to increase rates but reduce consumption), and the basic effect of demand elasticity, which reduces consumption in response to higher prices.
Affordability of Electricity Bills
How much of household income is spent on electricity bills and how does that compare across restructured and non-restructured states? Figure 4 addresses this question by expressing residential bills as a percentage of median household income as reported by the Bureau of Census. 7 This shows that electricity bills amount to less than 3 percent of household income. This is consistent with national compilations of expenditures, showing that spending on electricity accounted for only 2 percent of after-tax personal income, as of 2009. 8 Consumers spent more of their after-tax income on other classes of expenditures such as: housing (28 percent), transportation (13 percent), food (10 percent), and health care (5 percent).
As Figure 4 shows, despite the high average rates, electricity bills account for a smaller share of household income in full retail access states than in non-restructured states. While electricity bills account for almost 3 percent of household income in non-restructured states, they were only 2.7 percent of household income in full retail access states and 2.5 percent in suspended restructuring states. In California, only 1.8 percent of average household income is spent on electricity bills. The data also show that while spending on electricity has increased over the last decade, electricity’s share of household income has been fairly stable over time, with current shares in restructured and non-restructured states roughly equivalent to the shares during the 1990s.
Economics and Restructuring
This update of retail rate trends in restructured and non-restructured