Four cents a kilowatt-hour

The high price of electricity deregulation

Posted by Kristina & Jason Makansi (Guest Contributor) at 9:44 AM on 06 Sep 2007

Read more about: business | energy | electricity grid

In David Cay Johnston's NYT article "A New Push to Regulate Power Costs," he writes about the fact that many states are rolling back their deregulatory initiatives. The main reason, he says, is price.

Ahh, price. That magic number at the nexus of supply and demand. The problem with price in electricity markets is that it is not determined by supply and demand, as in a free, deregulated market -- even in those states where there was, supposedly, deregulation.

In fact, we've long argued that deregulatory initiatives, as they were designed and implemented, had nothing to do with what most people understand as "deregulation" at all. Johnston points out that retail price controls, artificially induced competition on the wholesale side, and same old-same same-old metering does not a free market make. As Peter Van Doren of the Cato Institute says, "Just calling something a market does not make it a market."

According to a study quoted in the NYT article, conducted by the former Washington state utility regulator, rates in deregulated states run about four cents a kWh higher than in regulated states. Although each situation is different, there are several reasons that the cost of power in "deregulated" states has been going up so dramatically:

Because many of these same states have tougher emissions regulations, they embraced cleaner-than-coal gas-fired power plants and have, therefore, been the victims of the escalating cost of natural gas for fuel.
As pointed out in the article, they artificially reduced prices during competition through "mandated" controls.
They did not put in place tools (smart metering) with which consumers can see/react to their electricity usage.
They have deregulated the wholesale market but not the retail market, so there's a gap that suppliers can take advantage of.
They forced their utilities to divest their generation assets and allowed stranded cost recovery. Initially, the utilities got through that OK in terms of financial health, but now there are serious costs looming (fuel, transmission, global warming) and unless the regulator wants to see the utilities go belly-up, rates have to rise.

Plus, keep in mind that when experts talk about consumer prices being reduced through competition, they mean that "average" prices across all consumers will decline. Ninety percent of consumers can pay a higher rate, while 10 percent pay a lower rate -- they buy the most electricity and, like all bulk purchasers, enjoy the steepest discounts.

What Johnston doesn't mention is the role that electricity storage -- or rather, the lack of it -- plays in the marketplace. Electricity is not like other commodities, at least not today, because we don't have a way of storing it in the same way that wheat, corn, or even natural gas and oil can be stored. The product is unique in that sense. Electricity is produced for immediate, "on-demand" use, so the market for electricity is not like other markets.

Also, the transmission system has not been upgraded to enable power to be easily moved in response to market signals (as opposed to emergency transfers). Because there are still so many "constraints" and "transmission loading relief" requests, any benefits from electricity markets is squelched. A robust system of electricity storage would allow a more responsive and "real" electricity market to emerge.

Real markets only work when consumers have information on which to make decisions. Today, at the residential and small-user levels, there is no way to respond to higher prices (which would moderate load which would moderate prices). Only 15 percent of the country has an "advanced meter" on their home or business, and these were mostly designed for the utility to shed meter readers (these meters can be read remotely). The really advanced meters -- two-way communication devices that help the utility understand and control load and usage patterns -- have not been widely adopted, except for a few areas of the country. With no ability to respond to rising prices -- say, changing the thermostat -- consumers cry foul and turn to regulators to keep prices down.

For story: Four cents a kilowatt-hour
7 Comments | Post a Comment

Thank you ED and NRDC

for your leadership in greenwashing deregulation in California and elsewhere. This is beyond "weak environmentalism". This is conflicted and corrupted environmentalism in service of corporate law firms and Wall Street interests which in turn service the utility sector. ( Plus some other more heinous covert connections to the energy sector, shhh!). And let's not forget the corporate oriented foundations which lavished you with $$$ to pursue this agenda while tossing a pittance at the grassroots.

And thank you Nature Conservancy, WWF, and others for standing by idly or diverting attention towards utility friendly measures while being on the take from the energy companies.

Now let's allow you to apply your "Enron Environmentalism" to global warming.

bernardo issel - http://www.NonprofitWatch.org - bernardo (at) NonprofitWatch.org

by NonprofitWatch at 10:22 AM on 06 Sep 2007

ok bernardo

We know what you don't like: The ED, the Nature Conservancy, deregulation, market mechanisms...

So what kind of environmentalism do you promote?

And who is watching Nonprofit Watch? ;)

by naturescene at 11:41 AM on 06 Sep 2007

deregulation NOT

They have deregulated the wholesale market but not the retail market, so there's a gap that suppliers can take advantage of.

As far as I know, all the problems listed above applied to California's "deregulation" disaster. But this one is really heinous and glaring, and it shocks me that no one really figured out that this was going to happen until after it was a done deal. If you regulate the retail prices, but not the wholesale prices, that's begging for trouble. It's also not deregulation in any meaningful sense of trying to cultivate a market.

by GreenEngineer at 12:04 PM on 06 Sep 2007

I brought this issue up

with my former boss one day. I asked what she thought about electricity deregulation, and she replied that the California experience had shown her that deregulation was not all it was cracked up to be.

I asked her how keeping price controls in place could possibly constitute deregulation. All I got in return was a blank stare.

The California debacle set back efforts among economic and evironmental thinkers alike to show that deregulation is beneficial.

Thanks for bringing up this issue again.

"Just calling something a market does not make it a market."

by naturescene at 12:34 PM on 06 Sep 2007

ditto deregulation NOT

Amen, GreenEngineer. However, there were people out there sounding the warning bell. Some of us were writing and speaking out about the inevitable failure of the deregulatory programs being adopted, and many of us warned early on that these programs would lead to higher prices. But...oh, well. Anyway, if the past is prologue, some of the steps these states are taking to "remediate" the problem may just make it worse. And so the problem just continues to build on itself as average consumers become increasingly convinced that deregulation didn't work...when there was no true deregulation in the first place.

When giving talks around the country, one of the first questions is, "Why are my rates going up?" There have been several times when the explanation--covering various deregulation debacles as well as every day costs of doing business such as emissions control equipment, maintenance and upgrades, investments in new technologies, competition for scarce talent, and, of course, grappling with CO2 reduction--just doesn't seem to make any sense. For some consumers the bottom line is that electricity should be always on, always reliable, always clean, and always cheap.

We believe that there are ways to fill all those bills--but the prescription (outlined in Lights Out) requires a lot more personal accountability and political will than is so often evident.

Pearl Street::Jason and Kristina Makansi Read Lights Out reviews

by Kristina & Jason Makansi at 12:45 PM on 06 Sep 2007
[ Parent ]

? re the Enviros in Calif. dereg.

Kristina and Jason,

What's your view of the role that the enviros played in California's deregulation?

From my perspective, there seemed to be a divide that peaked in '98 with an initiative by grassroots enviro and consumer groups to repeal the deregulation coupled with the massive stranded cost recovery for the nuclear utilities.

This effort to repeal deregulation was heavily opposed by the utilities with the aid of ED and NRDC who sold deregulation as a means to let individual consumers buy green energy. A counterpoint as I recollect was that this would only be done by a few enviro-minded people while most big energy users would shift to the cheapest (and often dirtiest sources of energy) available.

At the same time, there were extensive ties between these enviros and the old and new energy companies. For example, John Sawhill, then head of the Nature Conservancy, was on the board of Pacific Gas & Electric. The CEO of Southern California Edison had been a founder of NRDC. Enron's Ken Lay seems to have been close with ED -- various articles talk about him working closely with ED's president Fred Krupp. Also, Lay was a board member and probable heavy donor to a project of ED's then vice-chair Teresa Heinz, herself a major donor to ED. There are many more such ties, but I won't burden this post with them. These ties raise questions for me regarding the ability of these groups to impartially and with integrity weigh in on major matters relevant to the interests of the energy companies.

Now what I find to be a conflict others might call a synergy, but it would seem that several years later a major debacle occurred.

I'll try to add your book to the long list of books that I'd like to read.

Cheers, b.

bernardo issel - http://www.NonprofitWatch.org - bernardo (at) NonprofitWatch.org

by NonprofitWatch at 1:34 PM on 06 Sep 2007
[ Parent ]

The wisdom of Mr. Miyagi

Remember the Karate Kid? "It is good to know karate. It is good not to know karate. It is not good to know a little karate." Ditto for deregulation - and in NO instance have we deregulated electricity markets to any meaningful degree. We know a little karate, and therefore leap to crazy conclusions. Witness California, that gets beat up so much. Notwithstanding the fact that there deregulation was partial and crummy (competitive wholesale + capped retail + a $16 billion bailout for the "deregulated" utility may be many things, but deregulation it ain't), they aren't even deregulated!

Folks who study this stuff (see here) identify 27 states that have remained "fully regulated", 17 states that have "restructured", 3 states that engaged in "limited restructuring" and 4 states that "suspended/reversed restructuring". California falls into this latter camp. So making judgments about the effectiveness of deregulation based on California is no more legitimate than making judgments about the merits of taking a self defense class based on my personal experience dropping out of judo before I ever got my yellow belt. And yet, that is exactly what the typical conversation does. (Note that I'm using NRRI's jargon - they refer to states like NY as "fully deregulated", but that's like saying that an 18 year old is "fully mature". I would have chosen another word to describe states that have simply gone farther than any others in their peer group, but c'est la vie.)

The really interesting thing - and the point that Cay gets very close to in his article - is that the prices for power in the states which chose to deregulate was higher BEFORE they started to deregulate. Which means that simply saying that those states are now 4 c/kWh higher is irrelevant, unless you also know what the gap was before. And on that metric, one comes to very different conclusions. From 1992 to 2005 (the last full year that the DOE has data available), the average price for electricity in states that chose to deregulate has risen by 15%. By contrast, the average price for electricity in states that remained fully regulated has risen by 22%. Meaning that to the extent you were in a state that was exposed to underlying upward pressures on price (gas exposure, transmission constraints, etc.) you are actually better off having deregulated.

That said, no state has deregulated the downstream parts of the grid, and if you don't deregulate the downstream bits, you don't have the ability to invest in the kinds of grid upgrades that have the most potential to save cost. (You can't run a power plant on opportunity fuels like wood waste from a lumber mill or landfill gas from a landfill if you have to first carry that opportunity fuel many miles to a central power plant. On the other side, you can't carry waste heat from a central power plant to a downstream customer, but it is easy to recover and use that heat if the generator is located downstream.) Thus, the only real thing you can do to chase efficiency with our limited upstream dereg is to fuel-switch and do a better job of generator dispatch - which we have certainly done, and accounts for the slower increases in price in restructured states. But the kind of huge efficiency savings possible with downstream dereg still don't have any direct way to participate in the market.

by Sean Casten at 1:52 PM on 07 Sep 2007

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