The high price of electricity deregulation
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.