Electricity Deregulation -- Who Gains, Who Loses?

1
Electricity Deregulation -- Who Gains, Who Loses?

• Presentation by John Kelly
• Director of Economics Research
• American Public Power Association
• Washington, DC
• Center for Research in Regulated Industries
• Rutgers University
• Newark, New Jersey
• March 28, 2008

2
Overview

• What Whats the Issue?
• Whats What Whats the Evidence?
• So What?

3
The General Question

• With continuing analysis of competitive
  performance of alternative institutional
  arrangements we will be able to determine more
  definitely what is the best that we can expect in
  an imperfect world. (Emphasis added)
• Paul Joskow, The Electricity Journal, January
  2006

4
What Dimension(s) of Performance?

• Average Prices
• Price Structures
• Customer Switching
• Efficient Investments
• Environmental Benefits
• Demand Response
• Alleged shifting of risk

5
Focus Chosen Here is Average Prices

• The promise of lower prices was the political
  selling point for competition in most states.
• Joskow

6
Focus Chosen Here is Average Prices (Cont.)

• The correct test where markets have been
  introduced, is not whether prices have fallen but
  whether electricity prices would have been lower
  today if the old formula of regulated wholesale
  prices had remained in effect. (Emphasis added)
  
• 
  Branko Terzic
• Former
  FERC Commissioner
• The New
  York Times, Letter to the Editor
• November
  21, 2006

7
Are Consumers Better Off, Prices Lower?

• APPA commissioned study in 2006 to examine
  methods and findings of major studies Pro and
  Con
• John Kwoka, Professor of Economics at
  Northeastern University, reviewed 12 major
  studies.

8
Studies Reviewed

• Apt, Jay. Competition Has Not Lowered US
  Industrial Electricity Prices. Electricity
  Journal. 2005.
• Cambridge Energy Research Associates. Beyond the
  Crossroads The Future Direction of Power
  Industry Restructuring. 2005.
• Center for the Advancement of Energy Markets.
  Estimating the Benefits of Restructuring
  Electricity Markets An Application to the PJM
  Region. September 2003.
• Energy Security Analysis, Inc. Impacts of the PJM
  RTO Market Expansion. November 2005.
• Fagan, Mark. Measuring and Explaining
  Electricity Price Changes in Restructured
  States. Electricity Journal, June 2006.
• Global Energy Decisions. Putting Competitive
  Power Markets to the Test The Benefits of
  Competition in Americas Electric Grid. July 2005.

9
Studies Reviewed

• ISO/RTO Council. The Value of Independent
  Regional Grid Operators. November 2005.
• Joskow, Paul. Markets for Power in the United
  States An Interim Assessment. Energy Journal.
  January 2006.
• New York State Department of Public Service.
  Staff Report on the State of Competitive Energy
  Markets Progress To Date and Future
  Opportunities. March 2006.
• Synapse Energy Economics. Electricity Prices In
  PJM A Comparison of Wholesale Power Costs in the
  PJM Market to Indexed Generation Service Costs.
  June 2004.
• Taber, John, Duane Chapman, and Tim Mount.
  Examining the Effects of Deregulation on Retail
  Electricity Prices. Cornell University Working
  Paper. February 2006.
• Weaver, Jacqueline. Can Energy Markets Be
  Trusted? The Effect of the Rise and Fall of Enron
  on Energy Markets. Houston Business and Tax Law
  Journal, 2004.

10
Major Finding

• Despite much advocacy there is no reliable
  and convincing evidence that consumers are better
  off as a result of restructuring of the U.S.
  electric power industry.
• Restructuring the Electric Power Sector A
  Review
• of Recent Studies, November 2006

11
Major Problems with Studies

• 1. Definition of Restructuring
• 2. Treatment of Restructuring as a Discrete
• Event
• 3. Overlook Rate Freezes, Stranded Costs, and
  Excess Capacity
• 4. Fail to adequately control for or at all
  --other factors affecting price

12
A Closer Look at

• Propositions/Assertions by Prominent Energy
  Economists
• Propositions/Assertions by the Federal Energy
  Regulatory Commission

13
Prominent Economists

• There is growing evidence and convincing studies
  that show that consumers have saved billions of
  dollars in energy costs as a result of
  competitive markets. (Emphasis added)
• Vernon Smith, Alfred Kahn, Paul Joskow, William
  Hogan, et al. in Open Letter to Policymakers,"
  Compete Coalition, Washington, D.C., June 26, 2006

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Paul Joskow (Electricity Journal, January 2006)

• Empirical evidence suggests that well-designed
  competitive market reforms have led to
  performance improvements in a number of
  dimensions and benefited consumers through lower
  retail prices." Emphasis added.)
• It is evident that real residential prices fell
  more in states that implemented retail
  competition programs than in those that did not.

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FERC

• Under wholesale competition, the efficiency of
  existing nuclear, coal, and other types of
  generation has improved significantly, lowering
  costs to consumers and reducing environmental
  effects, and the increased capacity factors and
  availability of these units has further lowered
  electric generating costs.
• -- ANOPR, Wholesale Competition in Regions
  with Organized Wholesale Competition in Regions
  with Organized Electric Markets, , June 2007

16
Kwoka on Open Letter

• On Open Letter
• Existing studies do not support their
  proposition.
• The unsupported conclusions of these studies
  should not serve as the basis for further
  ill-defined deregulation or competition
  solutions to the present difficulties in
  electricity markets. (Emphasis added)

17
Kwoka on Joskow Study

• On Joskow Analysis
• Represents a good effort at evaluating the
  price impacts of electricity restructuring in
  many ways, but not all.
• Its limitations are sufficiently serious that
  its results should not be relied upon as a guide
  to the effects of restructuring.

18
A Closer Look at Joskow Analysis

• -- What exactly does retail choice mean
• meant to imply? (e.g. Ohio)
• -- Ignores effects of rate freezes

19
Price Comparisons of Selected States in Joskow
Analysis (Residential Customers Prices in
cents/kWh)

• Change Change
• 1996 2004 2007 1996-2004 1996-2007
• ME 12.6 12.2 15.2 -3.2 20.6
• MA 11.3 11.8 16.3 4.4 44.2
• RI 11.8 12.2 14.0 3.4 18.6
• CT 12.1 11.6 18.7 -4.1 54.5
• PA 9.7 9.6 11.0 -1.0 13.4
• NJ 12.0 11.2 14.4 -6.7 20.0
• IL 10.3 8.4 10.4 -18.4 1.0
• OH 8.6 8.5 9.5 -1.2 10.5
• CA 11.3 12.2 14.4 8.0 27.4
• NY 14.0 14.5 17.1 3.6 22.1

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Price Comparisons of Selected States in Joskow
Analysis (All Customers Prices in cents/kWh)

• 
  Change Change
• 1996 2004 2007 1996-2004 1996-2007
• ME 9.5 9.7 13.3 2.1 40.0
• MA 10.1 10.8 15.2 6.9 50.5
• RI 10.5 11.0 13.2 4.8 25.7
• CT 10.5 10.3 16.2 -1.9
  54.3
• PA 8.0 8.0 9.1 0.0 13.8
• NJ 10.5 10.3 13.4 -1.9 27.6
• IL 7.7 6.8 8.6 -11.7 11.7
• OH 6.3 6.9 7.9 9.5 25.4
• CA 9.5 11.4 12.8 20.0 34.7
• NY 11.1 12.6 15.4 10.8 38.7

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Selected Factors Affecting Residential Price
Changes in Retail Choice States (used in Joskow
Analysis)

• ( Change
• State 1996-2004) Selected Factors
• ME (- 3.2) Standard Offer Service (SOS)
  Staggered Auctions
• MA ( 4.4) Rate Reduction, Rate Freeze
• RI ( 3.4) SOS, Rate Cap Formula
• CT (- 4.1) Rate Cap, Rate Reduction
• PA (- 1.0) Rate Cap (generation service)
• NJ (- 6.7) Rate Cap
• IL ( -18.4) Rate Reduction, Rate Freeze
• OH ( -1.2) Rate Reduction, Rate Freeze
• CA (8.0) Masks 2000-2001 increases
  mitigating effects of large
• proportion of public power in state
• NY (3.6) Rate Reduction, Rate Freeze

22
Electricity Price Trends Deregulated versus
Regulated, PPI, Marilyn Showalter, February
2008
23
Electricity Price Trends Deregulated versus
Regulated, PPI, Marilyn Showalter, February
2008
24
Price Comparisons Selected Regulated and
Deregulated States

• (All Sectors, Prices in cents/kWh)
• 1996 2007 Cents Chg
  Chg
• Deregulated
• DE 6.9 11.4 4.5 65.2
• DC 7.4 12.1 4.7 63.5
• MD 7.0 11.4 4.4
  62.9
• NJ 10.5 13.4 2.9
  27.6
• Regulated
• GA 6.4 7.8 1.4 21.9
• NC 6.5 7.8 1.3 20.0
• SC 5.7 7.2 1.5 26.3

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(No Transcript)
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Generation Mix of Selected Deregulated and
Regulated States, 2006
27
Generation Mix of Selected Deregulated and
Regulated States, 2006
28
Generation Mix of Selected Deregulated and
Regulated States, 2006
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Generation Mix of Selected Deregulated and
Regulated States, 2006
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Benefits Selected Company Profits (I)

• ROE ()
  Cash Flow to
• Equity ()
• 2005 5-Year 2005
  5-Year
• Exelon 19 18 33
  33
• Constellation 13 13 28 25
• PSGE 4 16 27
  24
• PPL 16 20 32
  50
• Allegheny 10 -1 30
  11

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Benefits Selected Company Profits (II)

• Summary of Stock Holding Period Returns ()
• (1995-2005) 10 yrs. 5 yrs. 3 yrs. 1yr.
• Regulated 10 9 9 12
• SP 500 7 5 10 15
• Exelon 22 27 30 26
• Constellation 13 22
  19 11
• PSGE 19 13
  20 4
• PPL 17 18
  23 15
• Allegheny 7 3 60
  49

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Benefits Selected Company Profits Projections
(III)

• Year ROE ()
• Exelon 2008 22
• Constellation 2008 17
• PSGE 2009 22
• PPL 2010 23
• Allegheny 2010 26

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Concluding Observations --

• Empirical evidence DOES NOT SUGGEST that
  well-designed competitive market reforms have led
  to performance improvements in a number of
  dimensions and benefited consumers through lower
  retail prices

34
Concluding Observations

• Joskow on electricity market restructuring
• With continuing analysis of comparative
  performance of alternative institutional
  arrangements we will be able to determine more
  definitely what is the best that we can do in a
  imperfect world.

35
Concluding Observations

• Stiglitz
• Imperfect information, imperfect capital
  markets, imperfect competition These are the
  realities of market economics aspects that
  must be taken into account.

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Concluding Observations Posing the Question

• Joskow
• A contest between the performance of the
  regulated
• monopoly framework for governing the electric
  power sector in
• the U.S.
• Stiglitz (speaking about markets in general)
• Do not see the question as markets versus
  government, but
• the appropriate balance with the
  possibility of many
• intermediate forms of economic organization
  .

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Waiting for Schumpeter in Maryland