The Jan. 4 New York Times had a headline and article that have caused considerable consternation among energy analysts and economists: Why Are Energy Prices So High? Some Experts Blame Deregulation.
The teaser below the head read: “California and the 34 other states that have deregulated all or parts of their electricity system tend to have higher rates than the rest of the country.” The article was written by Times LA staffer Ivan Penn, who focused on electricity prices, not the broader topic of energy prices.
Penn joined the New York Times in 2018, after eight years at the Tampa Bay Times, where he reported, quite insightfully, on several electricity topics in a region dominated by traditionally regulated electric companies, among them Southern Co.’s troubled Vogtle project. Penn also reported for the Baltimore Sun for many years.
In the January article, Penn wrote, “On average, residents living in a deregulated market pay $40 more per month for electricity than those in the states that let individual utilities control most or all parts of the grid. Deregulated areas have had higher prices as far back as 1998.”
First, a terminological quibble: The article’s use of the term “deregulation” carries unwarranted baggage. Penn was writing about “restructured” markets where wholesale electricity prices are the product of competition. There is still plenty of regulation in those regional transmission organization and independent system operators.
The article produced a kerfuffle among many who closely follow electricity markets, as well as some amusement. Commenting for an article in RTO Insider, former Montana regulator Travis Kavulla, now an executive with merchant generator NRG Energy, said, “There is no such thing as ‘deregulation’ or a ‘free market’ in this industry anywhere — which remains regulated everywhere.”
Veteran electricity economist Robert McCullough, who provided Penn with some of the numbers he used in the Times article, commented to RTO Insider, “Of course, one of the evocative things about electricity — evocative in that it attracts a lot of confusion — is it is complicated, and so it’s very hard to get some of the concepts across.”
The article’s most thorough dissection, or perhaps vivisection, came from a blog by economist James Bushnell at the University of California at Berkeley’s Energy Institute at Haas. He and Haas director Severin Borenstein have been addressing this issue for many years. Bushnell doesn’t object to the term “deregulated,” using it to mean the “degree to which generation is compensated by market-based prices rather than cost-based regulation,” but he pulls apart the data to look at its components.
Bushnell notes that “retail prices in States that deregulated were already very high. That’s a big part of why they deregulated! So any comparison of retail prices needs to be mindful of different starting points.”
Another key is that electricity prices “closely follow marginal generation costs,” largely a product of the costs of natural gas, now the dominant generating fuel, particularly in competitive markets. A final “complication in studying electricity prices,” writes Bushnell, “is that the cost of buying electricity comprises at most half the retail price in most states. The costs of transmission, distribution, which remain regulated everywhere, along with a myriad of other charges, make up half or more of the retail price.”
Breaking out California’s costs from the group of states in restructured markets shows this phenomenon. Bushnell concludes, “When we remove California from the ‘deregulated’ group, you can see how dramatically California’s prices have gone in the opposite direction of the other deregulated states. The sharpest climb in California electricity rates has hit in the last five years, complicating any attribution to the deregulation process in 1998. After removing California, retail prices in all the other deregulated states have risen more slowly than those in the regulated category. The gap between those two groups, in real terms, is now about half of what it was in 1998.
“So instead of ‘some experts blame deregulation,’ a better sub-title for last week’s article would probably be ‘experts should blame California.’”
The Times article also makes a bald statement that “utilities in deregulated states have financial incentives to build transmission lines.” Bushnell responds, “Actually utilities in every state have a financial incentive to build transmission lines, it’s called rate-of-return regulation, and it continues in every state in the country.
“I do believe that regions with Independent System Operators have managed to build more high-voltage transmission over the last 20 years, largely because they have proven to be an effective vehicle for coordinating planning and cost recovery across multiple states and utilities. By far the largest expected driver of transmission expenditures, however, is the need to support renewables expansion. An expansion on which California sits on the cutting edge.”
In a tweet, veteran D.C. energy analyst Rob Gramlich, co-founder and president of Grid Strategies LLC, commented about the Haas rebuttal, “Much better analysis of ‘deregulation’ and retail rates than that @nytimes story a couple of weeks ago. Lots of things can raise rates. Competition in generation has not been the cause.”
–Kennedy Maize
To subscribe to The Quad Report – it’s FREE – just click on the email address above and type “subscribe” in the subject line. I’ll take care of it from there.
To comment: