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Electricity Deregulation -- Who Gains, Who Loses?

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. Overview .

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Electricity Deregulation -- Who Gains, Who Loses?

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  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 – What’s the Issue? • What’s What – What’s 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 America’s 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

  14. 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.”

  15. 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. • It’s 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 1996200420071996-20041996-2007 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%

  20. Price Comparisons of Selected States in Joskow Analysis (All Customers; Prices in cents/kWh) % Change % Change 1996200420071996-20041996-2007 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%

  21. Selected Factors Affecting Residential Price Changes in Retail Choice States (used in Joskow Analysis) (% Change State1996-2004)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) 19962007Cents Chg% Chg Deregulated DE6.9 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

  25. Generation Mix of Selected Deregulated and Regulated States, 2006

  26. 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

  29. Benefits: Selected Company Profits (I) ROE (%) Cash Flow to Equity (%) 20055-Year20055-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

  30. 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 S&P 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

  31. Benefits: Selected Company Profits Projections (III) YearROE (%) Exelon 2008 22 Constellation 2008 17 PSGE 2009 22 PPL 2010 23 Allegheny 2010 26

  32. 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”

  33. 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.”

  34. Concluding Observations: • Stiglitz: “Imperfect information, imperfect capital markets, imperfect competition: These are the realities of market economics – aspects that must be taken into account.”

  35. 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 ….”

  36. Waiting for Schumpeter in Maryland

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