Electric market deregulation has failed to deliver on the promise of lower rates
States that kept the vertically-integrated utility model have benefitted from lower prices for consumers, Gerry Anderson, CEO of DTE Energy, writes in a guest post
The recent Utility Dive article titled “With CPP on ice, utilities seek organized market reforms to save baseload plants” was helpful in highlighting an important debate around how to solve some of the problems being experienced by organized (or deregulated) markets. Along with many of my fellow CEOs, I strongly believe that the rules in deregulated markets need to be addressed quickly to ensure that the industry can continue to provide reliable electricity with a diverse, increasingly cleaner portfolio of generation resources.
However, the article’s claim that deregulated markets are “generally working to lower prices for consumers” is simply not accurate, as can be seen in the chart below.
Electric rates in deregulated states were higher than those in regulated states when deregulation was first introduced in the late 1990’s and remain higher to this day. Indeed, rates have grown at the same pace over the past 15+ years in regulated and deregulated states. Furthermore, customers in deregulated states have experienced significant price volatility, which often led to temporary price freezes, price caps and other forms of market intervention as regulators worked to address the problems inherent in the restructuring of electric markets.
The reason prices in deregulated states have not declined when compared to those in regulated states is straightforward. States which deregulated typically did so because their rates were higher than the national average. These states hoped deregulation would eliminate perceived cost inefficiencies inside the utilities, thereby bringing rates down toward the national average. The reality is that rates in these states were higher than average primarily because of structural factors, such as low electricity usage and limited access to hydroelectric power or low cost fuel. Electricity usage is a particularly important factor, so I would like to spend a little more time describing to your readers how usage impacts rates.
Because a significant portion of a utility’s costs are fixed – the infrastructure needed to bring electricity to a home or small business is roughly the same regardless of how much electricity is used – states that have high usage tend to have lower rates than states that have low usage, as can be seen in the chart below. Usage is driven largely by weather, so warm states like Louisiana use a lot more electricity than my home state of Michigan, while states like Vermont use a lot less.