Executive Insight, Generation, T&D, Transmission

Electricity prices and utility restructuring: better or worse?

Electricity prices in restructured electric utility states have been empirically tested in restructured states, pre- and post-restructuring, relative to U.S. electricity prices. Are electricity consumers better or worse off as a result of electric utility restructuring?

The vertically integrated, government-regulated natural monopoly electric utility model worked well in the U.S. for nearly 100 years; however, some governors and state legislatures wish to reduce their states’ electricity prices and have been advised that electricity prices would fall naturally if free market competitive marketplaces were established.

Consequently, beginning in the late 1990s, some states restructured their vertically integrated, government-regulated natural monopoly electric utilities by instituting free market competition in the electricity generation and retail sales’ sectors while maintaining the middle-two sectors of transmission and distribution as a government-regulated natural monopoly.

Data and Method

The U.S. Energy Information Administration (EIA) is the source of electric power price data for this study from 1970 through 2011 for the restructured electric utility states and U.S. electrical power system.

The EIA identifies 15 states and the District of Columbia that are in different stages of restructuring their electricity markets and explains that “restructuring means that a monopoly system of electric utilities has been replaced with competing sellers,” and also states that “restructured states” may be referred to as “deregulated states.” Illinois, Ohio, Michigan and Pennsylvania severely limited their electricity market restructuring during this 1970-2011 study period and consequently are not included in states that effectively have restructured their electricity markets.

The 11 states and D.C. that effectively restructured their vertically integrated government-regulated natural monopoly electric utilities and offer free market competitive marketplaces and the year their electric utility industry is effectively restructured are listed in Figure 1.

Figure 1: 11 States and Washington, D.C., Offer Consumers Free Markets and Effective Year Restructured

11 Electricity  Free Market Competitive States and D.C.

Year Electricity Utility Industry  is Effectively Restructured

Connecticut

2000

Delaware

2000

Maine

2000

Maryland

2008

Massachusetts

1998

New Hampshire

2003

New Jersey

2003

New York

2002

Oregon

2002

Rhode Island

1998

Texas

2002

Washington, D.C.

2001

Means testing was used to statistically analyze electricity prices from 1970 to 2011 for states that restructured their electric utilities pre-and-post restructuring relative to U.S. electricity prices; thus determining whether restructured electricity utility states are more or less efficient after restructuring than before.

Results

U.S. electricity prices increased 4 percent a year from 1970 through 2011, denoted by its linear least-squares trend line. During the same time, electricity prices for the 11 effectively restructured states and Washington, D.C.’s mean increase was 8.9 percent a year (see Figure 2). In the effectively restructured 11 states and Washington, D.C., electricity prices rose some 220 percent faster than U.S. electricity prices from 1970 to 2011.

U.S. electricity prices and those in each of the restructured states changed yearly. To discover when electricity prices are rising fastest in the restructured states, relative price changes are computed. U.S. electricity prices are subtracted from the electricity prices in each restructured state for each year from 1970 through 2011. By comparing relative electricity price sample means for the U.S. and the restructured states, pre-and-post restructuring for each state,  it is determined if electricity prices in the restructured states are increasing significantly faster after restructuring than before restructuring, relative to U.S. electricity prices.

One-way ANOVA p-values — testing between group means for each  free market competitive state’s regulated vs. restructured data sets — and Levene’s, Welch, Brown-Forsyth and Mann-Whitney U tests’ significance levels are shown, where required,  in Figure 2.

Figure 2: One-way ANOVA—Testing Between Group Means for Each Free Market Competitive State

11 Electricity  Competitive States and Washington, D.C.

Electricity Price Increases: 1970-2011

One-way ANOVA

P-values

Levene’s Test

Welch Test

Brown-Forsyth Test

Mann-Whitney U Test

Connecticut

4.1%

.881ns

 

 

 

 

Delaware

6.2%

.000***

.328ns

 

 

 

Maine

13.1%

.000***

.090ns

 

 

 

Maryland

3.2%

.659ns

 

 

 

 

Massachusetts

7.9%

.000***

.006**

.001**

.001**

.000***

New Hampshire

3.1%

.445ns

 

 

 

 

New Jersey

2.8%

.683ns

 

 

 

 

New York

6.0%

.000***

.065ns

 

 

 

Oregon

9.9%

.000***

.798ns

 

 

 

Rhode Island

14.1%

.000***

.000***

.000***

.000***

.000***

Texas

6.5%

.000***

.002**

.005**

.005**

.003**

Washington, D.C.

29.9%

.000***

.000***

.000***

.000***

.000***

Levene, Welch, Brown-Forsyth and Mann-Whitney U test significance levels are shown, where required.

*** extremely significant at p < .001; ** very significant at p < .01; * significant at p < .05; ns – not significant at p ≥ .05

 

Levene’s tests for Delaware, Maine, New York and Oregon are not significant; therefore, no difference between population variances is assumed, and no further statistical tests are required.

Of Washington, D.C., and the 11 states and that have effectively restructured their electricity markets and allow free market competition, electricity prices have gone up more than four times faster after restructuring than before restructuring, relative to U.S. electricity prices. Delaware, Maine, New York, Oregon, Rhode Island and Washington, D.C., have extremely significant electricity price increases and are extremely less efficient after their electric utilities restructure.

Massachusetts and Texas have very significant electricity price increases and are less efficient after their electric utilities restructured. Connecticut, Maryland, New Hampshire and New Jersey had no significant relative price increases pre- and post-restructuring; however, these four states retained substantial price-suppression regulation through re-regulation of their electricity marketplaces. No effectively restructured electric utility state is statistically more efficient.

The relative electricity price mean values for each free market competitive state, pre-and-post restructuring, are listed in Figure 3.

Figure 3: Relative Electricity Price Mean Values for Each Free Market Competitive State

11 Electricity Free Market Competitive States and Washington, D.C.

Regulated (R) and Restructured (D) Relative Electricity Price Mean Values

Connecticut

0.2157 (R)

0.2325 (D)

Delaware

0.6437 (R)

1.2658 (D)

Maine

0.4377 (R)

3.2142 (D)

Maryland

-0.0545 (R)

0.0050 (D)

Massachusetts

0.7604 (R)

1.7457 (D)

New Hampshire

0.2400 (R)

0.3744 (D)

New Jersey

0.2433 (R)

0.1867 (D)

New York

0.6669 (R)

1.3640 (D)

Oregon

-0.1056 (R)

1.8340 (D)

Rhode Island

1.2764 (R)

4.0036 (D)

Texas

0.1938 (R)

0.7970 (D)

Washington, D.C.

1.4539 (R)

9.5418 (D)

 

The relative electric power price means for restructured states prior to restructuring totaled 5.9717, and after electric utility restructuring was 24.5647. Relative to U.S. electricity prices, from 1970 to 2011, the restructured free market competitive states had electricity prices during their restructuring periods increase more than four times faster than increases in electricity prices prior to their restructurings. Extremely significant and very significantly higher relative electricity prices, evident after electric utility restructurings in eight restructured states, increased burdens on electricity customers — placing these eight restructured states at a competitive disadvantage when attracting new jobs and industries.

Conclusions, Policy Implications

The results presented do not support the economic theory that free market competitive marketplaces naturally achieve lower prices in the electric power industry. Instead, electric company operating efficiencies are extremely and very significantly reduced in many restructured states, making society poorer.

Free market economic theory is not being applied appropriately to electric utility restructuring. Unique technical and organizational limitations might be the reasons. Empirical evidence does not support the energy policy of additional states’ restructuring their electric utilities using the existing market design. What is important is developing and implementing an appropriate economic policy that realistically assesses the organizational and technical limitations in the vertically integrated, government-regulated natural monopoly electric power industry.

Eric L. Prentis is on the Cameron School of Business faculty at the University of St. Thomas in Houston. Reach him at [email protected].