EPSA warns against return to cost-plus regulation

By Steven M. Brown, Associate Editor

The good old days, it turns out, may not have been so good after all.

Team New Jersey’s prototype fuel cell vehicle, Venturer, garners the checkered flag (in their category) at the New York City to Washington, D.C. Northeast Sustainable Energy Association (NESEA) American Tour de Sol, the U.S. eletric vehicle championship held annually in late spring. Photo taken by Clay Turnbull, courtesy of NESEA.
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Results of a newly released study commissioned by the Electric Power Supply Association (EPSA), suggest that a return to cost-plus rate regulation in the electric utility industry would be ill-advised. The study, “Assessing the Good Old Days of Cost-Plus Regulation,” found that during the period from 1985 to 1999, inflation-adjusted electricity prices decreased by an average of 30 percent for residential customers and by an average of 36 percent for commercial and industrial customers.

The study contrasts those price decreases against the 25 percent inflation-adjusted average price increases for residential customers and the 86 percent inflation-adjusted average price increases for commercial and industrial customers that FERC reported during the period from 1970 to 1985.

The study, which Craig Roach, principal of Boston Pacific Co., conducted for EPSA, examined sales data provided by 60 investor-owned utilities for the time period between 1980 and 1999. According to the study report, that time period was chosen because the first efforts to move toward wholesale competition began with the Public Utility Regulatory Policies Act (PURPA) around 1980. The study also focused specifically on results beginning in 1985 because, according to the report’s author, “competition had more strongly taken hold by then.” An examination of the utility-provided data used in the study showed that inflation-adjusted prices trended lower throughout the time period covered in the study.

Mark Stultz, EPSA spokesperson, said the study showed that competitive wholesale markets have worked as intended and have led to efficiencies that would not have occurred under cost-plus rate regulation.

“As a result of what’s happened in California, people have indicted competition in general, not just retail competition but wholesale competition as well,” Stultz said. “This study shows that true competition puts downward pressure on prices.”

According to the study report, the price increase that FERC reported (on page 14 of FERC Order 888, Docket Nos. RM95-8-000 and RM94-7-001) between 1970 and 1985 “is in sharp contrast to the significant decrease we found in inflation-adjusted electricity prices during the subsequent 15-year period in which the nation began evolving toward a competitive electricity business. In the 1985-1999 period, inflation-adjusted electricity prices decreased on average by 30 percent for residential customers and by 36 percent for industrial/commercial customers.”

The report pointed out that the price decreases were not isolated among only a few of the IOUs that participated in the study. According to the study report, 84 percent of the participating utilities showed greater than a 20 percent inflation-adjusted price decrease for residential customers, and 94 percent reported greater than a 20 percent decrease for commercial and industrial customers.

Lynne Church, EPSA president, said that while other factors, such as falling fuel prices, slowing inflation and power plant depreciation, played a part in electricity’s downward price trend over the last 20 years, wholesale competition also was a significant factor.

The study report listed a number of factors to support EPSA’s opinion that wholesale competition figured significantly in the downward price trend. According to the study’s findings:

  • Real prices for commercial and industrial customers fell more than those for residential customers. The report stated this can be attributed to the fact that PURPA exerted competitive pressure by encouraging the use of onsite cogeneration to serve large commercial and industrial customers.
  • The 36 percent price decrease for all customers reflects lower prices at the wholesale level during the 1985-1999 period.
  • Prices across utilities converged during the 1985-1999 period. According to the report, price convergence indicates competition between utilities to win wholesale business.

A copy of the complete study is available at www.bostonpacific.com/powerprices.

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