Researcher says competition not good for consumers; advocates fire back

Washington, D.C., Dec. 7, 2006 — “[D]espite 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,” said Dr. John E. Kwoka, after reviewing a dozen often-cited research studies to date.

Kwoka, who is the Neal F. Finnegan distinguished professor of economics at
Northeastern University in Boston, conducted the review for the American Public Power Association. He analyzed the methodologies of the 12 studies, looking at their strengths and limitations. Nine of the 12 found retail price benefits or cost efficiencies from restructuring that ranged from expansive to tentative. Three reported no benefits or outright consumer costs.

“Federal and state regulators, market participants, and consumers need high quality and transparent information based on standardized methodologies that reflect real-world situations to be able to analyze and make decisions about the future direction of the electricity marketplace,” said Alan H. Richardson, APPA president and CEO. “Dr. Kwoka’s findings demonstrate that too little is known about the effect of past decisions to conclude that our industry is on a path that can or will produce customer savings.”

Kwoka concluded that despite differing in their findings, each study had its own specific limitations, and many shared three common and major deficiencies:

* A lack of precision about what is meant by “restructuring,” which often over-simplifies the process and mischaracterizes the data;
* Failing to look beyond initial transition effects, such as state-mandated rate reductions and freezes, stranded cost adjustments, and excess capacity, which are not a reflection of the permanent or equilibrium market price; and
* Not controlling for other factors that affect prices, which can result in incorrectly attributing price effects to restructuring.

According to Dr. Kwoka, most of the studies pay too little or no attention to three factors that should be part of any comprehensive assessment of restructuring: market power and manipulation, rising costs of Regional Transmission Organizations, and potentially adverse effects of restructuring on service quality and reliability.

COMPETE, a coalition of 145 electricity stakeholders who support competitive electricity markets, fired back. COMPETE’s chairman, former U.S. Senator Don Nickles, issued a statement, saying, “COMPETE’s 145 members, many of whom are customers that participate in electricity markets on a regular basis, firmly believe that they get the best deals in competitive markets. Electricity markets are providing great value to consumers even during this time of high fuel costs for electric generation. When suppliers compete, the customer wins. Competitive, well-structured, and organized markets pave the way for renewable resources, demand resources, and innovative technologies that ultimately will move our nation toward greater energy independence.”

“The benefits of competitive markets have been well-documented by numerous studies. Just because APPA’s expert disagrees does not make his views right and the other studies wrong. We stand by the weight of the numerous analysts who have conducted the previous studies,” the statement concluded.

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