The New York Times Calls the Bluff on the Deregulation Cabal
The new year arrived with some bad press for the small but vocal group of electricity deregulation advocates that continues to peddle its preferred policy prescriptions. It came in the form of a New York Times article highlighting the failure of electricity deregulation to deliver on its promises of lower energy costs for consumers.
While Energy Twitter gadflies made a parlor game out of pointing out misused acronyms and nomenclature in the story, that misses the forest for the trees. The salient takeaway was that the Times found it was traditional, state-centric utility regulation that continues to deliver the best value for consumers. In its own words, “Average retail electricity costs in the 35 states that have partly or entirely broken apart the generation, transmission and retail distribution of energy into separate businesses have risen faster than rates in the 15 states that have not deregulated, including Florida and Oregon. That difference has persisted for much of the last two decades or so, including in the last year, when energy prices increased worldwide after Russia invaded Ukraine. On average, residents living in a deregulated market pay $40 more per month for electricity than those in the states that let individual utilities control most or all parts of the grid. Deregulated areas have had higher prices as far back as 1998.”
The article notes that the primary drivers for these differences arise from at least two factors: (1) wholesale market design in which all suppliers – regardless of their own costs – get paid what the most expensive units needed for reliability require for compensation to run; and (2) the increasing cost of transmission being passed on to consumers.
Put another way, it is all about design incentives. Deregulation, as defined by the Times, creates individual products that are piece-parts (generation, transmission, distribution) of the system that provides a usable product – electricity – to consumers. In practice, this can result in an outcome in which the different products (like generation and transmission) each individually maximize profits, with limited consideration for what that means for the rate paid by average customers who receive a bill each month. In contrast, when a utility is traditionally regulated – as in the 15 states the Times noted have lower overall costs – it must go before a state regulatory commission to prove the way it is handling investments, as a whole, provide reasonably priced service to its customers. In the utility industry, this is known as “bundled” service. When a regulator reviews this bundled rate, it is seeking to ensure that generation, transmission and distribution are planned cohesively and work together to provide a reasonably priced product to the end-use customer.
As with any complicated topic, a mainstream press article is likely to raise at least as many questions as it answers, and this one is no different. The article lumps all states that have joined RTOs as having been “deregulated,” a point the crew on Twitter seized on to try and point out lack of understanding. But further analysis could seek to explore the distinctions between the states that have fully deregulated, and those that have maintained some aspects of vertical integration while existing within an entity like an RTO/ISO. It might also attempt to better quantify how much more consumers have been paying for generation given the unique nature of how the organized markets price energy. It would be illuminating to know the extent of any windfall profits that generators may have earned from these wholesale market design choices. Analyzing reliability data amongst different regulatory regimes might prove enlightening also. It’s all worthy of more discussion and debate, but this much is clear: 2023 has arrived and the deregulation cabal is on notice. The press is watching, and they are awakening to the fact that the promises of deregulation are being weighed against the failures of its results.