A recent New York Times article claims that states with deregulated – or, more accurately, “reorganized” – electricity markets have disproportionately higher prices compared to regulated states. However, research examining changes in consumer electricity prices over time in reorganized and regulated states shows this isn’t true.
Times reporter Ivan Penn overlooks the fact that transmission remains under the jurisdiction of traditionally regulated investor-owned utilities – even in reorganized states.
As a Pacific Research Institute’s paper in 2021 shows, the 14 states with the highest percentage increases in electricity prices from 1996 to 2020 were all states with traditionally regulated electric markets, while four of the five states with the lowest percentage increases were reorganized states.
It is also shortsighted to only look at the consumer price changes over the past three years due to the abnormal circumstances affecting energy markets, including the pandemic, the Russia - Ukraine situation, and the impacts those events have had on supply chains, manufacturing, labor costs and availability, and the like.
Furthermore, the Times article does not distinguish between states that have reorganized their wholesale and retail markets and ones that only participate in wholesale markets. The Times article focuses substantially on California, which has not reorganized its retail market.
As a side note, the rise of community choice aggregations is giving California consumers some choice, along with the substantial amount of roof-top solar – for which upcoming changes to the state’s net-metering policy threatens future growth. But that's another story.
As Josiah Neeley writes in Reason, a substantial portion of the difference in total costs between electricity markets is due to higher transmission costs in reorganized market states. Reorganization does not affect higher transmission costs because they are regulated and the responsibility of the local monopoly utility in all states.
Even in the 14 states that are the most deregulated, the transmission and distribution parts of the business—the "wires" industry segment—remain as a traditional monopoly with state-regulated rates. This leads to the second odd thing about the Times argument: It singles out rising transmission spending as one of the key factors driving prices higher. When the Times says that prices are higher in deregulated states because they are spending more on transmission, it is pointing precisely to the part of the market that has not been deregulated – Josiah Neeley writing in Reason.
Meanwhile, utility-owned generation in regulated states provides a guaranteed rate of return for investor-owned utilities – even when projects are delayed, over budget, or never completed. Such is the case with the delayed expansion of the Vogtle nuclear plant in Georgia and the canceled VC Summer plant in South Carolina. The traditional monopoly model that still exists in most states puts all the risk on ratepayers instead of on the utilities making the investment decisions. Conversely, in reorganized states, the risk is taken by the private-sector companies building the generation, and therefore, such investments would be seen as too risky to finance in the first place.
Furthermore, aging generation will inevitably be retired as its capacity factor – the amount of electricity produced as a percentage of what it could theoretically produce if running at 100 percent capacity for a year – falls to the point where it is no longer profitable to operate.
As the “electrification of everything” continues to displace demand for fossil fuel-based generation, particularly for transportation and heating, the cost savings in reorganized markets will increase as companies compete for customers.
“A superior natural resources policy is one that favors those institutions by which new resources are substituted for old ones: individual enterprise, guided by the price signals of the market, and technological advances that conserve resources and permit them to be used more efficiently.”
While increased demand for electricity will delay the retirement of some older generators, the vast majority of the new generation will come from renewables, especially in reorganized states where competition is encouraged.
Renewables are expected to be the fastest-growing source of electricity generation through 2050, according to the U.S. Energy Information Administration. Solar power, which accounted for roughly 15 percent of renewable generation last year, will increase to nearly 50 percent by mid-century. Solar prices are expected to continue to decline by 15 to 20 percent annually, becoming the cheapest power source by 2030.
Other emerging technologies like geothermal and small modular nuclear reactors may prove to be viable in the future, but one reason the pilot projects for these technologies are being deployed in regulated states like Wyoming, Idaho, and Utah, is that they are not close to being cost-effective and therefore need the security of a guaranteed rate of return.
The command-and-control regulatory approach is attractive to investor-owned utilities and policymakers, but it is inefficient in practice. The existing policy and regulatory framework governing the electricity sector should be replaced with competitive wholesale and retail markets that are responsive to consumer choice and provide transparent price signals for market participants.
In many states, consumers are passive users of electricity. But giving consumers more control over their electricity use can turn them into much more active and important players in the energy market. Competition addresses a number of market failures in the traditional utility monopoly model, including reducing regulatory barriers to private investment in clean energy generation and advanced technology.
Policymakers should finish the work they started almost 50 years ago and fully restructure electric power markets to allow competitive wholesale and retail competition. Then maybe the New York Times will see the value in giving consumers a voice in their energy use.