PowerFacts
ECONOMISTS: DESPITE HEADLINES, RESEARCH SHOWS “WHOLESALE COMPETITION HAS BEEN SUCCESSFUL”
“Numerous experts continue to assert that competition is yielding lower production and procurement costs, improved access to lower cost generation, billions in savings to consumers, and far more efficient power plants despite the fact that competitive markets are only now just beginning to mature with the expiration of rate caps. They also caution against hasty and reactionary political action in the face of rising rates tied to high fuel costs. A return to rate base would not be a panacea for increases seen in certain parts of the country given the fact that rates are rising in restructured and non-restructured regions alike.”
John E. Shelk
President and CEO
Electric Power Supply Association
November 2, 2006
Excerpts from “The Fallacy of High Prices,” by Dr. Howard Axelrod, Dr. David DeRamus, and Collin Cain (Public Utilities Fortnightly, November 2006)
Fast Facts
• Wholesale Competition a Success, Fosters Lower, More Stable Prices Over the Long Term. “[D]espite the headlines, our research – and that of several others – has shown that wholesale competition has been successful, especially in markets in the eastern United States, and will foster lower, more stable electric prices over the long term than a retreat to traditional rate regulation.” p. 55
• Consequences of Rate Caps, High Fuel Prices Delay and Overshadow Competition’s Benefits. “[T]he development of robust competition in the electricity industry has arguably been delayed by numerous transition mechanisms imposed by regulators and politicians. Those mechanisms, especially multi-year price caps that ‘guaranteed’ consumers savings, provided at best a temporary protection as world energy prices continued to rise. Moreover, those price caps, however well-intentioned, prevented consumers from slowly adjusting to market fluctuations typical of any industry. Not surprisingly, as if a dam burst, the end of those price caps, coupled with the sharp increases in fuel prices, has led to large price increases.” p. 56
• Better Access to Lower-cost Generation Under Competition Yields Big Savings. “[C]ompetition has increased access to lower cost generation, particularly in the organized markets. Numerous studies have documented this impact, with some studies finding as much as $15 billion in savings in the Eastern Interconnection.” p. 56
• Significant Benefits of Restructuring Appeared in a Short Time. “Our evidence shows that there have been significant benefits from electricity restructuring, even in the relatively short time since that restructuring was implemented. Not only has restructuring lowered wholesale and retail prices, it has also shifted significant risks away from customers to generators, who are better able to address those risks.” p. 60
• Fuel Prices, Resulting Rate Increases Know No Boundaries Between Restructured/Non-Restructured States. “[F]uel prices are pushing up electric rates everywhere. Customers, whether in restructured or non-restructured states, are seeing higher electric prices. In some cases, the end of artificial price caps is resulting in higher competitive procurement costs. In other states, fuel pass-throughs are resulting in increased rates. Either way, customers are paying more for electricity.” p. 58
Real Gains Seen in Plant Efficiencies Despite Youth of Competitive Markets
• Benefits Seen in Both Construction and Operation. “[C]ompetition significantly increased efficiencies in the construction and operation of power plants.” p. 56
• Nuclear Plant Refueling Outages Are Down “Dramatically.” “Since 1996, refueling outage times at nuclear power plants decreased dramatically, while operation and maintenance (O&M) expenses were lowered and capacity factors increased.” p. 56
• Improvements Seen in Coal Plants, As Well. “Similarly, heat rates and capacity factors improved at coal-fired plants while O&M costs declined.” p. 56
Production, Procurement Costs Have Declined in the Face of High Fuel Prices
• Competition Has Kept Rates Low Despite Astronomical Rise in Fuel Costs. “Average per-unit production costs, or procurement costs in states with competitive procurement, declined 1.1 percent per year between 2001 and 2004. In 2005, when oil prices increased 135 percent and natural gas prices rose 210 percent, production/procurement costs rose only 5.6 percent. Indeed, if restructured states had used the fuel cost adjustment pass-throughs common in states with traditional rate regulation, rates would have been 15 percent higher.” p. 56
Price Comparisons Between Various States, Regions Are “Irrelevant and Misleading”
• Different Circumstances Throughout the Country. “There are limits on how far one can extend such a comparative analysis of rates across different regions of the U.S. For example, the state of Maryland was recently engulfed in a significant political controversy when bids to provide Standard Offer Service to Baltimore Gas & Electric’s (BG&E) residential customers were 72 percent higher than the then-current retail rates, which had been frozen since 1999 at a 6.5% discount to rates in effect since 1993. Obviously, if one were to compare Maryland’s retail electric prices with prices in the Pacific Northwest (PNW), one would observe that PNW retail prices are significantly lower. Does that prove that there are not any benefits from competition? The answer is clearly no, since prices in the PNW reflect abundant, federally-subsidized hydroelectric capacity not available in Maryland, which makes direct price comparisons between the two regions irrelevant and misleading.” p. 59
Benefits Seen in Shifting Risks From Consumers to Suppliers
• Risk Assumed By Suppliers with “Incentives and Ability” to Manage Risks. “Another benefit of wholesale competition has been the shift of significant risks from consumers to power producers. Prior to restructuring, if a regulated utility built too much generation (surplus capacity), most if not all of the costs would have been passed through to consumers. However, with a competitive wholesale market and competitive procurements by regulated distribution utilities – such as auctions for Provider of Last Resort (POLR) or Standard Offer Service (SOS) – significant risks are shifted away from captive customers to other market participants with the incentives and ability to assess and manage those risks.” p. 59
• Cost Overruns and Delays Cannot Be Shifted to Ratepayers Under Competition. “In particular, developers of new generation capacity assume the risk associated with that project coming in on time and on budget. In such a scenario, cost overruns and delays cannot simply be shifted to captive ratepayers as frequently occurs when incumbent utilities pursue ‘self-build’ strategies under traditional cost-of-service rate regulation. In a competitive market, only those developers who can appropriately assess and manage the risks associated with building new capacity are able to earn a profit and attract capital; those who cannot are eventually forced to exit the market.” p. 59
Regulatory Environment Must Become “Less Politicized.”
• Reactionary Positions Only Hurt Ratepayers, Create Uncertainty, and Increase Investment Risks. “Ultimately, for the full benefits of electric competition to be realized, the regulatory environment needs to become less politicized. Abrupt reactions to short term circumstances, such as proposals for a return to traditional utility regulation, not only impede a rationale resolution of the challenges faced by policymakers and regulators, but also directly hurt ratepayers by creating uncertainty and increasing perceived investment risks – which ultimately lead to increased borrowing costs and higher rates.” p. 60
CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660
EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.