PowerFacts

Analysis of Flaws in Carnegie Mellon Report on Electricity Costs and Prices

The Carnegie Mellon Electricity Industry Center (CEIC) released a paper entitled "Electricity Prices and Costs Under Regulation and Restructuring" in March 2008. The authors state the study is intended to examine whether restructuring of the electricity industry has led to improved operating efficiency of electric power generation, lower costs and lower retail prices. The study falls short of determining any of those answers because of deficiencies in the data used, inconsistencies in its analysis and disregard of inconvenient facts. Yet the authors still manage to conveniently conclude that the difference between prices and costs is greater in restructured regions than traditionally regulated regions. The study's major flaws are detailed below.

<center>THE DEFICIENCIES IN THE DATA USED AND A LACK OF DEPTH IN THE ANALYSIS CALL THE STUDY'S CONCLUSIONS INTO SERIOUS QUESTION.</center>

Two different data sources are used to compare prices and costs; however there are very different assumptions in the information that is used to quantify price data (Edison Electric Institute's Typical Bill & Average Rate voluntary survey) than in the information used for cost data (FERC Form 1).

• The authors rely on the Edison Electric Institute's voluntary survey of its member companies ("Average Rates and Typical Bills") from 1990 to 2005. These figures are self-reported, companies are self-selected and the data is not audited.



• Most importantly, the data does not include prices from non-utility retail suppliers, co-ops, public power providers or co-generators, and thus likely overstates actual retail prices in states that restructured.



• FERC Form 1 does not include cost information from suppliers that have FERC approved, market-based rates.


• In determining the average cost of generation, the study excluded depreciation costs (capital recovery). Depreciation costs are ongoing, because capital investments in generation are ongoing. The actual difference between costs and prices will vary depending on how capital costs are factored in.



• There is no meaningful way to compare "average price" to "total costs" if depreciation and capital costs are excluded. Further - even if you could, the regulated world is based on "historic embedded costs" and the restructured world is based on "replacement costs." Again, the comparison is that of apples to oranges.



• Buried in Appendix C, the authors admit the inadequacies of the data, but nonetheless use this flawed sampling to arrive at sweeping conclusions.

The report relies on data sets ending in 2005, which reflects 2004 prices and costs. It thus fails to capture the significant changes in costs and prices that took place during and after Katrina-related run-ups in late 2005. It also means that neither the price nor the cost data reflects more recent increases in fuel prices, environmental compliance costs and construction material prices.

The study fails to capture numerous variables, most notably significant fuel cost differences between the regions. Generally speaking, restructured regions are far more dependent on natural gas for generation, while traditional vertically integrated utility regions are heavily dependent upon coal. Natural gas is more expensive for a variety of reasons, including increased demand due to environmental policies in restructured regions.


THE AUTHORS CHERRY PICK RESULTS THAT SUPPORT THEIR CONCLUSIONS AND IGNORE DATA THAT DOESNT SUPPORT THEIR CONCLUSIONS.

• When their data yields inconvenient conclusions, it is glossed over. For example, their data found a decrease in the cost-price ratio of $.0274/kWh in regions within an RTO and with retail competition; however this finding is noted neither in the summary nor the abstract.



• The paper neglects to mention that RTO/ISO market monitors do have proprietary cost information from generators to determine if a market is competitive. For the past several years, ISO/RTO market monitor reports have continued to find that organized markets are competitive. Note that no such analysis is conducted on utilities in non-organized markets, which lack independent market monitors.



• CEIC did not include cost and price data from municipal and co-op utilities in the analysis, despite the institute's long relationship with the American Public Power Association.


THIS IS JUST ANOTHER IN A SERIES OF FLAWED STUDIES FROM CEIC THAT DEMONSTRATES BIAS AGAINST COMPETITIVE MARKETS. THERE ARE NUMEROUS STUDIES THAT SUPPORT DIFFERENT CONCLUSIONS.


• In January 2008, CEIC released a study that claimed the robust growth of renewable energy projects in organized electricity markets is not related to market structure. That study prompted the American Wind Energy Association to issue a public statement in support of the significant benefits of organized electricity markets for wind energy. (Over 70 percent of today's wind generation is located in ISO and RTO markets, even though these markets only represent 53 percent of total energy demand and 44 percent of the nations wind potential.)



• It cannot be ignored as a factor that a major source of funding for the "Electricity Prices and Costs" paper is the Southern Company, which is a parent to numerous traditionally rate-regulated utilities.

Analysis of Flaws in Carnegie Mellon Report on Electricity Costs and Prices

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.