September 13, 2007
The Honorable James Brennan
Dear Mr. Brennan:
Re: Electricity Price-Trend Comparisons, New York v Regulated States
Thanks for your request for more information on New York prices. The graph below shows retail prices for electricity in New York, compared to prices in states that did not deregulate. Prices are for the twelve months ending in May of each year, through May 2007 (the latest data available from the US Energy Information Agency). They are for total delivered cost (generation, transmission, distribution) to all customers in the state.
In 2000, the average price for all customers in New York was 10.4 cents/kwh; the comparable figure for the collective regulated states was 6 cents/kwh-or a difference of 4.4 cents. As of May 2007, the difference had widened to 6.8 cents (14.4 cents/kwh for New York and 7.6 cents/kwh for the regulated states).
This is not to say that deregulation is responsible for the whole gap, or that the gap can be closed. It is to emphasize, however, the significant economic value of lower-cost electricity systems, and the importance to any state or region-whatever its resource base-of pursuing the most effective form of economic regulation of electricity.
For example, if, since 2000, the average price in New York had simply risen at the same rate of increase as the average price in the regulated states (roughly paralleling historical trends prior to 2000), consumers in the New York would have $9.6 Billion (in 2006 dollars; $10.9 Billion in present value using a 5% real discount rate) in their pockets to spend on other things-on their families, their businesses, or new electricity infrastructure. For this past year alone (the 12 months ending May 2007), the figure is $1.6 Billion in 2006 dollars.
Again, one cannot say that New York would have followed this exact price-path had it not deregulated. Exact prices might have been higher or lower, depending on a number of factors, including growth, density, resource mix, and effective regulators.
The hypothetical yellow line does, however, provide a conceptual benchmark for examining why prices in New York have risen above it. A fair place to start would be New York's wholesale market design. By design, the most expensive needed resource, often a natural gas plant, sets the price for all needed resources, regardless of their underlying cost. So if the price of natural gas increases, as it has, or if an even more expensive renewable resource becomes the marginal resource, prices for all resources will increase as a result.
By contrast, in regulated cost-based systems, a higher-cost resource will not significantly affect the amount consumers must pay for a lower-cost resource.
Here are comparison-charts broken down by class of customer: residential, commercial, and industrial.
Finally, for your interest, the following graph traces the total average delivered electricity price for all of the price-deregulated states, compared to the average price for the regulated states.
Since 2000, the gap between the two has risen from approximately 2 cents/kwh to over 4 cents/kwh. (In the twelve months ending 2000, the average price was 8.1 cents/kwh for the (now) deregulated group and 6.0 cents/kwh for the regulated group. For the 12 months ending May 2007 the average price was 12 cents/klw for deregulated group and 7.6 for the regulated group). This gap reflects a significant difference in purchasing power. Had the deregulated group been able to buy their power at the regulated group's average rate, they would have saved $ 48 billion (in 2006 dollars) over the 12 months ending in May 2007.
The prices are averages for the 12 months ending in May of each year, 1991 through 2007. (A rolling 12-month average captures all seasons and can be updated each month.)
The prices shown are for total delivered price (generation, transmission, and distribution) for all customers in the state, whether served by an investor-owned or public-power utility.
The "regulated states" include all states except CA, CT, DC, DE, MA, MD, ME, MI, NH, NJ, NY, RI, TX, which comprise the "deregulated" states. Characterizing a state as "regulated" or "deregulated" involves some judgment, since different states can have different approaches to pricing for different classes of customers and to divestiture of regulatory assets. In general, states whose residential customers retained regulated rates are defined as "regulated." The states of IL, OH, PA, VA are included in regulated states, due to price caps in those states through 12/06. Price caps in Illinois were removed as of January 2007, but since the prices shown are for a twelve-month rolling average, Illinois will be reflected as "regulated" until more than six months are "deregulated" (no price caps; no credits). California suspended deregulation but remains in the "deregulated" category because significant regulatory assets were divested, some customers remain unregulated, and others are exposed to wholesale market rates due to divestiture. Montana is included in "regulated" states because it never fully exposed its residential customers to the open market, though its main utility did divest itself of its regulatory assets. Arguably, Montana should be included in the "deregulated" category, at least for a period of years, but doing so would not significantly change the graphs, because it is a small-population state. New Hampshire, another small state, is characterized as "deregulated," even though some regulatory assets were preserved. Also, a "deregulated" state may include territories, notably those of public-power utilities that have been exempted from the state's deregulation requirements. These graphs include all prices for all customers in a state, regardless of which utility or supplier serves them. The label "deregulated" or "regulated" is applied at the state level. Finally, pr ices for any given state are shown in either the "regulated" or "deregulated" line for the entire period, even though most states began deregulation around 1999 or 2000; prior to that time all states would have been classified as "regulated."
Please let me know if I can provide any further explanation or information.