The following is a guest post from Gerry Anderson, chairman and CEO of DTE Energy, an electric and gas utility serving more than 2 million customers in Southeastern Michigan. If you are interested in submitting a guest post, please review these guidelines.
The recent Utility Dive article titled “With CPP on ice, utilities seek organized market reforms to save baseload plants” was helpful in highlighting an important debate around how to solve some of the problems being experienced by organized (or deregulated) markets. Along with many of my fellow CEOs, I strongly believe that the rules in deregulated markets need to be addressed quickly to ensure that the industry can continue to provide reliable electricity with a diverse, increasingly cleaner portfolio of generation resources.
However, the article’s claim that deregulated markets are “generally working to lower prices for consumers” is simply not accurate, as can be seen in the chart below.
Electric rates in deregulated states were higher than those in regulated states when deregulation was first introduced in the late 1990’s and remain higher to this day. Indeed, rates have grown at the same pace over the past 15+ years in regulated and deregulated states. Furthermore, customers in deregulated states have experienced significant price volatility, which often led to temporary price freezes, price caps and other forms of market intervention as regulators worked to address the problems inherent in the restructuring of electric markets.
The reason prices in deregulated states have not declined when compared to those in regulated states is straightforward. States which deregulated typically did so because their rates were higher than the national average. These states hoped deregulation would eliminate perceived cost inefficiencies inside the utilities, thereby bringing rates down toward the national average. The reality is that rates in these states were higher than average primarily because of structural factors, such as low electricity usage and limited access to hydroelectric power or low cost fuel. Electricity usage is a particularly important factor, so I would like to spend a little more time describing to your readers how usage impacts rates.
Because a significant portion of a utility’s costs are fixed – the infrastructure needed to bring electricity to a home or small business is roughly the same regardless of how much electricity is used – states that have high usage tend to have lower rates than states that have low usage, as can be seen in the chart below. Usage is driven largely by weather, so warm states like Louisiana use a lot more electricity than my home state of Michigan, while states like Vermont use a lot less. [1]
Deregulation failed to deliver on its promise of lower rates because it could not address the structural factors which drove the differences in rates in the first place. While I applaud your article for highlighting the different perspectives that are being debated with respect to the future of organized markets, I wanted to make sure your readers have an accurate perspective on how deregulation has impacted prices: deregulation of electricity has not delivered the price declines its proponents claimed it would.
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[1] Low rates do not translate to lower bills: customers in states that use significantly more electricity have lower rates but generally pay much higher bills than customers in states with higher rates.
