Consumers don’t benefit from electricity restructuring, says APPA


Dr. Kwoka 
Washington, DC, U.S.A. — (METERING.COM) — November 28,2006 – There is no reliable and convincing evidence that consumers are better off as a result of restructuring of the U.S. electric power industry, according to Dr. John E. Kwoka, who recently conducted a review of a dozen of the most prominent and often-cited research studies to datefor the American Public Power Association (APPA). The APPA is a national service organization representing more than 2000 community- and state-owned electric utilities in the U.S.

Dr. Kwoka, who is the Neal F. Finnegan Distinguished Professor of Economics at Northeastern University in Boston, analyzed the methodologies of the 12 studies, looking at their strengths and limitations. Nine of the 12 found retail price benefits or cost efficiencies from restructuring that ranged from expansive to tentative. Three reported no benefits or outright consumer costs.

“Federal and state regulators, market participants, and consumers need high quality and transparent information based on standardized methodologies that reflect real-world situations to be able to analyze and make decisions about the future direction of the electricity marketplace,” said Alan H. Richardson, APPA President & CEO. “Dr. Kwoka’s findings demonstrate that too little is known about the effect of past decisions to conclude that our industry is on a path that can or will produce customer savings.”

Dr. Kwoka concluded that despite differing in their findings, each study had its own specific limitations, and many shared three common and major deficiencies. These are:

1. A lack of precision about what is meant by ‘restructuring’, which often over-simplifies the process and mis-characterizes the data.
2. Failing to look beyond initial transition effects, such as state-mandated rate reductions and freezes, stranded cost adjustments, and excess capacity, which are not a reflection of the permanent or equilibrium market price.
3. Nnot controlling for other factors that affect prices, which can result in incorrectly attributing price effects to restructuring.

According to Dr. Kwoka, most of the studies pay too little or no attention to three factors that should be part of any comprehensive assessment of restructuring – market power and manipulation, rising costs of Regional Transmission Organizations, and potentially adverse effects of restructuring on service quality and reliability.

Four of the studies compared prices before and after restructuring, or with and without restructuring, based on econometric models of price determination (Cambridge Economic Research Associates; Joskow; Taber, Chapman, and Mount; and Fagan). Five compared prices (or costs) under restructuring to what they would have been in the absence of restructuring – but instead of econometric estimates of prices in the no-restructuring scenario, these studies constructed prices from accounting data or other simulation techniques (Center for the Advancement of Energy Markets; Apt; Synapse; Global Energy Decisions; and Energy Security Analysis, Inc.). The other three conducted non-quantitative evaluations of the impact of single companies or institutions involved in restructured electricity markets (Weaver; ISO/RTO Council; NY State Department of Public Service).

This study is part of APPA’s Electric Market Reform Initiative. APPA has launched the initiative to address the market failures and other serious challenges facing wholesale electricity markets across the country. APPA believes these challenges include rapidly increasing wholesale power prices, spiraling Regional Transmission Organization administrative costs, the failure of federal and state deregulation policies to ensure generation resource and transmission adequacy, and the near-impossibility of obtaining long-term transmission access at stable and reasonable rates.