The Disaster of Deregulation

PACE is Thankful for Progress in 2017
November 23, 2017
Hedging, Natural Gas and National Security
November 30, 2017

Earlier this year, PACE shared some thoughts about deregulation of the electric power retail markets and why it doesn’t make sense for consumers. With state legislatures across the country gearing up for 2018 sessions, it seems timely to touch on the topic again. When it comes to deregulating (or restructuring) retail electricity markets, the song remains the same. Nearly two decades of experimentation, creation of complicated behemoth markets and establishment of cumbersome oversight mechanisms has rarely, if ever, produced meaningful cost savings or competition.

Pushed by giant casinos and renewable advocates, Nevada’s Public Service Commission has recently created a new docket to study deregulation, even though the state spent countless months and public dollars studying the issue twenty years ago before deciding against restructuring. Voters will also consider the question on the state’s 2018 ballot.

As interest groups including the “Energy Choice Initiative” or “ACCES” (the American Coalition of Competitive Energy Suppliers) continue to preach the gospel of retail choice, other states could also roll the dice, running the risk of making expensive, drastic decisions that will impact millions of utility bills and consumers.

Throughout this year, PACE has reviewed deregulation impacts recorded in publicly available documents from government and academic sources. Even though some of the more dramatic events, such as implosion of the California electricity market, are now some years in the rearview mirror, the fundamental arguments against retail restructuring are still in place.

The most important – deregulation costs consumers more. The Energy Information Administration (EIA) regularly tracks retail electricity prices at the state level. According to a 2015 review of EIA data, over the period of 1997 to 2014 retail electric price increases were higher in states with deregulated electricity markets.

As a case in point, Texas has a long history with deregulation, having enacted its statute in 2002. The Texas Coalition for Affordable Power found that in the experiment’s first decade, Texas consumers paid 8.5 percent above the national average for electricity.

Deregulation means the traditional incumbent utility is no longer responsible for, and in fact may be prevented from, procuring and managing generation and transmission for customers. When many smaller players with multiple motives get engaged, and are chasing profits first, long-term decisions about generation and transmission services may not be made in the customers’ best interest, or by businesses with the appropriate amount of experience in procuring these necessary services.

The result too often is price volatility, which can also hit consumers on the bottom line. When deregulated utility companies gamble, sometimes they win on price, but just as often can lose. Customers in a contract with these companies are along for the ride. Among other states, Montana experienced extreme electricity price swings, prompting a state official earlier this year to call deregulation “an economic experiment which turned out to be the biggest financial disaster in our history.” State officials in Connecticut, New York, Maryland and other states have investigated or brought proceedings against retail electricity providers for bait and switch tactics (come for the low prices, stay for the unexpected gouging!) that harmed consumers.

Before the year is out, PACE will return to this topic, in order to highlight other states’ failed deregulation stories and provide a special focus on the unfortunate experiences of far too many low-income consumers. Deregulation often makes it harder to assure the 99.99 percent reliability that businesses and families expect. We’ll also refute the idea that technology is the panacea that will make the deregulation experiment work this time, if only we all believe hard enough.