As Americans recover from the recent winter storms, many are also bracing for an additional onslaught when they get their monthly electric bill. Retail electric prices are up in recent years, and while this can be attributed to everything from the war in Ukraine to broader inflationary trends, a recent article in The New York Times claims to have identified the real culprit: deregulation!
According to the Times, “residents living in a deregulated market pay $40 more per month for electricity than those in the states that let individual utilities control most or all parts of the grid.” The Times notes that so-called deregulated states tend to spend more on transmission lines and suggests that this—along with the way electric market auctions are structured and, of course, “energy company profits”—accounts for the higher prices.
This argument is unpersuasive and frankly a little odd.
The first odd thing about the argument is the number of states reported as deregulated: 35. Thirteen states and the District of Columbia allow most of their electric customers to choose their electric supplier. So most experts would say 14 states have deregulated power markets. The Times appears to be counting every state in which a major electric utility participates in regional power markets as “deregulated” too. Included in these 35 are the 14 states with retail electric choice, but the other 21 states keep most of their retail customers locked into monopolies with state-regulated rates. For this reason, industry insiders vastly prefer the term “restructuring” over “deregulation.”
Even in the 14 states that are the most deregulated, the transmission and distribution parts of the business—the “wires” industry segment—remain as a traditional monopoly with state-regulated rates. This leads to the second odd thing about the Times argument: It singles out rising transmission spending as one of the key factors driving prices higher. When the Times says that prices are higher in deregulated states because they are spending more on transmission, it is pointing precisely to the part of the market that has not been deregulated.
The Times claims that transmission spending “often gets minimal review by state and federal regulators” but “officials in areas that have not deregulated…maintain much greater control over utility spending.” That would be news to transmission and distribution utilities, which still face oversight for their spending in regulated sectors.
The Times offers a decent explanation for why transmission spending has been going up: Utilities are spending more to connect customers to geographically distant renewable resources and harden the grid against the consequences of a changing climate. Neither one of these things is the result of “deregulation.”
The Times is similarly confused when it comes to the intricacies of real-time electric market auctions. In an organized wholesale electric market, generators submit bids to supply power to the grid and the market automatically chooses the cheapest mix of bids needed to supply customer demands. The article portrays this approach as wasteful because the lowest-cost generators get paid the same price as the most expensive bid chosen. The truth is the approach rewards low-cost generators more than high-cost generators and, thus, pressures all generators to work more efficiently. This isn’t just theoretical speculation. There is plenty of research demonstrating that this “uniform clearing price” approach works to promote efficiency in practice.
That leaves the third explanation by the Times, the old staple of anti-market thinking: Competition leads to higher prices because of “profits taken in by energy suppliers.” Based on reading the Times article, you might be surprised to learn that monopoly utilities also make profits. Indeed, utility rates are typically set to give the utility a set percentage of profit based on their past investments. This, needless to say, does not encourage utilities to find ways to lower costs.
If deregulation isn’t to blame, then why are electric prices higher in so-called deregulated states? A hint at an answer comes in the Times article itself, which notes that “Deregulated areas have had higher prices as far back as 1998.” Most of the states implementing reforms did so after 1998. If these states had higher electric prices before they were deregulated, it’s hard to blame that on deregulation. In fact, the higher prices could be part of why they choose to deregulate in the first place.
A clear example of this comes from a study of electric prices in Texas. The study took advantage of a little-noted fact about the Texas electric market: While much of the state has full retail competition, certain areas were grandfathered into the old system and remain monopoly utility providers. The study found that an area was more likely to enter competition if it had relatively higher prices before competition and that relative prices had come down since competition had been introduced.
There are reasonable arguments to be had about why competition hasn’t resulted in larger price declines. For example, in many states, the effect of retail competition was blunted by allowing the old incumbent utilities to continue providing electric service to customers who didn’t actively switch. But the Times analysis is so confused that it only leaves the reader more in the dark about electricity price increases.