Energy Inflation, Deregulation, and the Laboratories of Democracy

United States Supreme Court Associate Justice Louis Brandeis’ famous observation that states serve as the “laboratories of democracy,” is a useful framework for policymakers considering the effects of utility restructuring and deregulation.  Not every state has made the same choice in electricity policy, and because of that, we have variables against which we can test hypotheses and measure the impacts of utility regulatory policy.

As previously noted by this blog, one particularly intriguing laboratory is New England.  Five of the six New England states fully deregulated, while Vermont alone still engages in traditional utility regulation.  One hypothesis is that when wholesale and energy commodity market prices spike, consumers in deregulated states (being more directly exposed to market pricing) will see electricity rates climb higher and faster than in traditionally regulated states (where customers are protected with longer-term supply contracts that support a more diverse generation resource portfolio).

Sure enough, the hypothesis is being confirmed in real time.  Look at the latest monthly data available from the Energy Information Administration related to residential retail electricity rates in New England:

Every New England state, save Rhode Island, has seen significantly higher electricity rate hikes than regulated Vermont.  But even the Rhode Island anomaly can be explained.  Ocean State residents will soon be in the same boat as their deregulated New England brethren.  The default electricity rate in Rhode Island was set to rise 47% beginning October 1, and is not yet captured in the EIA data, but it is only a matter of time before the results of the test are complete.  The anti-consumer effects of deregulation become more evident every day as the energy inflation crisis continues.  It should serve as a wake-up call for those willing to study the outcomes being produced in our nation’s state policy incubators.