What Goes Down Must Come Up: Here is the Emerging Price Trend to Watch

Supporters of electricity deregulation, without much evidence, have long claimed that electricity deregulation has led to lower prices for consumers in those states that have attempted it.  Of course, the facts do not back-up this claim, but it hasn’t stopped deregulation’s cheerleaders from making curious arguments to justify their position.  Among those claims, is that “electricity rates in deregulated markets have declined at a rate faster than in traditionally regulated markets.”  Unfortunately, this assertion is mostly an example of the games you can play with numbers, not a serious policy analysis.

To the degree electricity rates declined in deregulated states after 2009, it was a function of where prices started, and the declining cost of natural gas.  Rates in deregulated regions were always higher than in regulated states, so when natural gas prices started falling thanks to shale gas, they had further to drop in deregulated states than they did in regulated regions – which had lower overall prices to begin with.  So while prices often fell by a greater percentage in deregulated regions, the actual price paid by customers was still usually lower in regulated states.  Even within a single state like Texas – where it is part deregulated, and part regulated, prices were generally lower for regulated utilities than deregulated ones.  Nonetheless, the difference between the two slowly narrowed in recent years, as discussed in this report by the Texas Coalition for Affordable Power.

This contrast between regulated and deregulated prices likely stems from the fact that regulated customer rates tend to be a reflection of generation costs that are averaged over a fleet of generators; whereas deregulated markets expose customers more directly to the wholesale marginal cost of energy.  This worked to the advantage of deregulated markets for most of the last decade.

But the next few years are likely to be less kind to deregulated markets.  Marginal and wholesale costs of generation are skyrocketing .  In PJM, which is the RTO covering some of the biggest deregulated states, prices are up over 120% over the same period last year. In New England, prices are up nearly 150%.  And in Texas, last year (the period which captured the effects of Winter Storm Uri) wholesale prices were up a whopping 550%!

The next few years will be an example of “what goes down must come up.”  To be sure, electricity prices are going to rise for all customers – whether in a deregulated state or not – but really hold on to your wallets if you’re in a deregulated state.  Just as prices, as a percentage, dropped in an era of declining natural gas costs, the next few years will see the gap between deregulated and regulated markets widen once again.  The bottom line: even when every wholesale market trend was favorable for states that deregulated, they never did on average have lower prices than regulated states.  Now that the wholesale markets have flipped, just watch retail customer price trendlines in deregulated markets in relation to regulated ones.  It’s not going to be pretty for customers in deregulated states.