Are We Better Off Because of Power Industry Restructuring?

Michael Giberson

Last week the The New York Times printed a letter to the editor by Bronko Terzic responding to the most recent of the paper’s power markets restructuring articles. (Lynne and I have previously commented on the article.) Terzic writes:

There is a big difference in saying that electricity markets are not working because the rules are not right versus saying one cannot create a market for electricity.

It is not even clear that electricity markets are not working. Economists have come down on both sides of the issue with conflicting studies in many electricity markets.

On that point, consider two recent reports. The first, by John Kwoka, reviews 12 earlier studies examining the costs and benefits of electricity restructuring and finds that the methods used in the studies “fall short of the standards for good economic research.” On these grounds Kwoka concludes that there “is no reliable and convincing evidence that consumers are better off as a result of restructuring of the U.S. electric power industry.”

The second report, by Scott Harvey, Bruce McConihe and Susan Pope, concludes that while “electricity rates have increased since LMP-based coordinated markets were first implemented in PJM in 1998, the study finds that the average rates of public utilities have risen less than they would otherwise have in … NYISO and PJM. The estimated reductions in average rates … [for NYISO and PJM] over the 1998-2004 period range from $.50 to $1.80 per megawatt hour.”

Kwoka’s study, funded by the American Public Power Association, did not review the recently completed Harvey et al. report, funded by PJM. However, the APPA did issue a news release in which it seeks to counter the claims made by Harvey et al.

However a news release complaining that costs have gone up in some places, sometimes by a lot, hardly can be taken as a serious counter to a thorough economic analysis. The news release tries to make up for its lack of depth by waving its hands in the direction of the “important methodological issues identified by Dr. John Kwoka in his analysis.” On quick glances through both the Kwoka and Harvey et al. pieces it appears that Harvey et al. do relatively well at meeting the standards Kwoka invokes, certainly as compared to some of the 12 articles that Kwoka looked at. By this same standard for evidence, of course, we’d have to completely dismiss the anecdotal claims made in the APPA news release that some costs have gone up in some circumstances.

As Terzic points out in his letter to the editor, “The correct test, where markets have been introduced, is not whether prices have fallen but whether electricity prices would have been lower than those today if the old formula of regulated wholesale prices had remained in effect.”

The Harvey et al. paper appears to the the latest, best attempt to conduct this test of whether prices are lower than they otherwise would have been because of the introduction of restructured power markets. Their analysis may have its flaws, but it will take more than a news release to gainsay its claims.