As I mentioned yesterday, I thought the Washington Post‘s story (“Decade of deregulation felt in climbing bills“) on various costs embedded in electric power bills was reasonably good. But the article covers several aspects of the overall picture without always being clear about the role played by the charges. From the economics point of view, the vital element of any charge included in the consumer’s bill is whether it tends to contribute more or less to efficiency in the production and consumption of electric power. One step toward sorting out the issues here is to sort out the different charges depending on whether they arose under the old or new regulatory regime.
Re-reading the article, I counted about nine overlapping categories of costs or charges that feed into a consumer’s bill. Below I identify the nine types of costs and assign them to one of three categories: (1) Costs left over from the old regime, (2) Costs arising in the new regime, and (3) Continuing cost types. Each of the categories is illustrated by a quote from the article.
Of course the biggest factor of influence over the bill — fuel costs — is mostly ignored in the article by design. The focus was explicitly on elements of a consumer’s bill “that have nothing to do with the rising price of fuel.”
Costs left over from the old regime/Transitional costs:
- Stranded costs – “Virginians are paying Dominion Power tens of millions of dollars a year for a nuclear plant the company planned in the 1980s but never built.”
- Rate freezes (aka Performance-based ratemaking) – “The charges include $238 million for a new nuclear reactor at its plant outside Richmond. Dominion canceled plans to build the plant 26 years ago amid safety concerns about nuclear power. The last of the charges was set to expire in 1999. But when rates were frozen during the transition to deregulation, the charges stayed. They’ll continue until at least next year.
Costs associated with the new regime:
- Congestion pricing – “Federal rules that accompanied deregulation also increase costs to consumers. Because of them, customers pay a premium for living in a congested region thirsty for power.”
- Uniform marginal price – “Now, on hot summer days, for example, when the demand for electricity is high, the price is set by the last, most expensive plant that is needed to supply power. These are typically natural gas plants. But the rising price of natural gas has produced a windfall for owners of older nuclear and coal plants.”
- Capacity market payments – “And although they began paying surcharges last year so power companies will invest in new plants, the charges have resulted in relatively few additional megawatts. These charges account for about 25 percent of the price of electricity in the District and Maryland and less in Virginia.”
- Structural impediments to competition – “Critics say the supply has increased so little because the existing system not only benefits the companies in the region, it gives them an incentive to constrain the supply of electricity to keep prices high…”
Same as it ever was:
- Funds for eventual decommissioning of nuclear plant – “More than 1 million residents of the Washington-Baltimore area paid $920 million to take the Calvert Cliffs nuclear … off-line in 2034….”
- Continued political influence over rates – “The deal reached between Constellation and Maryland Gov. Martin O’Malley (D) this month blunted two years of recrimination over a 72 percent rate increase for 1.1 million Baltimore Gas and Electric customers. They will get a $170 one-time credit and relief from future decommissioning costs.
- Flawed consumer incentives to use power economically – “PJM spokesman Ray Dotter said the Aug. 1 price reflected the cost to produce electricity that day. But customers pay a flat rate, giving them little reason to use less power, he said. “A more ideal situation would be that the price sends a signal that people conserve more.””
- Hmmmm… – “Electric bills in Virginia are expected to climb when the state returns to regulation next year, although it’s unclear by how much.”
This is just sort of a rough draft approach at a sorting. I know we have some expert readers and I’d be happy to receive comments from them. Each of these topics could bear individual attention. I’ll post on some of them over the next several days.
You may have noticed I referred above to “the old or new regulatory regime,” and not to “the regulated or deregulated regime.” Yep. I am one of those wackos that prefers the ugly word “restructuring” to the apparently more catchy term “deregulation” when talking about the changes in public policy toward certain elements of the electric power industry over the last ten to twenty years.