A leading economist last Monday questioned whether restructuring of the U.S. electricity industry has resulted in any discernible benefits to energy customers over the years.

“There is no reliable and convincing evidence that consumers are better off as a result of restructuring of the U.S. electric power industry,” said John Kwoka, professor of economics at Northeast University, at a conference sponsored by the American Public Power Industry in Washington, DC.

He said he reached this conclusion after reviewing 12 of the “most comprehensive, prominent and oft-cited evaluations of electricity restructuring.” Kwoka noted that most of the studies, if not all, relied on faulty methodologies.

The studies “consistently fell short of the standards for good economic research, In addition, most of these studies fail to fully address the effects of restructuring. These deficiencies call into question the conclusions reached by existing studies of restructuring,” he said.

Of the 12 studies, nine found there have been retail price benefits or cost efficiencies from restructuring, while the remaining three reported no benefits or even consumer costs from restructuring. Kwoka said he found three “common and major deficiencies” in nearly all of the studies.

“First, there is a lack of precision about what is meant by ‘restructuring.’ Some studies recognize that restructuring has involved a series of policy actions occurring over time at different rates in different regions, and attempt to capture that complexity. Others, however, treat restructuring as a discrete event that occurred at a single point in time. That latter approach over-simplifies restructuring and mischaracterizes the data,” he noted.

“Second, many studies overlook the fact that the post-restructuring prices in many states are the result of rate reductions and freezes, stranded cost adjustments and excess capacity. All of these factors mean that post-restructuring prices are actually administratively set and not at all a reflection of the permanent or equilibrium market price,” Kwoka said.

“Third, while most studies recognize that many other factors beside restructuring affect prices, not all are careful to control for those other influences. For example, studies that control only for natural gas prices, or select a very small number of particular states for comparison, are unlikely to isolate the effect of restructuring correctly.”

Kenneth Rose, senior fellow for the Institute of Public Utilities at Michigan State University, sought to debunk the popular notion that natural gas prices are the sole cause behind increases in electricity prices. “In many cases people assume that natural gas and power prices are very correlated, and that’s the reason why the power prices have gone up,” he said.

Prior to Hurricane Katrina striking in August 2005, Rose recalled that power prices were high. But post-Katrina, when gas prices went through the roof, power prices fell, he said. “That tells you that there’s something else going on here.”

“Some of those [electric price] spikes that we’re seeing in the summer are clearly not attributable to natural gas. They’re attributable to [electricity] load,” Rose noted. When the electric load is high, as is the case during the summer, that’s the “more dominant factor” in the pricing of power. But when gas prices shoot up, then that’s a driving factor in prices, he acknowledged. “They’re both important,” Rose told NGI.

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