Citation:
Abstract:
Excerpt from the Executive Summary:
Over the past several years, a number of groups have questioned whether implementation of coordinated wholesale electricity markets in several regions of the United States has benefited retail electricity customers. The development of these markets was motivated in large part by a desire to achieve increased short-term and long-term efficiency in the generation and delivery of electricity through increased reliance on market mechanisms. Along with this came the expectation of lower retail electricity prices, similar to what occurred in other industries that have undergone a deregulation, such as long-distance telephone service, passenger airlines, and interstate trucking. Spurred by recent increases in electricity prices, some groups have called for a re-examination of the deregulated market structure adopted in coordinated markets in the Midwest, Mid-Atlantic and Northeast (i.e., LMP pricing, day-ahead markets based on security- constrained unit commitment, and financial transmission rights). Some critics have even called for a return to the previous system of rate of return regulation and control area operation by vertically integrated utilities.
This paper provides an empirical analysis demonstrating that the implementation of coordinated markets has served to reduce the increase in average consumer rates that has resulted from increases in input costs for electricity generation. In addressing this policy question the issue is not whether average consumer rates have risen or declined in recent years, but whether they are lower than they would have been absent implementation of coordinated markets. In fact, average electricity rates have risen over the period since the implementation of coordinated markets, but this increase has occurred in all regions of the country as a result of increasing fuel prices, regardless of market structure.