Electricity: Deregulation Sends Prices Soaring

David Cay Johnston's headline says it all: "Competitively Priced Electricity Costs More, Studies Show". When states deregulate their electricity sectors, the price of electricity goes up, not down – and the attempts of pro-deregulation advocates to spin the data otherwise are downright embarrassing.

Dean Baker notes that the news here is actually even more striking than it looks at first glance. The studies looked at the market for industrial energy, not the pricess paid by residential or commercial users. And one of the driving ideas behind electricity regulation is that there's a cross-subsidy: industrial users will pay more so that residential users can pay less. If you get rid of the regulation, then, industrial users should pay less pretty much automatically, since they're no longer subsidizing residential users.

Mark Thoma picks up on the description of the way that electricity auctions in deregulated states are designed, and quotes Hal Varian as saying that differences in auction design can make an enormous difference. But I don't think that auction design is at fault here. Rather, electricity companies in a deregulated market will generally find a way to charge whatever they can get away with. Sometimes they get slapped down: when Arizona, Illinois, Ohio, Pennsylvania and Virginia deregulated their markets, it didn't take long for them to change their mind and impose rate cuts, freezes or caps. But that's OK, because in the really big states like California, Texas, and New York, the state simply allowed deregulated electricity prices to rise and rise, to the point at which they're now 49% higher than electricity prices in states with price regulation.

What's more, the difference in prices spiked up during the infamous period when Enron was manipulating energy prices in California – but it never really came down thereafter, and is much bigger now than it was then. What we're seeing now is actually worse, in aggregate, than what we saw during the California energy crisis. There's no way to spin this: electricity price regulation is good for consumers, and electricity price deregulation is bad for consumers. End of story.

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