It's really not news, per se, but it's now been verified by economic data -- regulated utilities with cost of service rates have no incentive to minimize their costs that are passed on to ratepayers. In addition, state-regulated utilities may actually buy more expensive, in-state fuel to appease their political puppets. And they get away with it because our state regulatory agencies are cozily captured by the entities they regulate.
These were some of the findings of a recent study by Asst. Prof. Steve Cicala from the Energy Policy Institute at Chicago that was published in American Economic Review. The study, When Does Regulation Distort Costs? Lessons from Fuel Procurement in US Electricity Generation, was undertaken to study regulation to find the characteristics of "bad" regulation, instead of simply doing away with all regulation.
These were some of the findings of a recent study by Asst. Prof. Steve Cicala from the Energy Policy Institute at Chicago that was published in American Economic Review. The study, When Does Regulation Distort Costs? Lessons from Fuel Procurement in US Electricity Generation, was undertaken to study regulation to find the characteristics of "bad" regulation, instead of simply doing away with all regulation.
This paper evaluates changes in fuel procurement practices by coal and gas-fired power plants in the United States following state-level legislation that ended cost-of-service regulation of electricity generation. I find that deregulated plants substantially reduce the price paid for coal (but not gas) and tend to employ less capital-intensive sulfur abatement techniques relative to matched plants that were not subject to any regulatory change. Deregulation also led to a shift toward more productive coal mines. I show how these results lend support to theories of asymmetric information, capital bias, and regulatory capture as important sources of regulatory distortion.
The study looked at fuel deliveries to coal- & gas-fired electric power plants, to compare regulated to deregulated.
He found that the deregulated plants combined save about $1 billion a year compared to those that remained regulated. This is because a lack of transparency, political influence and poorly designed reimbursement rates led the regulated plants to pursue inefficient strategies when purchasing coal.
Deregulated plants paid 12% less for coal... because they have an economic interest in the cost to run the plant. Deregulated plants sell a product, and all their costs to produce that product are included in the cost of their product in a competitive market. In contrast, regulated plants sell a service at their cost, the supply of power. You will pay whatever it costs to produce the power, plus a guaranteed return. The higher the cost, the bigger the return. With ratepayers footing all the bills, these plants have absolutely no incentive to purchase the cheapest fuel available.
This is compounded by the "confidential," opaque nature of coal markets, where regulators may not compare prices to know when plant operators are paying too much for fuel. The same effect was not found in deregulated gas plants, and this was attributed to the transparent nature of natural gas markets.
In addition, the study found that regulated plant owners are more likely to curry favor with state regulators by purchasing more expensive in-state fuel for their plants. With ratepayers picking up the tab, why not? This is how states like West Virginia continue to be ruled by a dying coal industry, and part of the WV PSC's basis for approving the "sale" of an uncompetitive deregulated coal-fired plant into West Virginia's regulated environment in 2013.
The study also found that deregulated plants increase their purchase of low-sulphur coal from out-of-state mines as a cheaper way to meet environmental regulations. Regulated plants will choose installing expensive scrubbers, because ratepayers pick up the tab and the utilities collect a return on their investment.
Although the study only concentrated on fuel costs of regulated v. deregulated generators, its findings can be liberally applied across the board to all aspects of regulated electric utilities, whose cost of service rates are padded with all sorts of uneconomic purchases. When faced with the cost of its own inefficiency, the utility will always find a cheaper way to get things done, but not when ratepayers are picking up the tab.
This is compounded by the "confidential," opaque nature of coal markets, where regulators may not compare prices to know when plant operators are paying too much for fuel. The same effect was not found in deregulated gas plants, and this was attributed to the transparent nature of natural gas markets.
In addition, the study found that regulated plant owners are more likely to curry favor with state regulators by purchasing more expensive in-state fuel for their plants. With ratepayers picking up the tab, why not? This is how states like West Virginia continue to be ruled by a dying coal industry, and part of the WV PSC's basis for approving the "sale" of an uncompetitive deregulated coal-fired plant into West Virginia's regulated environment in 2013.
The study also found that deregulated plants increase their purchase of low-sulphur coal from out-of-state mines as a cheaper way to meet environmental regulations. Regulated plants will choose installing expensive scrubbers, because ratepayers pick up the tab and the utilities collect a return on their investment.
Although the study only concentrated on fuel costs of regulated v. deregulated generators, its findings can be liberally applied across the board to all aspects of regulated electric utilities, whose cost of service rates are padded with all sorts of uneconomic purchases. When faced with the cost of its own inefficiency, the utility will always find a cheaper way to get things done, but not when ratepayers are picking up the tab.
RSS Feed