The Highs & Lows of Interstate Electricity Trade
A.H. Barnett
American
University of Sharjah
Justin Isaacs
Hampden-Sydney
College
Auburn
University
Consumers would
have choice between suppliers with retail electric competition. The less touted flip side of “consumer
choice” is “producer choice.” Producers
in low price states, free of their obligation to serve their traditional areas,
would be able to sell to customers in higher price states. Inside the low price states, increasing
exports would raise electricity demand and prices. Across states, prices would tend to converge
as the level of interstate trade increases.
Maloney and McCormick (1997) strongly advocate
retail competition, projecting nationwide price decreases of 25% with peak load
pricing and smoothing over production cycles.
Barnett and Thompson (1997)
predict a much smaller average price reduction and point out that the price of
electricity will rise in some states. Biewald (1997) makes the point that retail
competition will cause utilities in low price states to ration output by
raising prices. Clifton, Wilder, and Woodward (1997) predict
retail competition will cause higher prices in South Carolina, a low price
state. Freshwater, Goet, Samson, Stome, Johansson,
and Greer (1997) make the same prediction for another low price
state, Kentucky. A study on
Indiana by Sparrow, Holland, Gotham, Yu, Sanders, and Stamber
(1998) makes the point that some
states will experience higher electricity prices as interstate trade increases
and the only sure winners will be residential customers in high price
states.
The weekly online newsletter Utility Spotlight (1999) reports that the
Department of Energy predicts consumers in every state will enjoy lower
electricity prices with retail competition.
Projections of regional prices by DOE, however, are higher than present
prices in some states. An unreleased
Department of Agriculture study uses a DOE model and forecasts that residential
consumers in 19 states will pay higher prices.
With increased interstate trade in electricity, changing prices will
create winners and losers. Suppliers in the
exporting states will enjoy higher prices, and consumers in the importing
states will enjoy lower prices. Losers
will be consumers in exporting states and suppliers in the high cost states
facing increased competition. The
present paper looks at the potential price changes.
Some background on interstate electricity trade
Table 1 compares electricity prices in the
Southeast and the US. Prices are lower
than the national average for every group of customers in every Southeastern
state except industrial customers in Florida.
Table 2 illustrates
that low industrial prices in Kentucky, Tennessee, Alabama, and Mississippi
attract industry that uses higher than average shares of electricity.
Inside the US,
there are obvious interstate trade patterns.
California effectively imports about all of the electricity exported
from Washington, Oregon, Utah, Arizona, Montana, Wyoming, and New Mexico. These Western states are in the same
interconnected reliability council.
States in the Northeast import electricity from Pennsylvania and West
Virginia. Florida is a net importer of
electricity from Alabama and South Carolina.
The evolving system of wholesale competition
involves the market for bulk electricity with any generator in principle having
access to the transmission systems owned by regulated monopolies. The Energy
Information Agency (1997a,b) predicted wholesale
competition would reduce the national average price of electricity by $.003 per
kWh through 2005, and prices in the Southeast are predicted to converge as they
fall.
Retail
competition would lead to increased exports from low price states and increased
interstate transmission if utilities in low price states are relieved of their
obligation to serve customers in their franchise areas. Transmission interfaces will become crucial
under retail competition and interstate shipments will be subject to regional
regulation. There is uncertainty about
which structures of retail competition will prove technically feasible and
economically efficient, and about how the new regulatory regime will administer
transmission.
Nevertheless,
underlying market forces will shape the
evolution of prices and interstate trade.
The price elasticity of demand depends on the amount of time allowed for
adjustment, which consumer groups are included, and so on. Estimates of the price
elasticity of demand for electricity in the literature fall between 0.5 and 1.0
in absolute value. See Barnett and Thompson (1997)
for a review of estimates. The following
simulations provide a baseline for changes in interstate trade and prices that
can be anticipated with retail competition.
Interstate electricity trade in the Southeast
If transmission
systems were costless, retail competition would imply equal prices of
electricity in every state. The
following idealized example may provide some gauge of the potential of retail
competition and interstate trade. Table
4 lists prices, consumption, and net exports in the Southeast. At one extreme, Florida has the highest price
at $.072 per kWh and imports 15% of its consumption. At the other extreme, Alabama has a low price
of $.053, and exports 35% of its production.
Assume generation
in the Southeast is fixed at present levels and net trade with other regions
remains constant. Total consumption in
the Southeast would remain at 732.8 million mWh and
net imports from the rest of the country would remain at 5.0 million mWh. Assume free
transmission with no transmission constraints or charges. Perfect retail competition and free
interstate trade would redistribute the 732.8 million mWh
of generated electricity and equalize prices in the region.
Adjustments in
price and consumption would depend on price elasticities
of demand. To gauge sensitivity,
consider two demand elasticities, 0.5
and 1.0. Calculations impose arc elasticities on initial prices, final prices, and
consumption levels in each state, deriving the regional price and consumption
levels that would equalize prices across states and leave total regional
consumption unchanged. Changes in
consumption and net exports are reported in Table 3.
With an
elasticity of 0.5, prices move to $.0620 in each state. For Alabama and Tennessee, the lowest price
states, this would be a 17% increase in price.
For the state with the highest price, Florida, this would be a 14%
decrease. Consumption adjusts in each
state to the new price. In the three
major exporting states, Alabama, Tennessee, and South Carolina, consumption
drops by 7%, 8%, and 6% while exports rise by 14%, 89%, and 38%. At the importing end, consumption rises 8% in
Florida, and 2% in North Carolina and Georgia. The largest jump in imports would occur in
Florida, a 50% increase.
With an
elasticity of 1.0, prices would move to $.0619 in each state. While the regional price would be almost
identical, consumption and import adjustments are larger with the higher demand
elasticity. At the extremes, Alabama
exports would rise 26% while consumption falls 14%. In Florida imports would rise 105%, consumption
would rise 16%, and price would fall 14%.
Given the
assumption of constant generation, price changes translate into equivalent
percentage changes in generation revenue.
In Alabama and Tennessee, generation revenue would increase 17%, and in
South Carolina 13%. In Florida, revenue
for native generators would fall 14%.
Neither consumers
nor producers in Georgia and Virginia would notice much change with regional
retail competition. Mississippi would
see higher prices and decreased imports.
North Carolina would experience a small price decline and increased consumption.
Increased
generation capacity can be included in the model. If capacity increases 10% in the Southeast to
a total of 806.6 million mWh, the regional free trade
price would fall from $.062 to $.051 with a demand elasticity of 0.5. In Alabama and Tennessee, regional generation
would have to increase 8.3% to return prices back to their 1997 level.
Conclusion
There will be
winners and losers with retail electric competition. The main losers in the low price states will
be residential customers. While large
industrial customers might be able to bargain for lower rates, export demand
would put upward pressure on all prices inside exporting states. Facing proposals to mandate retail
competition at the national level, policymakers in low price states should
realize the benefits of maintaining regulated low prices and an obligation to
serve for the immediate future. When
prices in the relevant electricity market have fallen and restructuring schemes
have settled, low price states can move to retail competition in a less costly
fashion.
Barnett, A. H.
and Henry Thompson (1997) Electricity
Deregulation: A Review of Maloney and McCormick, manuscript available on
request.
Brennan, T. et al (1996) A
Shock to the System: Restructuring America’s Electricity Industry,
Washington DC: Resources for the Future.
Clifton, John, Ronald Wilder, and
Douglas Woodward (1997) Electricity
Deregulation in South Carolina: An Economic Analysis, SCANA Corporation,
http://www.scana.com/deregulation/study/Scan_intro.htm.
Energy Information
Administration (1997a) Annual Energy
Outlook 1998, US Department of Energy.
Energy Information Administration (1997b) Electricity Prices in a Competitive
Environment.
Freshwater, David, Stephan Goet, Scott Samson, Jeffrey Stone, Tulin
Johansson, and Monica Greer (1997) The
Consequences of Changing Electricity Regulations for Rural Communities in
Kentucky (1997) College of Agriculture, University of Kentucky, sponsored by
the National Rural Electric Cooperative Association.
Kwoka, John
(1996) Power Structure: Ownership,
Integration, and Competition in the US Electricity Industry, Kluwer Academic Publishers.
Maloney, Michael and Robert McCormick (1996) Customer Choice, Consumer Value: An Analysis
of Retail Competition in America's Electric Industry, Citizens for a Sound
Economy, www.hubcap.clemson.edu/ customerchoice/
Sparrow, F.T., Forrest Holland, Douglas Gotham,
Zwei Yu, Patricia Sanders, and Kevin Stamber (1998) The Projected
Impact of Restructuring in Indiana Electricity Prices: An Interim Report,
State Utility Forecasting Group, Purdue University.
Utility Spotlight (1999) "DOE: Residential Consumers in all States to
Benefit from Deregulation," May 31, energysource.com.
Table 1. Regional Electricity Prices, 1997, DOE
AL $.067 $.065 $.038 $.053
TN $.060 $.061 $.043 $.053
MS $.071 $.067 $.042 $.059
FL $.081 $.067 $.052 $.073
GA $.078 $.071 $.042 $.064
KY $.056 $.052 $.029 $.047
US $.085 $.076 $.046 $.069
Table 2. State Electricity Sales by Customer Class,
1997, DOE
AL 34% 19% 46% 73 million
mWh
TN 39% 13% 47% 86
MS 37% 21% 40% 40
FL 50% 36% 10% 175
GA 36% 30% 33% 100
KY 27% 14% 54% 76
US 34% 29% 33% 3,115
Table
3. Adjustment to Free Interstate Trade in the
Southeast
elast = -0.5 elast = -1.0
1997 p = $.0620 p = $.0619
price cons net
exp cons net exp cons net exp
AL $.053 73.4 40.3 67.9 45.8 62.8 50.9
TN $.053 86.0 7.3 79.5
13.8 73.6 19.7
SC $.055 67.8 10.6 63.8 14.6 60.2 18.2
MS $.059 39.5 -8.3 38.5 -7.3 34.2 -3.0
VA $.061 87.2 -28.2 86.5 -27.5 85.9 -26.9
GA $.064 100.4 1.4 102.0 -0.2 103.8 -2.0
NC $.065 108.4
-1.0 111.0 -3.6 113.8 -6.4
FL $.072 175.1
-27.1 188.6
-40.6 203.6 -55.6
Tot 732.8 -5.0 732.8 -5.0 732.8 -5.0