The competitive marketplace has not been kind to the states that jumped on the energy deregulation bandwagon in the early 1990s, and Connecticut has fared worse than most.
Save for Hawaii, Connecticut had the highest retail electric rates in the country in 2007, according to a report issued by the University of Connecticut in the midst of an early season heat wave that led to brownouts in Hartford last week.
In 1990, the national average for the price of energy per kilowatt hour, or KwH, was $6.58. Connecticut’s price per KwH that year was $9.16, third highest in the nation.
By 2007, the national average per KwH had risen to $9.14, which was actually a decline when inflation is factored in. However, Connecticut’s per KwH rate skyrocketed to $16.18. Only Hawaii had a higher rate, according to U.S. Energy Information Administration data.
A number of variables affect electricity rates, but UConn economists unanimously agreed that deregulation was the main factor.
Auctions Neglected
“Deregulation has been much harder than many people, including myself, thought,” said Arthur Wright, an emeritus professor of economics at UConn. “Connecticut has not had the best, most enlightened minds working towards deregulation.”
In an article for The Connecticut Economy, UConn’s quarterly economic review, Wright asserted that the state’s goals for deregulation were not always straightforward, and “far too little attention” was paid to the design of the auctions for electricity.
Deregulation launched a bidding process for electric generation. But when prices began to increase instead of decreasing the way proponents had predicted, the state held off on carrying through on further stages of the deregulation process, Wright said.
Bruce Blakey, a retired Northeast Utilities economist, said deregulation was doomed in Connecticut because there was not enough supply to meet the increasing demand.
“The assumption in deregulation is that supply can happen and increase quickly,” Blakey said. “Connecticut was not in that position and, as a result, it never fully deregulated.”
At this point, the onus falls to the legislature to correct the system that hasn’t performed as supporters had hoped, said Beryl Lyons, a spokeswoman for the Department of Public Utility Control.
Now that the process of deregulation has started, there is little opportunity to return to the “good old days” of regulated electric utilities, Blakey explained.
‘Can’t Go Back’
“The egg has been broken and scrambled,” he said. “You can’t go back. The approach that needs to be taken is to make it better. It would be unfair to just blame the regulators.”
Connecticut isn’t the only state that has been disappointed by the results of deregulation.
In a statistical analysis Wright conducted of the 14 states that have deregulated electricity since 1990, he found that their average per KwH rate went up $4.84. States that chose to maintain regulation over electric utilities saw their rate per KwH increase by an average of only $1.62 in 17 years.
All three sectors of the usage market — residential, commercial and industrial — have seen their rates rise steadily since 1997 as the state’s electrical infrastructure has been strained.
The year’s 876 hours of peak demand — the 10 percent of the year when generators are working hardest, mostly hot summer days — account for almost 15 percent of the total electricity used and 20 percent of the cost of power.
“We have more users of electricity using more electricity,” said Steven Lanza, editor of The Connecticut Economy. “The most efficiency happens during the lowest demand hours when suppliers use the most efficient generating facilities.”
In concluding his article, Wright suggested three options for the state: improve the design of electricity auctions, re-evaluate breaking up utilities like Connecticut Light & Power and provide federal regulators with more clout to compel states to fully deregulate.
Dennis Heffley, head of UConn’s Department of Economics, said legislators and regulators have to examine how deregulation was set up and how it needs to be altered.
“Deregulation is not a zero-or-one choice, it clearly matters how it’s structured,” he said. “The rules of the game matter. Just saying that you’re deregulated isn’t going to get the results you desired.”
