Analysis – W.Va. pays less than most states for energy

CHARLES TOWN – Unpredictable and sometimes very large electric bills have left residents with a number of questions, among them: Is electricity more expensive in West Virginia than in surrounding states or the country as a whole?

[cleeng_content id="453762837" description="Read it now!" price="0.49" t="article"]A second issue that has received a great deal of attention, especially in relation to the proposed purchase of the Harrison Power Plant, is Potomac Edison parent company FirstEnergy’s status as a regulated monopoly. Some states, including Ohio, allow customers to choose between competing electricity suppliers on an open market as an alternative strategy to hold down rates, a process somewhat misleadingly called “deregulation.”

West Virginia, on the other hand, uses the Public Service Commission to set rates using an administrative review process. This begs a question: Would West Virginians be better off under a competitive market-based system?

The answer to the first question is no.

The price of electricity in West Virginia is well below the national average, according to the most recent data from the U.S. Energy Information Agency.

According to the EIA’s March report, West Virginians pay, on average 9.47 cents per kilowatt hour for their electricity, the ninth lowest rate in the nation. Of the bordering states, only Kentucky pays less at 9.33 cents.

West Virginians pay around 20 percent less than the average for the South Atlantic region, and around 25 percent less than the national average.

These differences cannot be entirely accounted for by differences in fuel prices. The EIA’s data shows that the cost of coal upon delivery to the state’s power plants is almost precisely equal to the national average, though the price on delivery is not published for many states.

None of this mitigates the severe disruption that can be caused by a massive “shock bill” that is the sum of the cost of several months of inaccurate estimates, but the data shows clearly that the state is doing well in terms of keeping prices down.

But could prices be driven down further by allowing customers to decide between alternative electricity providers?

It is more difficult to answer that question definitively, but the answer is probably not.

Standard economic theory predicts that in a fully competitive marketplace prices will be driven down as customers flock to the best values until the price of producing and delivering a good for sale is equal to the sale price. At this point, the producers will be making no profit, only recovering their expenses for production and delivery. If the price falls any lower than this the firm will be losing money by selling the good, and will likely choose to close up shop rather than continuing to sell.

So economic theory predicts that competition will drive prices as low as possible. If the theory is correct, it is difficult to see how a regulator like the PSC could be as good at keeping prices down as the market.

But studies of deregulated energy markets show that reality diverges sharply from the standard theory.

A 2011 study by William Marcus, chief economist with California-based consulting group JBS Energy, found that deregulation of energy markets has caused prices to go up about 10 percent in the states that tried it. Marcus found that not only was electricity more expensive on average in deregulated states than in regulated states like West Virginia, but that the cost of power was increasing more quickly in the majority deregulated states.

A 2006 study by three researchers at Cornell University reached similar conclusions when looking at an earlier period of deregulation. After controlling for a number of confounding factors including climate differences, fuel costs and energy sources, they concluded that “as a whole, the results from our analysis do not support a conclusion that deregulation has led to lower electricity rates.”

The EIA’s data does show one major trend in deregulated states: commercial customers tend to get larger discounts compared to residential rates. In regulated monopoly states, commercial customers pay on average 1.5 cents less per kilowatt hour than residential customers do, but in deregulated states the difference rises to about 2.1 cents. About 32 percent of the total variability in the commercial discount was attributable to deregulation.


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