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Dissecting the U.S. Electricity Bill7 Aug 06A look at the factors driving regional differences in electricity prices As heat waves blanket parts of the United States this summer, policy makers quiver at the thought that those states with deregulated markets will experience increases in retail prices if demand places stress on the grid. In fact, electricity prices between regions and states may fluctuate for a number of reasons. Differences in market structures, degree of deregulation, fuel cost, market power, transmission capacity, and level of demand are all drivers in determining the end-user's electricity cost. The structure of a state's electricity market can play a part. Before deregulation, utility companies were vertically integrated, with the generation, transmission, and distribution of electricity controlled by one entity and regulated by the government as a monopoly. In an attempt to introduce competition, the Federal Energy Regulatory Commission (FERC) issued Rule 888, which mandated equal access to the transmission grid for wholesale buyers and sellers (those who are not selling to individual customers), transmission pricing, and the recovery of investment costs in new plants. Many states followed suit after this ruling; most notoriously was California, which experienced a price hike and blackouts in 2001 that, among other factors, were the result of limited production capacity unable to meet heavy demand for electricity, increased temperatures, and income growth.
Average Retail Cost of Electricity for Residential and Business* Sectors, Ranked by 2005 Residential Costs by Region (Cents/kilowatt-hour)
*The combined electricity cost for industrial and commercial consumers. Fuel cost is also a major contributor to regional differences in wholesale and retail electricity prices. A state's natural resource composition and geographic position is important in determining which fuel source is most cost effective to use. States like Wyoming and Kentucky are rich in coal, while Texas and Louisiana (part of the West South Central region) each produce almost one-third of U.S. natural gas. Each state also has a unique "portfolio" of energy use by source for electricity generation. Differences in natural gas, for example, are related to a market's proximity to producing areas, the number of pipelines in the state, and transportation charges for distributing the fuel, in addition to a state's regulations. Not surprisingly, the West South Central region has the highest share of natural gas in its portfolio, while the West North Central, East North Central, and Mountain regions rank the highest for coal shares, and include large state coal producers such as Wyoming and Illinois. The West North Central region, which had the largest share of coal used for electricity generation in 2005, is sandwiched between coal-rich states. While natural gas is a popular fuel source because of its lower emissions levels, the increase in price over the last few years has raised concerns. After the Pacific noncontiguous region, the Northeast region had the highest retail rates of electricity for both business and residential customers in 2005, and was the second-largest user of natural gas in that same year. Most of the states in this region have undergone some restructuring of their markets, so the higher cost relative to other regions may be reflected in these fuel costs. States with high cost fuels (e.g., for natural gas) may import electricity from states that generate electricity from lower-priced fuel sources, such as hydropower and coal, if their market structure allows them to connect to other electricity networks. The Pacific noncontiguous states (Alaska and Hawaii) had the highest retail prices in 2005, and are therefore not connected to these networks. The evolving restructuring of the electricity market makes utilities like any private enterprise—forced to focus on the bottom line. Without government intervention, residential and business customers may see retail prices rise when demand increases, which has occurred in a number of states where restructuring is active. When restructuring is implemented properly to fully allow market competition, the deregulation of the wholesale electricity market can encourage energy efficiency because of the obvious price signals, enhanced technology to comply with future emissions standards, and increased flows of electricity across connected geographic regions. An example of this occurrence is in deregulated Texas, where wind and clean coal plants are being built.
by Sophia Parker
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