Indy Fact Check: Claims of lower electric rates from energy choice backers need significant context
With a seemingly unending barrage of days with triple-digit temperatures and the air conditioning running nonstop, it isn’t hard to imagine most Southern Nevadans looking at their monthly power bill and wishing the cost was a bit lower.
That’s part of the sales pitch being made to voters by backers of the Energy Choice Initiative (EIC), the proposed constitutional amendment that would require Nevada change its electric system from a monopoly model (where one company controls the generation, transmission and sale of electricity) to a many-supplier retail model by 2023.
Proponents of the ballot question — which has been largely funded by the Las Vegas Sands and Switch — have made the promise of lower electric bills a hallmark of campaign ads, an affiliated, so-called “news” website and countless social media posts.
“Now NV Energy has to compete for your business — they raise rates, you go to another provider,” one ad’s narrator states of Nevada’s future if the ballot measure passes. “That’s why rates in energy choice states are 14 percent lower.”
Opposition to the ballot measure, which has largely been funded by NV Energy, has taken a counter route and has run ads claiming that “states with deregulated electricity all have rates higher than Nevada.”
Outside the bluster, the question of what will happen to electric rates under a retail choice model is one of the most pressing and important questions for Nevada voters when they head to the ballot in 2018. There are many ways to look at the data on electric rates, and drawing strong conclusions about what they portend for a retail market in Nevada is difficult to do.
The 14 percent claim in the ad reference above stems from a 2016 opinion story in trade publication Utility Dive, authored by proponents of an effort to further open Michigan’s electric market to retail electric choice.
The report analyzed historical electric rate trends among the 14 fully-open “choice” states (Delaware, District of Columbia, Connecticut, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Texas) and the other 35 states with full or partial “monopoly” control of the electric market.
Between 2008 and 2015, the group estimated that so-called “customer choice” states saw a decrease in electric rates by about 13.9 percent across all sectors, from a 5.5 percent decrease in residential rates to a massive 25.8 percent drop in the industrial sector for those states.
Those decreases are juxtaposed with rate increases in “monopoly” states, which saw an across-the-board rate increase of 4.8 percent for all sectors over the seven-year period.
But there’s other important context that the ad omits.
For one, the same Utility Drive article also includes a comparison of change in electric rates for a longer period of time — between 1999 and 2015. That’s important, because nearly all of the states that transitioned from a monopoly model to a retail electric system did so in the late 1990s and early 2000s, not in the middle of the decade.
Over the longer period of time, rates in “customer choice” states actually rose by an average of 4.2 percent across all sectors, including by 5.9 percent for residential rates (commercial rates dropped by about 5.9 percent over the same period).
Monopoly states also saw an average rate increase of 14 percent over the same time period, including a 10.9 percent increase for residential rates.
Backers of retail choice say that using a period between now and 2008 is a better metric for comparing the effectiveness of retail choice states to monopoly states, as electric demand has stayed largely stagnant over the past ten years nationwide. Because retail states have seen larger drops in electric price than monopoly states during the “flat-load” period, advocates say the market structure is superior.
It’s fair to say that electric rates in “customer choice” states have increased less than those in “monopoly” states, but the 14 percent figure relies on use of an arbitrary cutoff date instead of the full length of time in which states have had a retail electric model.
Additionally, the report notes that Nevada was one of two “monopoly” state to see its average electric price go down between 2008 and 2015, although the majority of states with rate decreases were those with competitive electric markets.
Similarly, a study by the Retail Energy Supply Association — a nonprofit composed of 20 retail electricity and natural gas suppliers — in April 2017 found that the average percentage change in electric rates for the 14 retail choice states between 2008 and 2016 was a roughly 18 percent average decrease, adjusted for inflation. Monopoly-market states saw a 2.55 percent increase in rates over the same time period.
The study noted the price trends weren’t “accidental nor aberrational,” stating that the traditional rate-setting for monopoly-market states is largely reactive (Nevada approves rates every three years) which distorts price signals, encouraging “inefficient behavior.”
To prove its point, the study points out that nearly all states that saw an electric rate decrease between 2008 and 2016 were those with an open and competitive retail model, while those that saw the largest percent increases were those with monopoly models.
That is true.
But, just as in the Utility Dive article, the data shows Nevadans have enjoyed some of the largest decreases in rates over the past seven years — an all-sector price decrease of more than 20 percent, and trailing only Texas and Louisiana for the largest percentage decrease in prices.
A read of the Public Utilities Commission (PUC) of Nevada’s report on the Energy Choice Initiative can leave one feeling content with the state’s electric prices — the report states, after all, that Nevada’s “average energy prices are currently amongst the best in the country” at 8.39 cents per kilowatt hour (the average home in the U.S. uses 897 kilowatt hours per month).
But the proponent’s response to the PUC report reaches quite the opposite conclusion — Nevada’s residential rates are higher than 31 other states, at 12.5 cents a kilowatt hour.
Technically, both sides are correct, and require a narrow parsing of data from the U.S. Energy Information Administration to understand completely.
The PUC’s numbers come from a 2016 state-by-state report detailing the average retail price of electricity across all sectors — residential, industrial, commercial and transportation combined. A look at the average electric price across all sectors will tend to result in a lower average cost as commercial and industrial customers are more centralized and easier to serve than residential homes.
Although the PUC’s numbers came from 2016, the actual average retail cost of electricity hasn’t changed that much in the preceding two years — it’s currently at 8.46 cents as of May 2018, a shift of 0.07 cents.
But what about residential rates?
According to the most recent monthly EIA data in May 2018, Nevada’s average residential price for electricity is 12.05 cents per kilowatt hour (The above-mentioned proponent’s response used data from February 2018). As a caveat, it should be noted that the May data is a preliminary estimate by the EIA, and could change once the agency certifies the data.
That amount places Nevada below both the national average (13.15 cents per kilowatt hour) and below the average of geographically similar states in the “Mountain” region at 12.28 cents per kilowatt hour. It also places the state right near the median of all states, as the 20th least expensive electric rates of all states and Washington, D.C.
Advocates of the ballot question have been quick to point out individual success stories for certain states that have move to a retail market — studies show that Ohio ratepayers have saved an average of $3 billion a year since moving to a retail market in 2011, and Pennsylvania's rates have decreased since moving to a retail market (though residential rates have stayed above "average annual retail electricity rates")
Not every state has seen a success story after switching market types. Most recently, opponents of the ballot measure highlighted a report by the Massachusets attorney general's office showing customers of competitive suppliers paid $176.8 million more than if they had stayed with their incumbent utility.
A misleading metric?
Energy experts say a narrow focus on electric rates and swings in prices over time misses the larger picture given the numerous factors that affect prices beyond just how the market is structured.
A report by the nonpartisan Guinn Center on the ballot measure found that claims on both sides about the effect on rates from a restructured electric market both relied on a “problematic” data source — information from the U.S. Energy Information Administration. The agency itself recommends against using the data for comparison between restructured states as its data does not “capture the statewide variation in price determinants,” which leads to an “apples-to-oranges” comparison.
The five “key” factors that go into determining electricity prices include fuel costs, construction and maintenance of existing power plants, transmission system maintenance, weather conditions and regulations, the report states.
Essentially, states — regardless of market structure — add riders or other charges to electric bills that don’t reflect the pure cost of generation, transmission and distribution of electricity, adding variants to state-level pricing that aren’t necessarily reflected in the EIA data.
“Electric rates and/or prices are not one-to-one corollaries of generation, transmission, and distribution costs but are indicators of the multiplicity of inputs that shape cost drivers,” the report stated. “These can vary widely within states and across states, and because the EIA data is but a proxy for annual averages, an attempt to draw a conclusion regarding rate behavior in the context of restructuring versus the retention of a vertically integrated utility is likely to produce biased results.”
Proponents of the ballot measure have, outside of advertising, largely conceded this point.
In testimony before the Public Utilities Commission in January 2018, RESA lobbyist Ned Ross said passage of the ballot question didn’t fundamentally guarantee lower electric prices.
“If natural gas prices and other underlying fuel components increase in price, the price of power must increase or it will destabilize,” he said. “So we cannot guarantee an absolute lower price for energy if the underlying components all go up in price. So I want to be careful that we're realistic about what can happen. What I can tell you is that the competitive market will make prices as low as they can be, the service as high as it can be, and all of the options and technology and all of those other things will be as good as they can possibly be. That's not true in a regulatory regime.”
In New England, the region with the largest contingent of retail market states and some of the highest electric rates, the expenses are blamed on non-market factors — geography and distance from natural gas producing areas, fuel mixes, infrastructure decisions including the closure of old plants and a lack of “pipeline capacity” to bring in additional natural gas.
A strongly-worded motion to intervene in the PUC’s report by backers of the initiative claimed that a “discussion of national averages is not helpful” as states vary in average temperature, fuel mixes and other non-replicable factors that make them difficult to prepare.
“The fact that Nevada has lower electricity prices than New York, California, Massachusetts and other high-cost states where utilities are saddled with difficult to maintain systems and costs of outdated or shut down nuclear plants - among a multiplicity of factors - should come as no surprise to anyone, and trumpeting it as an accomplishment is misleading,” it stated.
Proponents of the Energy Choice Initiative say that approving the ballot measure will result in lower electric bills, and claim that electric rates in retail choice states are “14 percent” lower than other states.
It’s not that simple. While it is true that states with retail markets have seen a smaller percent increase in rates than monopoly-market states since the turn of the century, the 14 percent figure uses an arbitrary cutoff date that isn’t indicative of how retail states have performed since making the transition from a monopoly state.
More broadly, the use of electric rates to make a point about what will or won’t happen to Nevada power bills under the Energy Choice Initiative is inherently misleading. Because the source for all of this price data — the EIA — doesn’t discern each state’s individual “cost drivers” such as weather conditions or power plant maintenance, using the price points to try and draw a conclusion on the merits of a vertically-integrated electric monopoly versus a retail market is, as the Guinn Center study states, “likely to produce biased results.”
The shred of truth in the ads is that electric rates in retail choice states have gone down in price over the last decade when compared to monopoly states. But again, that omits the structural issue of relying on EIA data and only measures a portion of the time that retail markets have been in existence.
For those reasons, we rate the ad Hardly Abe.
Disclosure: Switch and NV Energy have donated to The Nevada Independent. You can see a full list of donors here.