Arthur W. Wright

English

Research Papers in Economics

By ARTHUR W. WRIGHT
Ask  most  any  Connecticut  resident 
and she’ll likely agree that her elec-
tric  rates  have  been  on  the  march, 
upward (not forward), in recent years.   
Of course, it’s old news in these parts 
that New England lacks commercially 
viable fossil fuels and is “at the end of 
the pipeline,” about as far as one can 
get in the contiguous 48 states from 
traditional  domestic  sources  of  oil, 
natural  gas,  and  low-sulfur  western 
coal.    Of  late,  though,  Connecticut 
seems  to  have  been  hit  especially 
hard at the wall socket.
	 The	perception	is	accurate.		The	
facts	 show	 that	 the	 Nutmeg	 State	
has	suffered	some	of	the	biggest	rate	
increases	in	the	country.		Linear	regres-
sion	analysis	of	the	data	reveals	that	a	
primary	 cause—likely	 the	 single	 big-
gest	factor—was	the	so-called	“dereg-
ulation”	 of	 electric	 rates	 introduced	
beginning	in	the	late	1990s.		
A PERSISTENT DUll ACHE…
	 As	 the	 table	 shows,	 in	 1990	 the	
average	 retail	 price	 of	 electricity	 sold	
in	 Connecticut	 was	 9.16	 cents	 per	
kilowatt	 hour	 (kWh),	 according	 to	
data	from	the	U.S.	Energy	Information	
Administration	(EIA,	the	source	for	all	
data	cited	here	unless	stated	otherwise).	 	
That	gave	the	Nutmeg	State	the	third	
highest	 average	 rate	 among	 all	 states	
including	 the	 District	 of	 Columbia	
(DC).			By	2007	that	figure	had	risen	
by	 some	 7	 cents	 to	 16.18	 cents	 per	
kWh,	moving	Connecticut	up	to	sec-
ond-highest,	 or	 (ignoring	 the	 outlier	
Hawaii)	top	dog	among	the	remaining	
50	states.	The	jump	equated	to	an	aver-
age	yearly	increase	of	3.2	percent	over	
the	18-year	period.		In	real	terms	(con-
stant	purchasing	power),	Connecticut’s	
electric	 rates	 rose	 0.60	 percent	 per	
year	faster	than	the	general	consumer	
price	 level	 over	 the	 18-year	 period.	 	
(Bruce	Blakey,	on	page	16	of	this	issue,	
shows	 that	 much	 of	 the	 increase	 in	
Connecticut	occurred	after	2003.)
	 For	the	nation	as	a	whole	over	that	
period,	the	average	retail	price	of	power	
rose	from	6.57	to	9.14	cents	per	kWh,	
a	yearly	average	rise	of	1.85	percent.	 	
But	in	real	terms,	the	average	price	of	
power	nationally	fell	by	an	average	of	
0.73	 percent	 per	 year	 from	 1990	 to	
2007.
	 So	 it’s	 adding	 insult	 to	 injury:	
Connecticut	 already	 paid	 2.6	 cents	
per	 kWh	 above	 the	 national	 average	
in	 1990,	 and	 endured	 a	 more	 rapid	
than	average	yearly	increase,	boosting	
the	differential	to	7	cents	per	kWh	by	
2007.
	 Total	electric	bills	depend	on	con-
sumption	as	well	as	rates.		Nutmeggers’	
10  THE CONNECTICUT ECONOMY  SUMMER 2008
Electric Rates in Connecticut:
BUyER’S REMORSE ON “DEREGULATION”
SOURCE: The Connecticut Economy from EIA data
AvERAGE RETAIL ELECTRIC RATES 
(ALL SECTORS), SELECTED STATES, 
1990 AND 2007
RANK:
HIGHEST
1990 TO 2007
LOWEST
(¢/KwH) (¢/KwH)
9.48 AK 1 HI 21.29
9.37 NY 2 CT 16.18
9.16 CT 3 NY 15.35
9.15 RI 4 MA 15.23
9.09 NH 5 NH 13.96
9.08 NJ 6 NJ 13.43
9.02 HI 7 ME 13.26
8.85 MA 8 RI 13.19
8.84 CA 9 AK 13.15
8.28 VT 10 CA 12.77
7.75 AZ 11 DC 12.06
7.65 PA 12 VT 11.99
7.65 ME 13 MD 11.41
7.49 IL 14 DE 11.35
7.10 NM 16 TX 10.27
6.57 KS 19 MI 8.59
5.93 IA 30 MT 7.51
5.78 TX 33 OK 7.29
4.18 OR 48 KY 5.76
3.96 MT 49 WY 5.27
3.80 ID 50 WV 5.27
3.40 WA 51 ID 5.06
6.57 U.S. U.S. 9.14
The facts show that the 
Nutmeg State has suffered 
some of the biggest rate 
increases in the country.SUMMER 2008  THE CONNECTICUT ECONOMY  11 
total	use	of	power	rose	from	a	bit	more	
than	27	billion	kWh	in	1990	to	slight-
ly	over	34	billion	kWh	in	2007.		That	
translates	 into	 0.94	 percent	 per	 year	
per	capita,	given	average	yearly	popula-
tion	growth	of	about	0.4	percent.		An	
average	price	rise	better	than	3	percent	
per	year	and	usage	per	person	growing	
nearly	1	percent	easily	leads	to	a	feeling	
that	total	electricity	costs	have	been	ris-
ing.		(Blakey’s	article	in	this	issue	traces	
the	sources	of	increasing	power	usage	
per	capita.)
	 It	 turns	 out	 that	 the	 foregoing	
overall	 averages	 understate	 the	 rise	
in	 residential	 electric	 power	 prices,	
usage,	 and	 therefore	 household	 elec-
tric	bills.		Residential	electric	rates	in	
Connecticut	rose	by	an	average	of	3.7	
percent	 per	 year,	 1990-2007,	 versus	
3.2	percent	for	all	power	sold	to	end	
users.		And	residential	sales	of	power	
actually	increased	a	bit	faster	than	total	
sales	(1.5	percent	versus	1.35	percent	
per	year,	on	average).		No	wonder	we’re	
feeling	the	pain.
THE COMPANy WE KEEP
	 Connecticut	has	not	been	alone,	of	
course.		In	order	for	the	2007	national	
retail	electric	rate	to	average	9.14	cents	
per	 kWh	 below	 the	 Nutmeg	 State’s	
16.18	figure	a	slew	of	states	must	have	
below-average	 rates.	 	 A	 “slew”	 here	
turns	out	to	equal	34	states,	ranging	
from	 Pennsylvania	 at	 9.07	 cents	 per	
kWh	down	to	a	mere	5.06	cents	per	
kWh	in	Idaho.		That	leaves	16	other	
states	besides	Connecticut	with	above-
average	 rates	 in	 2007.	 	 And	 four	 of	
those	states—DC,	Hawaii,	Maryland,	
and	Nevada—suffered	even	faster	rates	
of	increase	over	the	1990	level	than	did	
Connecticut.
	 The	 dispersion	 in	 electric	 rates	
across	 states	 also	 rose	 over	 the	 peri-
od.		The	coefficient	of	variation—the	
ratio	of	the	standard	deviation	to	the	
mean—among	all	states’	average	retail	
electric	prices	rose	by	a	factor	of	1.5,	
from	0.244	in	1990	to	0.365	in	2007.	 	
Moreover,	 that	 there	 were	 only	 17	
states	 above	 the	 national	 average	 fig-
ure	 in	 2007	 suggests	 that	 much	 of	
the	increased	dispersion	resulted	from	
more	 rapid	 increases	 in	 price	 among	
that	group	than	in	the	remaining	34	
states.		In	fact,	every	state	but	Alaska	in	
that	group	experienced	above-average	
rates	of	increase	in	electric	rates,	1990-
2007,	while	only	three	states	with	rates	
below	the	2007	national	average	saw	
rates	 grow	 faster	 than	 the	 U.S.	 aver-
age.	
	 What	 happened	 between	 1990	
and	2007	to	change	the	distribution	of	
average	retail	electric	rates	across	states	
so	dramatically?
THE SIREN SONG Of All 
THOSE DATA
  The	 U.S.	 Energy	 Information	
Administration	or	EIA	offers	a	pleth-
ora	of	raw	data	on	retail	electric	rates	
by	 state,	 by	 type	 of	 customer,	 and	
by	month,	from	1990	through	2007.	 	
(Why	else	choose	the	total	period	used	
in	this	analysis?)		Though	potentially	
one	could	concoct	a	huge	panel	study	
and	 give	 a	 couple	 graduate	 students	
their	 dissertation	 topics,	 for	 present	
purposes	 I	 focused	 much	 more	 nar-
rowly	 on	 using	 regression	 analysis	 to	
explain	 the	 change,	 1990-2007,	 in	
the	average	retail	electric	rate	by	state.	 	
The	 explanatory	 variables	 of	 choice	
included	 state	 data	 for	 (1)	 changes	
over	the	same	period	in	the	shares	of	
residential	 and	 commercial	 electricity	
use	(with	the	third	major	component,	
industrial,	 omitted);	 (2)	 changes	 in	
per	capita	Gross	State	Product	(GSP)	
(continued on page 14)
Every state but Alaska in 
that group experienced 
above-average rates of 
increase in electric rates.14  THE CONNECTICUT ECONOMY  SUMMER 2008
and	in	population	(both	only	through	
2006),	 to	 capture	 the	 effects	 of	 dif-
ferences	in	economic	activity;	and	(3)	
changes	 in	 the	 residential	 price	 of	
natural	gas	(again,	only	through	2006),	
to	capture	a	possible	substitution	effect	
and	 perhaps	 an	 indirect	 input	 price	
effect	from	the	growing	role	of	gas	in	
electric	generation.
	 In	addition,	for	two	reasons,	I	also	
included	a	dummy	variable	for	whether	
or	not	a	state	had	attempted	what	has	
loosely	been	called	“deregulation”	since	
the	1990s.		First,	in	a	November	2007	
paper,	Marilyn	Showalter,	of	the	lobby-
ing	group	Power	in	the	Public	Interest,	
argued	that	electric	rates	for	industrial	
users	had	risen	much	more	in	“deregu-
lation”	states	than	in	“traditional	regu-
lation”	 states;	 Showalter’s	 study	 did	
not	use	regression	analysis.		Second,	I	
noted	that	12	of	the	14	“deregulation”	
states	(CA,	CT,	DC,	DE,	MA,	MD,	
ME,	NH,	NJ,	NY,	RI	and	TX)	were	
among	the	17	states	with	electric	rates	
higher	than	the	2007	national	average	
price	of	9.14	cents	per	kWh	(see	table	
p.	10).
	 The	 results	 of	 my	 regression	 are	
shown	in	the	box	below.		What	they	
reveal	is	that	(1)	(by	omission)	none	
of	the	structural	variables	proved	sig-
nificant	at	less	than	the	27%	level	(i.e.,	
there	is	no	better	than	a	1-in-4	chance	
that	their	coefficients	are	actually	zero,	
rather	than	the	estimated	values	of	the	
coefficients);	but	(2)	the	“deregulation”	
dummy	variable	is	highly	significant,	
positive	 as	 predicted,	 and	 by	 itself	
explains	about	60%	of	the	variation	in	
the	dependent	rate	change	variable.	
	 For	 a	 “deregulation”	 state,	 the	
model	predicts	that	the	mean	change	
in	its	average	retail	electric	rate	would	
be	 3.22	 cents	 per	 kWh	 higher	 than	
the	 average	 change	 in	 non-deregula-
tion	states.		Put	differently,	the	average	
change	in	electric	rates	in	deregulation	
states	was	4.84	cents	per	kWh,	equal	
to	the	average	change	in	non-deregula-
tion	states,	1.62	cents	per	kWh,	plus	
the	coefficient	on	the	dummy	variable,	
3.22	cents	per	kWh	(see	bar	graph).	 	
Nothing	 else	 obvious	 comes	 close	 to	
explaining	 so	 much	 of	 the	 variation	
across	states	in	electric-rate	changes.	
A fEW lESSONS
	 My	results	indicate	that	Showalter’s	
critique	 of	 the	 attempted	 deregula-
tions	 of	 electric	 power	 markets	 was	
right.		Those	states	that	tried	deregula-
tion	 experienced	 significantly	 higher	
increases	in	average	retail	electric	rates	
than	the	states	that	did	not.		
	 Interestingly,	 not	 all	 of	 the	 14	
“deregulation”	states	suffered	relatively	
large	increases	in	average	electric	rates.	 	
Michigan,	California	and	Rhode	Island	
might	be	said	to	have	been	more	suc-
cessful	 with	 their	 deregulations	 than	
the	other	11	“deregulation”	states.		At	
the	same	time,	four	non-deregulation	
states—Hawaii,	 Nevada,	 Oregon	 and	
Washington—might	 be	 said	 to	 have	
suffered	 “deregulation”-like	 increases	
without	even	having	tried	it.		Hawaii	
relies	heavily	on	imported	oil	and	coal	
ElECTRIC RATES IN CONNECTICUT (continued from page 11)
0
1
2
3
4
5
Deregulation States Non-Deregulation States
4.84
1.62
WHAT A DIFFERENCE 
“DEREGULATION” MADE!
C
h
a
n
g
e
 
i
n
 
R
a
t
e
s
,
 
1
9
9
0
-
2
0
0
7
(
C
e
n
t
s
/
k
W
h
)
SOURCE: The Connecticut Economy
Coefficients P-value
Constant 1.6219
Deregulation Dummy   3.2243 0.0000
Adjusted R Squared: 0.5997
0.0000
ExPLAINING CHANGES IN RETAIL 
ELECTRIC RATES ACROSS STATES,
1900-2007
The coefficient on the constant measures the 
average change in electric rates in “tradition-
al regulation” states, while the coefficient on 
the dummy variable measures the additional 
increase in rates associated with “deregula-
tion.”  The p-values are estimates of the likeli-
hood that these coefficient values occurred 
by chance.  The smaller the p-value, the more 
statistically significant the result.
Those states that 
tried deregulation 
experienced significantly 
higher increases in average 
retail electric rates.
SOURCE: The Connecticut EconomySUMMER 2008 THE CONNECTICUT ECONOMY  15 
for	power	generation.		Nevada	was	the	
only	state	to	more	than	double	in	popu-
lation	over	the	study	period;	other	high-
growth	 states	 like	 Arizona	 and	 Utah	
(+73%	 and	 +54%,	 respectively)	 seem	
to	 have	 managed	 their	 surging	 power	
demands	 better.	 	 And	 Oregon	 and	
Washington	were	coping	with	the	end	
of	superabundant	hydro	power.		One	
deregulation	state,	Montana,	suffered	a	
large	increase	in	rates,	1990-2007,	but	
even	so	its	average	rate	was	still	below	
the	 U.S.	 level	 in	 2007;	 Montana	 has	
now	abandoned	its	deregulation	experi-
ment.
	 For	its	part,	Connecticut	had	the	
most	costly	experience,	in	terms	of	rate	
increases,	 of	 any	 of	 the	 deregulation	
states.		An	analysis	of	the	residual	val-
ues	from	the	regression	reported	in	the	
box	 showed	 that	 Connecticut’s	 actual	
increase	 in	 electric	 rates,	 1990-2007,	
was	nearly	2	cents	per	kWh	above	its	
predicted	value.		Next	highest,	at	some	
1.5	cents	per	kWh	above	predicted,	was	
Massachusetts.
	 “Deregulate	in	haste;	repent	at	lei-
sure.”	 	That	 is	 the	 clearest	 lesson	 for	
Connecticut	to	draw	from	my	regres-
sion	results.		Subjecting	electric	power	
markets	 to	 “competition”	 back	 in	 the	
1990s	seemed	like	a	good	idea	at	the	
time—to	many	economists	(me	includ-
ed)	 as	 well	 as	 policy	 makers—but	 in	
retrospect	 it	 wasn’t	 as	 straightforward	
as	a	lot	of	us	had	expected	or	at	least	
hoped.		The	goals	of	deregulation	were	
themselves	not	always	straightforward,	
and	what	was	supposed	to	happen	sel-
dom	transpired.		Far	too	little	attention	
was	paid	to	the	design	of	the	auctions	
used	to	establish	so-called	competitive	
prices,	with	the	result	that	bidders	(the	
suppliers)	often	could	take	advantage	of	
the	auctions	to	reap	higher-than-com-
petitive	prices.		Too,	a	number	of	states’	
regulators,	including	Connecticut’s,	lost	
their	nerve	as	rates	rose,	and	postponed	
further	phases	of	the	deregulation—in	
the	process,	pulling	the	rug	from	under	
would-be	investors	in	new	capacity	and	
discouraging	other,	potential	investors.
	 The	best	course	may	well	be	“back	
to	 the	 drawing	 board,”	 but	 with	 all	
options	on	the	table—not	just	rolling	
back	the	clock	to	traditional	regulation.	 	
For	instance,	we	might	improve	auction	
design,	re-think	the	wisdom	of	breaking	
up	electric	utilities	like	CL&P	vertically	
(the	 company	 has	 recently	 acquired	
some	generation	facilities),	and	provide	
Federal	regulators	with	greater	clout	to	
compel	states	to	follow	through	without	
flinching.		
	 A	 second	 approach	 would	 be	 to	
take	 advantage	 of	 all	 those	 glorious	
data	points	from	EIA	to	increase	both	
the	breadth	and	depth	of	our	empiri-
cal	understanding	of	what	determines	
electric	rates.		Such	an	understanding	
would	help	us	to	learn	from	the	deregu-
lation	experience	and	find	better	ways	
to	run	the	electric	power	business.
Connecticut had the 
most costly experience, 
in terms of rate 
increases, of any of 
the deregulation states.

Electric Rates in Connecticut: Buyer's Remorse on "Deregulation"

http://cteconomy.uconn.edu/articles/AW_Su2008.pdf

Electric Rates in Connecticut: Buyer's Remorse on "Deregulation"

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