Don't Believe This Balderdash on Electric Costs

 | Nov 26, 2013 | 9:30 AM EST
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If you believe weekend reporting, you might conclude that electricity prices are suddenly going through the roof. It is not true. For the last five years, most retail consumers found their electricity prices have been relatively stable. Some consumers actually experienced a slight decrease.

The reporting originated from data released by the U.S. Bureau of Labor Statistics. Last Friday, the Drudge Report published a link labeled, "Price of Electricity Hit Record for October . . . Up 42% in Decade." The link referenced an article with the same title. Deep in the article the author references the BLS data and claims, "Americans now pay 42% more for electricity than they did a decade ago."

What is missing is context. It turns out that not all Americans are paying 42% more.

Digging through the BLS and Energy Information Administration numbers reveals important patterns. BLS limited its analysis to U.S. cities, not outlying areas, and its data do not include industrial or non-urban consumers. EIA measured prices for states, including cities, and its data cover all Americans and all industries.

Nevertheless, the national trend over the last 10 years is consistent. Looking at EIA data, we see price trends changed direction in 1999. From that point forward, prices grew each year for the next 10 years. You can the pattern it in this graph:

Source: EIA/Williams

Recent trends show prices returning to stability in 2008. Today, the average industrial consumer pays six-hundredths of a penny more than it did in 2008. The average commercial consumer is now paying two-hundredths of a penny less than it did in 2008. The average residential consumers are now paying 89-hundredths of a penny more than they did five years ago.

While the macroeconomic trends are interesting, the numbers behind the numbers are more revealing. When the national averages are ripped apart into state-by-state and customer classes, unexpected patterns emerge.

Two Outliers: Hawaii and Illinois

According to EIA, electricity prices in Hawaii jumped more than 211%. Over the last 20 years, average residential consumers have paid 201% more, commercial pays 191% more and industrials pay 232% more.

Hawaii is an outlier. It is the only state that relies on oil to make its electricity. So, until recently, if oil prices increased, so did electricity prices. Over the last 20 years, oil prices have increased substantially, which required the state's Hawaiian Electric (HE) to raise electricity prices.

More typical are price increases in the range of 96% to 50%. However, it is not that states many might expect.

States leading the pack with the highest price increases are Montana, Wisconsin, Washington, Idaho, Oregon, Tennessee and Wyoming. The graph illustrates the top 25 states in order:

Source: EIA/Williams

For many, it is a surprise to see how Connecticut and California fared. They are right in the middle of the pack.

On the other end of the spectrum is Illinois: Compared with all other states, this state is an outlier. According to EIA, Illinois had the most stable pricing of any state. For the last 20 years, its average retail price of electricity for their residential consumers was less than 1%. Its average commercial customer saw a price decline of 1.02%, while industrial customers saw their prices increase by whopping 5.73%. Overall, Illinois saw its electric prices increase by only 3.81% over 20 years.

One possible explanation for Illinois' amazing performance is its nuclear power plants. According to the Nuclear Energy Institute, Illinois is home to 11 nuclear power plants. Most of these facilities are owned and operated by Exelon (EXC).

As the third graph illustrates, no other state comes close to Illinois.

Source: EIA/Williams

Like Illinois, Arkansas and Pennsylvania are home to several nuclear power plants. Exelon and FirstEnergy (FE) own and operate Pennsylvania's nine nuclear units.

Most would not expect to see four New England states (Massachusetts, Rhode Island, New Hampshire and Maine) at the bottom of the nation's price-increase list. New England is home to five nuclear units.

While it is difficult to offer generalities in a country as large and complex as the U.S., one point is clear. The five states with the highest price increases have no nuclear plants, and the four states with the lowest price increases host a fleet of nuclear power plants.

As of today, retail prices for electricity are generally stable. Some states are more stable than others. If price stability is a critical factor, businesses should consider states that host operating nuclear facilities. Because price increases are coming, businesses should avoid states like Georgia, South Carolina and Tennessee. They have nuclear plants under construction, and those states have already warned that they plan to pass on the costs of construction onto consumers.

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