Unpacking the Disconnect Between Wholesale and Retail Electric Rates

The 2017 DOE Staff Report to the Secretary on Electricity Markets and Reliability noted a disconnect between falling wholesale electricity prices and flat or rising retail investor-owned utility (IOU) electricity prices between 2008 and 2016.   This analysis sought to assess recent trends in utility costs, retail sales, and/or retail rates vis-à-vis wholesale market prices in order to help explain this disconnect.

Using FERC Form 1 and ICE Power Indices data, Berkeley Lab researchers developed key annual metrics between 2007 and 2016 at a regional level for five of the seven NERC regions: Midwest Reliability Organization (MRO), Northeast Power Coordinating Council (NPCC), ReliabilityFirst Corporation (RFC), SERC Reliability Corporation (SERC), and Western Electricity Coordinating Council (WECC).  The analyses of these metrics enabled Berkeley Lab researchers to arrive at the following conclusions:

• Retail and wholesale rates were increasingly disconnected across all included NERC regions;
• Reductions in wholesale electricity market prices happened concurrently with reductions in IOU fuel and purchased power (FPP) costs, but sizable regional differences in the degree of FPP cost reductions existed;
• Reductions in IOU FPP costs were offset in part by increases in non-fuel operations and maintenance (O&M) costs, but modest regional differences in the degree of these cost impacts existed;
• Reductions in IOU FPP costs were also offset in part by increases in capital expenditures, but regional differences in the magnitude and type of investments existed; and
• Reductions in retail sales tended to mitigate the effect on retail rates from reductions in total utility costs, but regional differences existed that were sometimes counterintuitive and suggest the value in a more detailed analysis of utility costs vis-à-vis general rate case filings and decisions to better understand retail rate changes over time.