A new paper from the energy experts at The R Street Institute finds that full competition in electricity markets delivers the most consumer benefits. The report provides further evidence that the existing big government central planning regulatory system in most state electricity markets is impeding the energy transition and saddling consumers with higher utility bills.
The paper, Electric Paradigms: Competitive Structures Benefit Consumers, recommends states pursue full restructuring of their wholesale and retail electricity markets to capitalize on private sector investment and consumer demand for new products and services.
“Electric competition has worked. It provides economic, reliability, environmental and governance benefits. It can work much better with stronger pro-market reforms,” the authors of the paper conclude.
In many parts of the country, state-regulated utility monopolies still control the energy market and customers can’t choose where they buy their electricity. A government granted monopoly may have made since at the beginning of the 20th century when people were still using “sad irons” to press their laundry, but advances in communications and energy technologies eliminated the “natural monopoly” in electricity markets decades ago.
These outdated market structures leave consumers out of the decision-making process, limit innovation, and unfairly compete with private sector investments in clean energy resources and technologies.
“For the past few decades, power generation and retail services have unequivocally not been natural monopolies,” the authors of the paper conclude. “The first cohort of states to recognize this and institute restructuring realized economic, reliability, governance and environmental benefits. Emerging technology makes the restructuring value proposition even richer.”
Only 13 states and Washington D.C. have fully restructured electricity markets that allow competition at the retail and wholesale levels. Eighteen states still maintain regulated monopolies, while the remaining 19 states use a hybrid model with competition for big energy users at the wholesale level but not for retail consumers.
The authors of the R Street paper, Michael Giberson and Devin Hartman, argue that restructuring the electric power industry to keep pace with technological advances will improve reliability, encourage the adoption of efficiency measures, reduce emissions, improve governance, and reduce consumer costs.
Giberson and Hartman looked at reliability, economics, environmental performance, and governance in monopoly and restructured markets to determine the best market structure from the viewpoint of the end-user – consumers.
“Full restructuring provides the most consumer benefit, but benefits are highly sensitive to implementation quality. The main implementation problems are allowing distribution monopolies to cross-subsidize competitive generation and retail markets, as well as failing to provide sufficient information and safeguards against manipulative suppliers,” Giberson and Hartman write.
The paper recommends expanding market reforms to increase competition at the wholesale and retail levels. Only the distribution of electricity should continue to be regulated as a monopoly. Recommended reforms include expanding customer choice and requiring competitive procurement practices at utilities.
“Consumer groups and states are progressing towards wholesale competition. But states should not neglect retail competition, as the benefits of wholesale markets are limited without allowing consumers to choose their electricity supplier,” the authors write.
Technological advances make it easier for consumers to become price- and emission-sensitive in their power consumption, Giberson and Hartman write. “Markets are better at discovering and meeting consumer preferences than regulatory processes. At a time when consumers are increasingly interested in supporting clean power, retail choice lets them exercise their environmental preferences.”
States should fully restructure by “quarantining the monopoly” to enforce a complete separation between regulated monopoly wires businesses and competitive generation and retailing businesses, the authors recommend. Additional recommended reforms include:
Minimizing subsidies and other state interventions.
Adopting supplier-consolidated billing.
Improving retail market oversight and energy provider licensing.
Ensuring secure access to consumer data.
The biggest strides, according to the paper, need to be made in the Southeast and West, which remain wedded to monopoly utilities. Most states in the Great Plains and Midwest participate in wholesale markets, but need retail reforms like giving consumers market access or putting utility generation plans out for competitive bidding. The Northeast should prioritize proper implementation of consumer choice and reduce interference in competitive markets.
The report comes at a pivotal time for policymakers as they grapple with the transition to cleaner energy. Special interest groups have popped up to defend the old monopoly system and protect its guaranteed rate of return that keeps consumers hostage.
“The politicization of energy policy impedes progress toward a decentralized electricity system that gives consumers real choices in their energy and service providers, including the right to generate their own electricity at home,” said Robert Dillon, executive director of the Energy Choice Coalition. “The best market structure is the one that results in the lowest possible costs and the greatest amount of freedom for consumers.”
Giberson and Hartman conclude that the debate isn't whether competition is good for consumers, “the real debate is how to best implement competitive reforms—not whether to pursue them.”
Read the full paper at The R Street Institute.