Feature Articles

Although retail energy markets are imperfect, regulations aimed at improving market performance more often make things worse.   The costs of imperfect regulation must be weighed against the costs of imperfect markets. The age-old question coined by economist Alfred Kahn remains – “What is the best that we can do in an imperfect world?”

Applying microeconomic principles to public policy and advocating for economic efficiency remain the best tools to improve consumer welfare.  Basic economic principles teach that competition promotes efficiency, innovation, and, in turn, maximizes benefits for customers.

There is little economic justification for monopolizing retail energy supply.  Perhaps regulated utilities may be necessary evils in distribution and transmission, but not in the retail energy market.

As policymakers weigh whether to expand or scale back deregulation or restructuring of electricity markets, the benefits of greater efficiency and innovation in energy markets continue to outweigh any market imperfections.

Policymakers in the restructured states should be particularly concerned about the utility’s recent efforts to own generation.  For example, Exelon executives in Pennsylvania recently advocated for regulated generation to ease resource adequacy concerns. Such calls should raise red flags and be viewed as a major step backwards.

In competitive retail markets, the utilities were correctly required to divest their generation assets from distribution and transmission facilities.  The rate-regulated restructured utilities are involved only in the delivery and transmission of energy. Moreover, the utility’s affiliates were correctly restricted from owning or operating supply assets, acting as suppliers, or generally offering energy-related products or services within their regulated footprint.

Rather than looking backwards, our country should instead take steps to further enhance competition. A crucial first step is to “quarantine the monopoly” by enforcing a complete separation between the regulated monopoly wires businesses and competitive generation.

Markets have reduced the cost of generating electricity.  And power plant generators operating in markets are more likely to keep their plants available to run when it is most economical for them to do so.

In the State of Texas, residents must choose a retail electric provider because the local utility is not allowed to provide electricity supply. Other states should consider following this construct.  In the other restructured states, residents who do not choose a retail supplier are automatically placed on the utility’s default service rate plan, which, of course, remains heavily criticized for creating artificial market conditions, impeding competition, and failing to reflect the true energy supply costs.

Continued improvements in the retail energy markets are absolutely necessary.  This includes minimizing subsidies, adopting supplier-consolidated billing, ensuring secure access to advanced metering infrastructure (AMI) data, and providing better information to consumers.

Evidence abounds that power markets and competitive retail markets have yielded considerable benefits, including improvements in production, efficiency, capacity utilization, and generation efficiency.

In fully restructured states, consumers can shop for their electric and gas supply from retail energy suppliers. Retail energy customers first reap the benefits of active competition in the form of reduced wholesale prices. Customers with retail choice may also shop for a variety of offers with different term lengths, pricing structures (e.g., fixed versus variable), innovative service offerings, green product offerings and bundling options that are not available under the monopoly rate structure.

Studies abound showing that electricity prices in states that allow retail choice tend to be lower than under a monopoly.  Rarely do legitimate economic studies find that retail competition leads to higher prices.  Several studies, however, have pointed to flaws in market design that may have led to higher prices. And the most common design flaw usually involves the policymakers’ failure to sufficiently “quarantine” the utility’s vertical market power so it cannot distort the retail market.

In states without choice, incumbent monopolies vigorously fight to preserve their special position.  In support of their position, they likely argue  that choice is bad for consumers or that competitive markets do not work as well as their familiar monopoly construct.

Competitive energy markets allow all customers to choose the products and services they desire, while investment risk remains with the competitive supplier rather than on the utility’s captive ratepayers. This latter point cannot be emphasized enough.

In policymakers’ minds, the central question should be: why hold captive ratepayers hostage by restricting their options in exchange for shouldering the business risk?  As with the airlines, telecommunications and natural gas industries, the original justification for monopoly status often unravels as market conditions change.  And to be sure there are real costs associated with any market restructuring efforts.

All of the recent hysteria about the evils of “deregulation,” in the retail energy markets suggests that the regulatory reforms have imposed enormous economic costs. But it is likely that the highest costs from “deregulatory” efforts have resulted from too little deregulation and industry restructuring, rather than too much.