There are few notions more central to the idea of America than freedom of choice. Yet when it comes to electricity, real choices can be hard to come by. In Virginia, individuals and businesses who need electricity often find themselves with just one choice: their local incumbent electric utility.
After a brief experiment with electrical competition around the turn of the millennium, Virginia mostly re-regulated its electrical system in 2007. This lack of competition in electricity has been bad for Virginia consumers. A residential customer who uses 1,000 kilowatt hours of electricity per month has seen his bill increase by 29 percent over the 10 years since competition was rolled back. In contrast, rates have fallen during the past decade in states with electric competition. Meanwhile, Dominion Energy, Virginia’s largest utility, has seen its operating earnings rise by 38 percent.
Competition is important because it forces businesses to be attentive to the needs of their customers. The ability to take one’s business elsewhere is a powerful incentive for businesses to keep prices low and find innovative ways to improve quality. If there were only one restaurant chain allowed in a town, the food would probably be nothing to write home about.
Attempts to substitute regulation for competition have been underwhelming. Ordinarily, regulated utilities have to go through periodic rate reviews to make sure they aren’t charging more than is appropriate, given their costs. Even this process can often have an upside-down economic logic, where the more costly a utility’s projects are, the more money it makes. In the absence of competition, regulatory oversight is essential.
In 2015, the General Assembly passed a law suspending rate reviews and freezing base rates until 2022. When the law passed, it was justified as being necessary to protect consumers from environmental regulations proposed by the Obama administration. The Trump administration has since withdrawn those proposals, yet the rate freeze continues. Judge James C. Dimitri of the State Corporation Commission, which oversees electric rate regulation in Virginia, estimates the rate freeze will result in a $1 billion windfall to Dominion.
Virginia law does officially allow larger customers to buy electricity outside the utility system. In practice, however, the law goes out of its way to make buying from a non-utility unappealing. Chief among these obstacles is the so-called “five-year minimum stay” requirement, which says that if a customer buys electricity from someone other than the incumbent utility, that customer can’t go back to buying from the utility again without giving five years’ advance notice.
This five-year minimum stay provision has been effective in preventing the emergence of competitors to the incumbent utilities. Companies are reluctant to go with a third-party electric supplier knowing that, if it doesn’t work out, they will be cut off from the utility for half a decade. This, in turn, discourages third-party generators from entering the market. These mutual reluctances reinforce each other, effectively preventing the growth of competitors to utility dominance.
Requiring advance notice is supposed to help utilities make long-term planning decisions. Plenty of businesses, though, manage to do long-term planning without restricting their customers’ ability to leave. Moreover, the length of notice required in the Virginia regulation is simply unreasonable as anything other than an anti-competitive measure.
When Virginia re-regulated its electrical system 10 years ago, lack of market competition was cited as the chief justification. Given these concerns, placing legal obstacles in the way of the existing rights to competition for larger customers is legally perverse. Virginia should restore the original promise of the 2007 reforms by removing the five-year minimum stay provision.
Image by Nagel Photography