Are customers losing out with energy choice?
Retail Energy Choice
Up until the late 20th century, utility customers had one choice for their electric supply—the utility. Then in the late 1990s, states began to deregulate the supply portion of customers’ bills allowing them to shop for their electric supplier; transmission and distribution remained a “natural monopoly”. Today 14 states and the District of Columbia have statewide residential retail energy choice programs that are bringing the benefits of lower prices and innovation. For example, a 2016 study by Ohio State and Cleveland State demonstrated that Ohio customers saved over $15 billion as a result of choice, and greater savings were projected into the future. Along with these lower prices, innovation has brought about new products and services that are not available through traditional utilities.
In an effort to pounce on the energy crisis in Texas, The Wall Street Journal published an article criticizing the retail markets and blaming deregulation for the blackouts. Texas is a unique state in that all of its retail electric customers must choose a supplier. These suppliers offer a variety of products including fixed and variable rate products along with time-of-use products. Along with those pricing plans, Texas suppliers also offer smart thermostats, airline miles, cash back offers and more. The article claimed that customers in the deregulated service territories were charged $28 billion more than “were charged to the customers of the state’s traditional utilities.” Not only is the analysis poorly constructed — it is incorrect given that in 2019 the Public Utilities Commission (PUC) of Texas reported to the legislature that “rates in the ERCOT competitive market have decreased by 31% since the transition to the competitive market.” This is a very poor comparison for a number of reasons.
First and foremost, this “analysis” is not comparing the supply portion of the bill that’s subject to competition, but rather the total rate customers are paying for the transmission, distribution and generation of electricity. One cannot say the losses are a result of deregulation. The distribution and transmission systems are still regulated by regulators.
Next, the article is comparing completely different systems. What the article describes as “traditional” electric utilities are municipal power systems and electric cooperatives that are non-for-profit entities and operate much smaller distribution systems. These systems are different in their financial structure and physical footprint than investor-owned utilities, and thus have inherently different cost profiles. Additionally, some of the municipal and cooperatives are not even in the Electric Reliability Council of Texas (ERCOT) system where all of the investor-owned utilities are located. Therefore, the WSJ compares retail rates for entities in entirely different wholesale markets, which is more akin to comparing electric prices in California to Texas. Retail energy markets should be evaluated as they grow, but this evaluation was inaccurate and not as simple as the authors attempt to present.
Other Retail Energy Markets
Last week the WSJ put out a second article criticizing customer savings and marketing activities. Unlike the Texas article, this article has some merit. There are bad actors in the selling of retail energy products, and the article only touches on a few of the cases that have been brought to utility regulators across deregulated states. These bad actors can go hand in hand with some of the high prices that are being paid by customers as a result of sales reps that deceive customers to think they are saving money as their rates are slowly increased over time. This is an issue that must be addressed on the state level, but it is a fine line to walk so as not to overburden the participants that are offering quality products and services to customers.
What must be addressed are the persistent bad actors that work across states and pay their fines, take a break from selling and do it all over again. Lessons must be taught that these types of practices will not be tolerated. Harsh penalties and license cancellations are a good start along with stricter evaluations of initial licensing and renewal applications. States need to look into ways to educate customers better, so they are able to make informed decisions and prevent bad actors from taking advantage of them. Customers must be protected so they can reap the benefits of competitive markets.
But the article also had serious flaws. It claims that retail customers paid $19 billion more than if they would have stayed with their utility, based on another inaccurate analysis. First, the data collected for this calculation was primarily from the U.S. Energy Information Administration (EIA)—which is not accurate for this type of analysis. A group of researchers from Ohio State and Exeter Associates determined EIA data, and specifically the form 826 data used in the WSJ article, provides an incomplete assessment of total customer bills. Other studies have made similar claims using different data. These studies also miss the fundamental premise that there is not a simple comparison between what retail suppliers are providing to customers and the basic product offered by utilities.
In most cases, retail suppliers are offering protection to customers by absorbing the risk of volatile wholesale markets. What was not mentioned in the article is that customers on fixed price contracts in Texas last month were protected from the $9,000-per-megawatt hourly prices; the retail supplier took the risk and protected the customer. These customers probably paid a premium for this service and will be happy for that when they get their bills next month. Such risk management options translate into a variety of different products consumers can select based on their individual risk tolerance. This benefit of retail choice is not part of any generic rate comparison calculation.
The calculation also does not take into account the source of supply, as many customers want renewable energy and are willing to pay more for it. Additionally, suppliers are offering products and services beyond basic electric service; products such as smart thermostats, airline miles and gift cards offer benefits to customers that are not captured in these very basic analyses. Further, retail suppliers offer rate discounts to consumers who voluntarily reduce their consumption when the wholesale system is stressed. Consumers value service reliability to widely varying degrees—orders of magnitude in difference even—and policies that enable retail suppliers to provide greater differentiated reliability products is critical to managing grid emergencies, like those endured in February.
The WSJ should not be faulted for examining the retail markets, as many states have spent considerable time evaluating this issue. The concern with these pieces is that they attempted to capitalize on the crisis that hit Texas by making inaccurate assumptions, which has unfairly tarnished the reputation of retail energy markets. The body of evidence clearly indicates that customers benefit from retail energy markets and policymakers should address legitimate bad actors while enabling the good actors to innovate retail products for the good of consumers and a more resilient grid.
Image credit: TWStock