Expanding Energy Choice in Virginia

Virginia’s economy has blossomed in recent years, punctuated by energy-intensive growth in Data Center Alley. But power limitations and environmental concerns may arrest further development. Virginia’s economic development and clean transition are hampered by outmoded electric regulation, specifically the state-sanctioned monopoly utility model.

Virginian stakeholders and policymakers can learn from states that have introduced electric competition already. The evidence is clear that proper competitive reforms result in superior economic and environmental performance, among other benefits like improved reliability and reduced cronyism. Encouragingly, Virginia has already enacted minor reforms that permit a degree of supply competition and consumer choice. A political window has now emerged to expand this progress, namely in the form of Senate Bill 591, which was introduced last week. This legislation would enable robust business consumer choice and residential clean energy choice. Virginia policymakers should pass this bill and simultaneously organize dialogue on adopting complete competitive reforms.

Broad States Context

In the eyes of economists and energy customers, power generation and retail supply should be competitively structured industries; they are not natural monopolies. A recent R Street paper found that states that restructured so that wholesale generation and retail services come from competitive, independent suppliers have seen superior cost savings, innovation, reliability, emissions reductions, and governance quality benefits. The new-age economics of electricity, marked by more diverse consumer preferences and energy supply sources, makes a stronger case for restructuring than when some states first pursued it in the 1990s.

Source: Michael Giberson and Devin Hartman, “Electric Paradigms: Competitive Structures Benefit Consumers,” R Street Policy Study No. 293 (September 2023), p. 5. https://www.rstreet.org/wp-content/uploads/2023/09/FINAL_r-street-policy-study-no-293.pdf.

Today, 13 states and the District of Columbia have adopted restructuring by securing competitive wholesale and retail reforms. Eighteen states remain wedded to traditionally regulated monopoly utilities. Nineteen states, including Virginia, fall under a hybrid paradigm, where most generation and retail services are served by regulated monopolies who participate in organized competitive wholesale markets. In recent years, states have generally migrated toward competition, primarily at the wholesale level, at the behest of commercial and industrial (C&I) customers. It is worth noting that large consumers initiated the onset of electricity restructuring in the 1990s, due to the untenable costs and socialized risk that monopoly utility decisions imposed on captive customers, versus the unmistakable appeal of supply choice.

The performance of electric competition comes down to the quality of reform implementation. The best results come from full restructuring, but political forces have relegated most states, forcing them to take incremental steps toward competition. The current nationwide trend is a rejuvenated push by C&I customers to have direct market access. This gives companies the ability to shop among suppliers for the best deals in terms of price, risk management, clean energy optionality, full or partial on-site supply, service quality, and other features.

Charting Virginia’s Course

Virginia policymakers wisely chose to join the PJM Interconnection, an organized competitive wholesale market, but the vast majority of customers take service from monopoly generation and retail services. The data indicate over 10,000 C&I customers shop for power in Virginia, saving over ten million dollars annually, on average. The bulk of procurement has been renewable energy, consistent with explosive industry trends.

Narrow consumer choice in Virginia is explained by the fact that the state is nominally competitive, but predominately monopoly in practice. Several requirements force most customers to remain captive to an incumbent utility:

• Large C&I customers (over five megawatts) are required to give five-year advance notice to utilities if they enroll with a competitive supplier and seek to return to utility supply. This unnecessarily amplifies the risk of competitive supply. Requirements in other states are de minimus, such as 15 days in nearby Maryland, Pennsylvania, Ohio, and the District of Columbia.
• Small-to-medium C&I customers must 1) aggregate their usage to five megawatts to be eligible to enroll with a competitive supplier and 2) file a petition for regulatory approval by the State Corporation Commission (SCC). This creates a pronounced barrier to choice, without merit, that stifles C&I shopping.
• Mass market customers, including residential, are only allowed to shop for 1) 100 percent renewable energy deals and 2) if the utility does not have a renewable offering already. Utilities now offer renewable plans, albeit on inferior terms to competitive suppliers, thus eliminating mass customer choice.

SB 591 would lower the aggregation threshold to one megawatt, remove the mandatory petition filing with the SCC, reduce the advanced notice requirement to six months, and permit customers to shop if they choose a 100 percent renewable plan. This will inject competition and customer choice into Virginia’s energy economy, which is long overdue. However, it will not result in full restructuring. This means that Virginia will retain a mix of choice and captive customers, which requires attention in reform implementation.

When states expand competition incrementally, they must confront potential stranded utility costs and cost shifts between choice and captive utility customers. Fortunately, the SCC has authority to address both and already addresses it, given the existing partial choice market. For example, in two cases, PUR-2021-00058 and PUR-2023-00101, the SCC reallocated over $300 million in utility distribution costs across choice and captive customers.

When it comes to stranded utility costs, the most important thing to avoid is forcing customers to pay for new uneconomic monopoly resources. Dominion’s latest resource plan threatens a massive, risky outlook, including investments in technology not yet commercially viable. By contrast, competitive suppliers manage investment risk better because they incur risk themselves, not captive customers. Paying for new utility investments is averaged across customer classes, thus expanding choice for the customer segment driving revived demand growth will greatly lower utility procurement needs. This de-risks the outlook for captive and choice customers alike. C&I choice is especially important for Virginia to mitigate concerns over who pays for the data center buildout.

Unsurprisingly, a diverse coalition of business, environmental, and free-market groups back SB 591. In addition to this legislation, policymakers should seek to convene a working group to explore full restructuring. Together, these efforts would benefit Virginians now and open the way for deeper restructuring in future years.