Missouri’s Electric Market Opportunity
Missouri once prided itself on having some of the lowest electric rates in the United States, yet it now has the fifth fastest rate growth in the country. Missouri’s electric rates are now higher than most of its neighbors and it is on track to have electric rates above the national average soon.
It’s not just Missouri. Electricity prices are rising across the country and the projected growth in electricity demand—as well as needed upgrades to the electric grid—are likely to push prices even higher.
If Missouri wants to tackle these rising costs and continue to have electricity rates below the national average, it needs to modernize its regulatory structure.
Missouri’s Current Electric Market Structure
Missouri’s current electricity system is like most others around the United States and has been that way since the early 1900s. For most of the twentieth century, these systems operated under what is known as a vertically integrated utility model. Under this model, a single utility in a given geographical area owns and operates all aspects of the electric system from power plants (generation) through to the local distribution system.
These monopoly utilities are also given the exclusive right and obligation to provide electric services to individuals and businesses in that area. A state’s public services commission (PSC) strictly regulates the utility and sets rates based on a cost of service model. The role of the PSC is to act as a substitute for competition.
Utilities must be regulated to prevent them from using their monopoly power to overcharge captive customers. But the model is far from perfect. Under a cost of service model, utilities that invest more are allowed to make more in profit. This can create a perverse incentive for the utility to overspend, leaving the costs and risks on captive ratepayers.
The vertically integrated model was adopted at a time when the electricity system was thought to be a “natural monopoly,” a space where competition was ill suited. Over time, however, people increasingly recognized that the natural monopoly argument did not apply to all sectors of the electric system. That is why utilities started participating in organized wholesale markets, sometimes referred to as regional transmission organizations (or RTOs), which introduced some competition and helped contain costs. States also introduced elements of competition into their retail markets (letting people choose between different electric suppliers) and in the generation market (allowing non-utility power plants to sell electricity into the open market).
While some sections of the grid today, like the distribution system, retain natural monopoly characteristics, other areas, such as generation and retail services, perform better under competition.
Experience Shows that Electric Competition Works
The case for competition is not based simply on theory but on experience. Roughly a third of states now operate under a “restructured” electric market that allows for competition and retail choice, while another third of states (including Missouri) are part of an organized wholesale electric market while retaining the vertically integrated nature of the utility monopoly. The experience of the last three decades shows that competition is superior to the vertically integrated model. There are four broad criteria for judging the success of an electric system: economics, reliability, environmental effects, and governance. A competitive system is superior on all four metrics.
Economics
First, as economics teaches, competition lowers costs and benefits consumers. Competitive power markets reduce costs by improving decision making about how to invest and when to retire uneconomical power plants. Competition also forces power plant owners to run them more efficiently and adopt cost-minimizing innovations. This has resulted in major efficiency gains in the fossil fuel and nuclear-powered fleets.
Free markets are better at managing and minimizing risks to consumers than monopolies. A single utility often lacks the balance sheet to finance new investment. By contrast, competitive generators have better access to private capital markets to finance lower-cost and lower risk investments. Under the monopoly model, ratepayers are on the hook for any bad bets a utility makes. Under a competitive system, private companies face those consequences.
Technological changes are also likely to increase the value of electric market competition going forward. The grid of the future will need far more complex capital investment decisions than in the past. Uncertain demand growth projections, more unconventional supply resources like wind, solar, and storage, and an increased deployment of demand-side resources will all make it more difficult for utilities to forecast what resources they will need, more complex for the utility to effectively plan and operate the system, and for state regulators to know which investments constitute least-cost service. This is what is known in economics as “the knowledge problem,” and competitive markets are a preferred way of addressing this problem.
Competition is important so customers are shielded from the costs of servicing new demand, such as large loads. Today’s monopoly services socialize costs and risks across their captive customer rate base, which has prompted blowback from consumer groups. Under a competitive system, by contrast, suppliers and counterparties (e.g., data centers) are the ones who bear the costs and risks.
Cost savings flow to consumers in the states with retail choice. The Midcontinent Independent System Operator (MISO), which covers parts of Missouri, has calculated that its members derive over $3 billion annually in cost-benefits from participation in the wholesale market—amounting to a 12:1 benefit-to-cost ratio. A recent peer-reviewed study has also found that competition decreased average electricity prices in the Midwest. However, in states like Missouri that lack retail and generation competition, ratepayers may not see the full benefit of these cost savings.
Notably, when competition was first adopted around the turn of this century, states with higher electricity rates were more likely to pursue competition. This makes sense, as high electricity prices can be a potent spur to reform. But this has sometimes left the misleading impression that competition does not result in lower prices, because some states with low electric rates still follow the monopoly model. Over time, however, states that have not adopted competition have tended to see their electric rates increase considerably, while states that embraced competition have seen more muted rate increases.
Competition has also produced an array of retail options that lets consumers choose services based on their individualized needs or preferences. Letting customers choose their preferred rate allows customers to determine their level of comfort. While some customers may prefer a fixed electric rate, others are comfortable with variable rate plans that subject customers to the risk of higher rates but also allow them to save money in most circumstances. Other customers may place a premium on “clean” or “green” energy and be willing to pay extra to ensure their electricity is derived from those sources.
Reliability
Competition helps maintain the reliability of the electric system. Most electric outages are due to local distribution level issues and thus are unaffected by whether the generation system is open to competition. However, competition can affect whether there is enough generation to meet demand in given circumstances, called bulk level reliability. The introduction of competition has led to a decline in the number of outages. This makes sense, as competition increases the incentives generators have to keep their plants running so they can make money from selling their electricity or risk substantial penalties.
In recent years, bulk level reliability problems have been connected to extreme weather events, such as Winter Storm Elliott and Winter Storm Uri. During Winter Storm Elliott, monopoly utilities were forced to implement rolling outages and only avoided deeper outages by importing power from competitive markets in neighboring regions. Indeed, stronger ties to Missouri’s southern neighbors would yield additional benefits to Missouri customers.
The Texas outages during Winter Storm Uri are often blamed on competition. Yet those outages were largely the result of problems unrelated to electricity market structure, such as lack of gas supply, poor gas-electric system coordination, lack of winterization of key infrastructure, and a lack of interconnection with other systems. In fact, Texas contains both competitive and monopoly utility generators, and competitive generators had lower outage rates than monopoly utilities.
Environment and Governance
Competitive power markets also have advantages when it comes to environmental and governance metrics. Markets lower emissions both for greenhouse gases and for traditional pollutants. This happens for the same reasons that competition reduces economic costs. More efficiently run plants pollute less, and uneconomic plants tend to emit more pollution than profitable plants. The cost of service model may encourage utilities to spend lavishly on environmental compliance at plants that weren’t economical to continue operating to begin with; a competitive owner would not. Markets also let environmentally inclined customers select “clean” or “green” options where they are supplied by lower emissions generation types.
Finally, competition is superior to the monopoly model in terms of governance. Under a competitive model, businesses succeed by offering quality services to their customers at a low cost. By contrast, the way a cost of service monopoly utility succeeds is by securing favorable treatment from regulators and legislators. “Accountability through competition” was part of the argument originally made for competition over two decades ago, and subsequent experience has shown that competition is “the antidote for bad behavior.”
Reform Options for Missouri
R Street Institute issued a state retail electric scorecard last year, ranking all 50 states by their electricity policy. Missouri performed relatively poorly, receiving a “D” grade. The grade is comparable to some neighboring states, such as Iowa, which also received a “D”, but is worse than Illinois, which earned a “B+”. Illinois has a competitive electric market and experienced economic benefits as a result. Ratepayers feel the results of these differences: The average monthly electric bill in Missouri is around $20 higher than the average bill in Illinois. Missouri residents and businesses would benefit if the state moved toward a competitive system as exists in more than a dozen other states.
Fortunately, Missouri regulators are taking some preliminary steps in favor of competition. The Missouri Public Service Commission partially removed the state’s prohibition on aggregators of retail customers (ARCs) in 2024, allowing large customers with demand over 100 kilowatts to sign up with an ARC that will participate in RTO markets. In this decision, the PSC recognized the importance of competition for demand response. Missouri should take the next step and allow all customers the opportunity to benefit from competition.
In addition, three proposed pieces of legislation would open Missouri’s electric market up to competition: HB 2207 by Rep. Mayhew; HB 2233 by Rep. Byrnes; and SB 1411 by Sen. Schroer. These bills are similar in that they would provide customers with retail choice. After a transition period, each bill would allow all Missouri residents and all commercial and industrial customers to choose their electric supplier. The bills also create a competitive generation market; each utility would be required to divest itself of its generation assets and future generation decisions would be decided according to market demand. Consideration of this legislation would ease cost burdens on Missouri’s electric consumers and help prepare the state for coming changes in the electric grid.