Testimony In SUPPORT of Senate Joint Resolution 25, a Joint Resolution requiring the General Assembly to pass legislation to establish an open, competitive retail electric energy market
March 28, 2019
Committee on Transportation,
Infrastructure and Public Safety
Mr. Chairman and members,
My name is Josiah Neeley and I am an Energy and Environment
Senior Fellow with the R Street Institute. R Street is a nonprofit,
nonpartisan, public-policy research organization with a mission to engage in
policy research and outreach to promote free markets and limited, effective
government. Thank you for allowing me to testify today on this important topic.
I am here today
to testify in support of Senate Joint Resolution 25. Electricity competition is
a free-market policy supported by both economic logic and common sense. But
more importantly, electricity competition is a tested policy that provides a proven benefit to states, both
economically and environmentally.
For the past two decades, roughly a dozen states have
operated under a competitive regulatory model. When we compare the performance
of these states to those that have stayed with a monopoly model, we find that
competition provides electric power that is cheaper and cleaner than that
provided by Missouri’s current regulatory structure, yet is still just as
reliable. The experience of these states can and should guide Missouri as it
contemplates taking steps to introduce competition to its electricity market.
I would like to stress four points in particular:
1. Competition
would mean substantial savings for electricity customers. Over the past decade,
electricity prices in restructured states have tended to fall or remain stable,
while prices in monopoly states have tended to rise. From 2008 to 2016,
the weighted-average price of electricity in monopoly states increased 15
percent, while it decreased 8 percent in restructured states.
Figure 1: State Ranking – All Sector Percentage Price Change, 2008-2016
These lower prices have translated into billions of
dollars in cost-savings for electricity consumers. In fact, a joint report by
the Illinois Chamber of Commerce, the Illinois Manufacturers’ Association, the Illinois
Retail Merchants Association and the Illinois Business Roundtable notes that electricity
restructuring resulted in $37 billion in consumer savings from 1998 to 2013.[1] Similarly, a study by researchers
from Cleveland State University and Ohio State University found that since
2011, restructuring in Ohio has led to $15 billion in consumer savings.[2]
It is not surprising that competition would deliver lower
prices. Whether it be car dealerships or washing machine vendors, businesses often
try to attract customers by offering better prices than those of their
competitors. Features of Missouri’s current regulatory model, though, would make a move to
competition particularly likely to lower costs.
Currently in Missouri, utility rates are set based on
what is needed for the utility to recover its costs, plus a percentage return
on investment. This means that, paradoxically, the more a utility spends, the
more it makes—even if that spending is wasteful. Utilities therefore have an
incentive to invest in large, costly projects even if those same projects would
not make sense in an open market.
I should stress that I am not blaming utilities here; they
are simply responding rationally to the incentive structure that the government
has put in place. But switching to a competitive structure would alter these
incentives, making utilities more likely to adopt practices that reduce costs
and, in turn, decrease consumer prices.
2. Competition
would help make the grid more efficient. The past decade has seen major
changes in the energy market, with new technologies across the board and, for
some fuel sources, falling prices. More changes are on the way, particularly in
the areas of distributed generation and demand response. Competition has helped
to ease these transitions, and has added flexibility and resiliency to the
grid.
Utilities in competitive markets have been quicker to
adapt to these changes and to innovate. Monopoly utilities, by contrast, have
often sought to stymie these developments or have ignored them altogether
because they are insulated from competitive pressures. Monopoly jurisdictions,
for example, typically have excess reserves far beyond what experts believe is
the economically efficient level. This waste costs ratepayers money.
3. Competition is environmentally
beneficial. States with competition have been quicker to adopt new, cleaner
technologies and fuel sources. For instance Texas, a competitive state,
generates the most wind power in the nation. By contrast, utilities in monopoly
states have been more likely to keep older, polluting plants in operation even
when they are uneconomical. Because of the cost-recovery issue mentioned above,
it can make sense for these utilities to keep older coal plants in operation—even
if it means installing costly emissions-control equipment required by federal
regulations—rather than shuttering the plant in favor of lower-cost natural gas
or renewable energy.
Even when it comes to traditional plants,
generators in competitive states have done more to conserve fuel use than their
counterparts in monopoly states, resulting in less pollution. For example,
regulated coal plants often use a costlier fuel-procurement approach and hold
higher levels of fuel inventory on-site than utilities in competitive states,
which results in greater particulate-matter emissions.[3] By contrast, in states
with competition,
coal plant owners have tended to improve fuel efficiency,
resulting in emissions reductions of between 4.6 and 7.6 percent in SO2, NOx and CO2 between 1991 and 2005.[4] Nuclear generators that are subject to
competitive pressures have also improved their availability and reduced
refueling outage times, resulting in a 10 percent gain in operating efficiency.[5]
Retail competition has also made electricity providers
more responsive to increasing demand for clean or green energy. Over the past
decade, a growing number of customers have expressed a preference for green
energy options. Providers in competitive areas have responded to this demand,
while monopoly utilities have sometimes been slower to do so. In the span of
just two years, for example, green choice customers in retail states more than
doubled, while the number of customers in traditionally regulated states
remained flat.
Figure 2: Green Pricing Customers by State
Regulatory Status
4. Electricity competition would also help make
Missouri more attractive to businesses. Many large
companies—from Walmart to General Motors to technology companies like Amazon
and Microsoft—have adopted internal sustainability goals that require the
purchase of renewable energy. In fact, corporate renewable energy procurement
was roughly six times higher between 2015 and 2016 than in the late 2000s and
early 2010s.[6] The availability of retail
choice can be a critical factor for corporations in deciding where to locate,
particularly for the technology industry and other large institutional buyers
of renewable energy. Yet monopoly utilities have often been slow to respond to
this demand and have offered green options that do not appeal to many
consumers.
For all of these
reasons, it makes sense to let Missouri citizens vote on whether they should
join the 15 other states that have already embraced competition. I would be
happy to answer any questions.
Josiah Neeley
Energy and
Environment Senior Fellow
R Street
Institute
[1] Illinois Chamber of Commerce et al., Electricity
& Natural Gas Customer Choice in Illinois—A Model for Effective Public
Policy Solutions, February 2014, pp. 1–2.
[2] Andrew R. Thomas et al., “Electricity
Customer Choice in Ohio: How Competition Has Outperformed Traditional Monopoly
Regulation,” Urban Publications, November 2016, 1.
[3] See Devin
Hartman, “Environmental Benefits of Electricity Policy Reform,” R Street Policy
Study 82, January 2017.
[4] H.R. Chan et al., “Efficiency and
Environmental Impacts of Electricity Restructuring on Coal-fired Power Plants,”
Journal of Environmental Economics and
Management, March 2013, at 32.
[5] James B. Bushnell and Catherine Wolfram,
“Ownership Change, Incentives and Plant Efficiency: The Divestiture of U.S.
Electric Generation Plants,” Flinders University School of Computer Science,
Engineering and Mathematics, Working Paper No. 140, March 2005.
[6] Bloomberg New Energy Finance, “2017
Sustainable Energy America Factbook,” 2017, p. 39.
