Electric Paradigms: Competitive Structures Benefit Consumers

Electric competition has worked. It provides economic, reliability, environmental and governance benefits. It can work much better with stronger pro-market reforms.

Consumer groups and states are progressing towards wholesale competition. But states should not neglect retail competition, as the benefits of wholesale markets are limited without allowing consumers to choose their electricity supplier.

The biggest strides need to be made in the Southeast and West, which remain wedded to monopoly utilities. Most states in the Great Plains and Midwest participate in wholesale markets, but need retail reforms like giving consumers market access or putting utility generation plans out for competitive bidding. The Northeast should prioritize proper implementation of consumer choice and reduce interference in competitive markets.

Last century, almost all electric power customers in the United States were served by vertically integrated monopolies. In the 1990s, however, consumer unrest over rising rates prompted reforms in roughly one-third of states, allowing for competition at wholesale and retail levels. Since then, many additional states have expanded wholesale competition incrementally, although retail competition has remained relatively static. The result is that a cohort of states have retained the traditional monopoly paradigm, whereas others have adopted either a hybrid model or a restructured model.

Eighteen states still use the traditional model, relying on state-regulated monopolies. Nineteen states use a hybrid model, in which regulated monopolies serve all or most retail customers and own power plants that participate in wholesale electricity markets administered by regional transmission organizations (RTOs). Thirteen states and Washington D.C. have adopted a restructured model, which embraces competition for retail services and power plant owners, who also participate in RTO markets. Although these paradigms use different combinations of wholesale generation and retail regulatory structures, distribution remains a regulated monopoly in all of the models.

This report assesses paradigm performance from a consumer’s viewpoint across four consumer-centered dimensions: reliability, economics, environment and governance.

• Reliability: Restructuring improves the reliability behavior of power plants by aligning their profit motive with performance and increasing voluntary demand reduction during times of grid stress. The reliability advantages of restructuring were evident in Winter storms Uri and Elliott. RTO markets offer reliability advantages over standard utility practices. For example, RTO capacity markets satisfy regional reliability criteria by coordinating resource entry and retirements while accounting for transmission constraints, which utility integrated resource planning (IRP) does not. This advantage grows over time, as the reliability value of resources becomes increasingly dependent on regional conditions.

• Economics: Restructuring has clear benefits at the wholesale level, while retail benefits are largely tied to the quality of state reforms. Competitive generators operate more efficiently, innovate, manage risks better and make sounder investment decisions than monopoly utilities. States that restructured have seen substantially enhanced demand-side participation. Texas, alone, implemented retail choice well. Other restructured states have flawed implementation, but nevertheless retail choice has helped reduce energy costs, manage risks and expand service offerings like green energy tariffs. Retail rates are often higher in restructured states because of unrelated drivers like higher fuel, tax, land, labor and environmental compliance costs in the Northeast.
• Environment: Emissions have fallen faster in restructured areas. Competition has promoted voluntary emissions reductions through consumers exercising choices for cleaner energy and accelerated clean technology adoption, especially reducing barriers to unconventional technologies. Despite competitive wholesale markets driving efficiency, some utilities persist in using older, high emission generation resources.
• Governance: The business model of monopoly utilities is predicated on securing favorable regulatory and legislative treatment, while restructured areas shift decisions to market forces. Patterns of government cronyism and corruption follow the monopoly utility model, whereas better governance is evident under competitive structures. RTOs present new governance challenges due to their unique, quasi-autonomous organizational structure.

Restructuring the electric power industry to align with today’s technological advances and challenges can improve reliability, encourage efficiencies, reduce emissions, fortify governance and deliver consumer benefits. The key is to implement quality reforms. We therefore offer three main recommendations.

• States using a traditional model should contemplate moving to a well-implemented hybrid model, with an emphasis on joining or creating an RTO and moving toward complete restructuring.
• States employing a hybrid model should transition toward full restructuring. If such steps are not currently viable, gradual improvements include enabling direct market access rates for large consumers, implementing robust all-resource competitive procurement to serve remaining captive customer customers and utilizing RTO data for prudence reviews of utility IRP and asset management.
• Restructured states should take steps to further enhance competition. A crucial enhancement, exemplified by Texas, is to “quarantine the monopoly” by enforcing a complete separation between regulated monopoly wires businesses and competitive generation and retailing businesses. Additional improvements include minimizing state interventions like subsidies, adopting supplier-consolidated billing, improving retail market oversight and energy provider licensing, ensuring secure access to advanced metering infrastructure (AMI) data and providing better information to consumers.