Power Plays: The Increasingly Competitive Electricity Landscape

As new ways of buying and selling energy emerge, the system of monopoly control is being challenged.
September 23, 2015
By Bob Graves  |  Contributor
Associate director of the Governing Institute and a co-founder of Governing's parent organization, e.Republic

Unless their cities run their own municipal utilities, most local governments have had little involvement in what electricity costs their residents. Historically, this has been the domain of private companies: the investor-owned utilities that are regulated by state-level public utility commissions. This monopoly arrangement created a secure energy environment but placed the retail pricing of electricity and its sourcing -- such as from coal, gas or solar -- well outside the control of consumers or local governments.

That is changing. Over the last few decades, policies have been adopted in more than a dozen states creating competitive markets that typically take one of two forms: "retail choice" programs that allow end-use customers to buy electricity from competing suppliers or "community choice aggregation," in which local governments combine their residents' and businesses' electricity demand to procure alternative and renewable energy supplies.

The profound effect of these policies is documented in a recent study conducted for Compete, a coalition of electricity stakeholders. Study authors Philip R. O'Connor and Erin M. O'Connell-Diaz are former Illinois utility regulators who were deeply engaged in the transformation of their state's electricity marketplace. "As our report findings show, customer choice is a sustained success, outperforming monopoly regulation on the key measures of price trends and generation performance," says O'Connell-Diaz, who also is a senior fellow with the Governing Institute.

The report provides a two decade compilation of facts and graphs comparing competitive market states to monopoly states. U.S. Energy Information Administration data show, for example, that between 1997 and 2014 the increase in the average electricity price in the 14 competitive states (a list that includes the District of Columbia) was 40.9 percent, compared to 59.9 percent in the 35 monopoly states in the contiguous United States. The competitive states occupy five of the six lowest spots for percentage price increases in the report's ranking.

Illinois provides a particularly successful case history, moving up from being the industrial Upper Midwest's worst performer to its best: the highest average price in 1997, but the lowest in 2014; the lowest capacity factor (a measure of production efficiency) in 1997, but the highest in 2013; and, the lowest percentage price increase in the nation, 15.2 percent. Monopoly neighbor Wisconsin had the highest increase, 105.5 percent. Illinois also has seen a boost in the number of retail electricity suppliers.

 

Illinois' approach is particularly interesting because it adopted both systems, retail choice and community choice aggregation (CCA). California didn't embrace retail choice, but local governments there are rapidly adopting CCA (also know as municipal choice aggregation), under which a city or county becomes the electricity retailer for its residents, handling the buying and selling of power while leaving grid management and billing to the existing utility.

CCA appeals to local governments for a number of reasons. They can use the revenue stream to make investments in renewable energy projects, generating jobs and local economic development. They can decentralize power generation, a key ingredient in resiliency. And in a state where so many citizens want to reduce their greenhouse gas emissions, this approach gives local governments a way to offer their residents energy supplier options and cleaner energy mixes while still selling electricity at competitive rates.

Perhaps because Illinois established statewide retail choice before it created community choice, it has a good working relationship with its private utility companies. Not so in California, where investor-owned utilities have aggressively attacked CCA's expansion. That may to have backfired, however: In 2011, the legislature passed a law prohibiting the companies from using ratepayer revenues to market against CCA. How this plays out in California will undoubtedly serve as a bellwether for CCA expansion across the country.

Some things already are clear, however: The issue of competition vs. monopoly control isn't going to go away, and the momentum is toward competition. Monopoly utilities would do well to embrace this trend and become part of the conversation rather than fight a rearguard action to protect an outdated business model.