Competitive Markets, Not Monopolies, Are What Power Consumers Deserve
Competition, not monopolies, generally present the best outcomes for consumers with lower prices, higher quality and more innovation. President Biden even emphasized this point in a recent Executive Order that aims to promote more competition in the U.S. economy. While this fact has been taken for granted with most sectors of the American economy, for too long consumers have accepted that there was no other choice but to purchase the electricity that powers their homes from a sluggish state sanctioned monopoly. Fortunately, in many places that is starting to change.
Critical voices in this debate are starting to urge federal officials to make competitive markets a priority. In a June letter to the Federal Energy Regulatory Commission (FERC), nine former FERC commissioners, appointed by Democratic and Republican Presidents, urged the Commission to “use the broad authorities and tools available under the Federal Power Act to move toward well-structured organized power markets in all regions of the country.”
Historically, electricity has been supplied from a vertically integrated utility that owns all levels of the power supply chain from generation to transmission and distribution. In effect, this has granted a monopoly on the production and sale of power to homes and businesses in an exclusive service territory to one utility provider. Under this cost-based regulatory model, the only safeguard ratepayers have against predatory pricing are state and federal regulators who help set rates and oversee how electric utilities plan and pay for projects. But precedent has shown that consumers do not always fare well when leaving such things in the hands of bureaucrats and politicians.
Recent history has revealed instances in this market of regulatory capture where regulators have been susceptible to the commercial influence of the utilities they regulate. Other times they have been caught up in straightforward corruption scandals. In Illinois, for example, executives at Commonwealth Edison were accused of orchestrating a multi-year bribery scheme to advance legislation favorable to the utility. Similar cases in other states such as Ohio and Indiana abound, highlighting the significant shortcomings of relying on regulation instead of market forces to police electricity markets.
Fortunately, a better option is being utilized by many states and is even on the horizon for some stuck in these monopoly structures. More and more power markets are transitioning from state-sanctioned monopolies to regulated competitive structures. These models employ competitive market principles while leaving guardrails in place to ensure consumers will continue to receive a steady and reliable supply of power. These restructured markets have also lowered costs and are able to adjust much more quickly to consumers’ changing supply circumstances and needs.
Today, wholesale power prices in many regions are at their lowest level in the history of these regulated competitive markets. A study from the Retail Energy Supply Association found that from 2008 to 2017 consumer’s purchasing power from monopoly utilities saw their rates rise by 19 percent on average while prices fell by 7 percent in competitive markets over the same period. That real money goes back in the pockets of American families and businesses across the country.
Market incentives also encourage power generators to be better stewards of ratepayer funds.
Under the old cost-based regulatory model, utilities earn a guaranteed rate of return on their capital expenditures. This has created a perverse incentive where utilities are encouraged to spend more on large projects in order to maximize their profitability. As more and more states implement renewable energy mandates, power generators will likely look to new wind and solar generation capacity as a way to continue to lock in large investments and high rates of return. All of this will ultimately be borne on the backs of captive consumers who will be forced to pay for these investments regardless of their merit.
Competitive energy markets by contrast shift the costs and risks of projects to investors, owners, and operators. This reversal of market dynamics encourages power generators to pursue projects that will be the most efficient and cost effective, which is, in turn, reflected in lower electricity rates. It also protects consumers from having to subsidize billions of dollars in losses from projects pursued by utility monopolies that are all too often more expensive than anticipated (as was the case with the Kemper Project in Mississippi) or end up abandoned altogether (read V.C. Summer in South Carolina).
The facts and public opinion bear out America’s desire for competitive energy markets. According to a Morning Consult poll, Americans view competitive electricity markets as more effective than utility monopolies at driving an array of positive outcomes. Public utility regulation has long been recognized as an imperfect institution in need of reform and any changes should be welcomed and encouraged.
Michael Busler, Ph.D., is a public policy analyst, economics expert and a professor of finance at Stockton University in New Jersey.