Electric Industry Deregulation: A Look at the Experience of Four States
Public Sector Consultants (March 2014)
In the late 1990s, several states, including Michigan, began deregulating their electric utility markets in the hopes that competition in the generation and sale of electricity would drive down consumer prices. The enthusiasm for deregulation had waned in Michigan, but interest in electric market choice is now rising again.
Public Sector Consultants Inc. (PSC) was hired to review the experiences of other states that deregulated their markets and identify lessons or issues that might be relevant to the current discussion of Michigan’s energy policy. PSC conducted case studies of Texas, Illinois, Montana, and New Jersey—four states that represent a range of geographies, political leadership, and deregulatory approaches and policy frameworks.
In our analysis, PSC found that while there were some limited benefits of electric market competition in these states, broad success for deregulation has either not materialized, or has come with other regulatory and financial costs. Specifically, the case studies of these four states found that:
Rates have sometimes been more volatile under deregulation
- Electricity rates for industrial customers in one of the states declined in the early years of deregulation, but climbed again after initial power delivery contracts expired and wholesale prices increased
- There are significant challenges with pricing default electric service—the service provided to residential customers who do not opt for, or cannot obtain, competitive electric service
- A more flexible rate stabilization mechanism (such as Texas’ “price to beat”) during the transition period worked better than traditional price caps in attracting alternative providers
- Electric capacity and reliability can be a substantial challenge
- Deregulation can reduce a state’s control of its energy policy because of the stronger role regional transmission organizations and the federal government play
- New forms of market/government intervention to address market failures often have been necessary
Updated Electric Industry Deregulation: Ohio Case Study
Public Sector Consultants (November 2016)
In 2016, PSC again researched developments related to electric deregulation starting with these four states (Texas, Illinois, Montana, and New Jersey) and looking at other jurisdictions where electric deregulation had been implemented. After reviewing the original four states’ experiences, PSC determined that there were not enough new developments to warrant updating the case studies; however, one state in particular stood out based on ongoing discussions related to its electric market — Ohio. Based on initial findings, PSC decided to prepare a case study examining Ohio’s experience with deregulation and the current status of their electric market, and the findings in Ohio reinforce those from the earlier analysis of the five states. Like other states, Ohio faces several challenges related to its electric supply that must be addressed in order to ensure long-term, affordable, and reliable energy for the state. For example:
- Electricity prices in Ohio have risen since the expiration of rate freezes and market stabilization mechanisms, impacting affordability for Ohio customers.
- Restructuring has not spurred significant new investment in the state by independent power producers, resulting in a net reduction in capacity in the state. This is further exacerbated by economic pressure and the need to update existing plants to improve efficiency and environmental performance, which may lead to even further erosion of the in-state generating capacity.
- Deregulation creates challenges to the efforts of the State’s regulatory agency to act to protect electric reliability and affordability.
This report summarizes PSC’s findings regarding Ohio’s experience.
Retail Choice In Electricity: What Have We Learned In 20 Years?
Prepared for Electric Markets Research Foundation by Mathew J. Morey, Laurence D. Kirsch, Christensen Associates Energy Consulting LLC (February 2016)
Electric power industry restructuring in the United States in the 1990s was motivated by the expectation that substantial benefits were available through increased competition at the wholesale level – that is, in power sales among generators and utilities for resale to ultimate retail consumers. These expected benefits were of two types. First, competition in generation services would induce technological and management improvements in power production that would reduce generation costs and improve generators’ performance. Second, the breaking down of barriers to trade among utilities and other wholesale market participants would foster competitive power trading that would substitute relatively cheap for relatively expensive generation.
In contrast to the very real expected benefits of wholesale restructuring, the potential gains from retail choice were speculative at best. By the time that restructuring occurred in the late 1990s, there was already a substantial body of evidence, from innovative retail electricity programs dating back to the 1970s, that customers’ short-term response to electricity prices was small and that customers’ willingness to be curtailed, even when they had promised to be available for curtailment, was even smaller. Nonetheless, through a confluence of hopes from disparate interest groups, particularly from industrial customers seeking lower electricity prices and terms of service better tailored to their needs, retail choice was adopted alongside wholesale restructuring in nearly half the states. Nearly two decades later, there is little evidence that retail choice has yielded any significant benefits.
Retail Electric Rates in Deregulated and Regulated States: 2017 Update
Prepared by Paul Zummo, Director, Policy Research and Analysis, American Public Power Association (May 2018)
Though the gap has narrowed in both percentage and nominal terms, the original promise of greatly reduced prices has not materialized. Moreover, most of the gains achieved in deregulated states has been in the commercial and industrial sectors. While a majority of commercial and industrial customers in deregulated states have chosen alternative suppliers, most residential customers have not.