Preserve Retail Competition

Proposals to eliminate competition in retail electric supply to consumers are in the air. A consultant to the Massachusetts attorney general has just published an update to a report of last year asserting that retail competition has led to nothing but losses. The report coincides with the recent filing of lawsuits alleging that competitive suppliers are committing fraud or engaged in unfair and deceptive practices because agreed prices were higher than the cost of default service. But, while certainly worth considering, the economic analysis by Susan Baldwin, a former DPU regulator, overlooks important aspects of the competitive electric supply market. The case for its elimination has yet to be made.

The report relies upon a comparison of what consumers paid on average to competitive suppliers to what they could have paid had they instead elected default service. But this analysis does not take into account the premium that low-income consumers reasonably want to pay for certainty in the electric rates, a principal feature of most market offers. By contrast, the rates for default service swing up and down. (Utilities offer “level billing,” but that doesn’t avoid price swing risk.) It may be that wealthier consumers can absorb such swings if they pay less overall in the long run, but consumers on fixed and/or low incomes don’t have that luxury. It should therefore be no surprise that, as the report notes, lower-income consumers choose to participate in retail electric supply at a much higher rate than those with higher incomes. Electric retailers who take on wholesale price fluctuation risk by offering fixed prices are fully entitled to a premium for taking on that risk.

The supplemental report also does not take into account the fact many retail supply offerings are for “green” power explicitly at a premium to prices based on the entire generation mix, including fossil fuels. Baldwin’s report of March 2018 dismissed this concern while candidly admitting a lack of data to justify doing so. It did rely on comparison of three supplier’s “green” and standard offers, but without discussing what “green” meant in those cases. It also relied upon the fact that only 27% of listed offers in December 2017 had a green element, but did not calculate respective market shares and then relied upon averages that would be affected by green premiums for some buyers. It’s no secret that truly green power is substantially more expensive on average, so adding even less than a quarter of green offers to averages undoubtedly increases average cost. Allowing such “green” offers is in fact a great way to help fight global warming in a politically painless way.

Baldwin’s report focuses on what she believes is bad about competitive electric supply, but does not discuss so much that is clearly good. This includes the tremendous opportunity to shift electric consumption patterns to match renewable output by, for example, offering energy for free on nights and weekends when the wind is blowing but there is less demand. Another way that competitive retailers can facilitate the switch to renewables is with aggregating demand response. (For a more detailed discussion, see T. Bodell, “The Role of Retail in Renewables,” Renewable Energy World (July 24, 2019).)

Regulated utilities have a long history of not innovating. They have little incentive to do so – their incentive is to build a greater infrastructure on which to earn a guaranteed rate of return. At a time when the shift to renewable energy and a necessarily more volatile grid will require creative marketing solutions to reshape consumer patterns of use, we need more market incentive for innovation, not less. Furthermore, any nostalgia for the pre-competition era of regulatory command and control would overlook the fact that, during that time, the cost of generated energy was much higher than it is today in real terms. The best form of consumer protection has always been competition, and that hasn’t changed. Yes, protect the consumer from false advertising or misleading sales tactics as with any other service or good. But don’t eliminate an evolving, competitive industry that will likely be critical to our renewable future.

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