Electricity customer choice out-performs traditional monopoly
Evidence is piling up to show that how customer choice can help Michigan ratepayers save millions, Wayne Kuipers from Energy Choice Now argues.
Editor's note: The following is a guest post from Wayne Kuipers, director of Energy Choice Now, and Laura Chappelle, the former Chair of the Michigan Public Service Commission. If you or one of your colleagues is interested in submitting a viewpoint article, please review these guidelines.
The evidence continues to accumulate that the performance of electricity customer choice is superior to that of traditional vertically integrated monopoly. Since the recession of 2008-9, electricity customer choice has been routinely outperforming traditional monopolies in terms of price.
The big question facing policy makers in states served by unreformed incumbent monopoly utilities is how much longer customers should be forced to pay higher prices to compensate for anemic demand for electricity. How much longer should customers in Monopoly states be required to bear the fuel, technology and market risks that in Choice states are borne by investors in competitive states?
One-third of U.S. electricity is consumed in choice states
There are 14 competitive regulatory jurisdictions in the contiguous United States  that are predominantly open for full customer choice in the service territories of investor-owned delivery utilities. These are Delaware, District of Columbia, Connecticut, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania Rhode Island and the ERCOT area of Texas. With the exception of Texas, customer choice states are concentrated in the northeastern quadrant of the country where the non-regulatory cost factors tend to be more pronounced. These 14 competitive retail markets account for one-third of U.S. electricity load.
The other thirty-five states operate predominantly under the traditional monopoly model, with a handful currently allowing only highly restricted market access, mainly for large users. This group includes states such as Michigan, which allows a mere 10% of retail load to be competitively served. Others with only small portions of load-permitted market access are Arizona, California, Montana, Nevada, Oregon and Virginia. If the analysis is intended to compare two groups of states, then those few states with only small portions of load served competitively ought to be included in the Monopoly group.
Choice states resist price
Two time periods are of most interest for a comparison of price performance between customer choice and monopoly states. One is the period in which competition has been operative, 1999-2015. The other is the more recent period of 2008-2015 characterized by recession and slow recovery, flat load due to efficiency and loss of manufacturing, the shale gas revolution and rapid growth in renewable and distributed energy resources.
The first period allows for consideration of the longer-run impact of regulatory style on price performance. The second addresses a key difference between the two regulatory models – the response of prices to demand for the product.
In both time periods, 1999-2015 and 2008-2015, increases in weighted average prices for the main customer classes – residential, commercial, industrial – and for all-sectors, fared better against in the Choice group than in the Monopoly group.
Choice states rank low – For price increases
A ranking of all 49 jurisdictions, by All Sector percentage price increases, shows that during the flat load period of 2008-2015, competitive choice states cluster toward the low end. Half of the choice states show price decreases, while just three Monopoly states, less than one-tenth of the 35, show price declines.
Choice CAGR Is Lower than Monopoly CAGR
During the 1999-2015 period, the Compound Average Growth Rate (CAGR) of weighted average All Sectors prices was lower than for the group of 14 competitive states, at 2.49%, than for the group of 35 monopoly states, at 3.07%. This difference of 58 basis points is substantial, representing a price increase CAGR for Monopoly states that is 23% greater than that of the Choice states.
In the flat load period of 2008-2015, CAGRs for All-Sectors average weighted prices were even further apart. In the Choice states, the CAGR is a negative .76% compared to a positive 2.07% in the Monopoly states. That is a difference of 283 basis points between the rising price CAGR for the Monopoly states and the declining price CAGR for the Choice states.
This divergence starkly illustrates the problem. Traditional Monopoly needs to push consumer prices higher as sales volumes stagnate. In contrast, in the Choice states overall prices are suppressed by flat demand – even with the inclusion of the traditionally regulated prices of monopoly delivery service that rises with stagnant demand.
Michigan’s monopoly price surge
Currently, ground zero for the Choice v. Monopoly policy debate is Michigan. For the past two years, the state’s major utilities have tried to convince legislators to eliminate what little choice is allowed.
Average All-Sector prices in Michigan have surged since the late 2008 imposition of a 10% cap on competitive retail load on a market that had been largely open. As the state ranking illustration above shows, Michigan had the 16th greatest percentage increase in All-Sector prices since 2008.
As shown in the illustration below, during the decade prior to 2008, Michigan average prices had been nearly identical to those in Illinois where the market was and remains robustly competitive.
If Michigan consumers had paid the same market-based prices as have Illinois consumers in the period 2009-2015, they would have paid $11.3 billion less than they actually did pay. This calculation includes consideration of the low market-based prices paid by the 10% of Michigan load served competitively.
The question that may quite properly be asked is “what, precisely, have Michigan consumers gotten for that extra $11 billion?”
The Choice v. Monopoly debate will continue
It is in the nature of things that incumbent monopolies will ask government to preserve their special position and will argue, perhaps in good faith, that Choice is bad for consumers or that competitive markets do not work as well as Monopoly. The central question, as was the case with the airlines, telecommunications and natural gas, is whether consumers should be held captive and their options restricted, in the interest of enlisting them to underwrite business risk on behalf of investors. The historical record suggests that monopolies unravel as the conditions that originally justified and fostered them change. 
 All price data used in this analysis are drawn from the U.S. Energy Information Administration (EIA).
 The analysis does not include Alaska and Hawaii, due to their respective unique circumstances.
 It is important for participants in the Choice v. Monopoly debate to make their arguments in a spirit of full disclosure of methods and data. In Michigan, certain monopoly advocates have been especially unmindful of this obligation. A prime example is the recent Utility Dive posting authored by DTE chief executive Gerry Anderson on Utility Dive (http://www.utilitydive.com/news/electric-market-deregulation-has-failed-to-deliver-on-the-promise-of-lower/422398/). The piece fails to inform the reader, (1) which states are included in the Choice (“deregulated”) and Monopoly (“regulated”) groups, (2) whether straight averages of prices or the more appropriate weighted averages are used, (3) whether the price trend lines are for residential, commercial, industrial or all sectors customer groupings, and (4) whether the CAGR figures have been rounded up or down. The unsupported assertion of greater price volatility in retail prices in choice states than in monopoly states is a familiar part of the litany chanted by certain monopoly supporters. Monopoly supporters routinely conflate wholesale markets and retail markets. Retail customers in choice states customarily contract for fixed prices for extended periods, thus achieving greater price certainty than can be realized in a traditional monopoly states where price changes occur on a schedule determined by utility rate case filings. The volatility claim has been debunked empirically. See “The Electricity Choice Debate: Conjectures and Refutations,” By Jonathan A. Lesser and Philip R. O’Connor, The Electricity Journal, Aug/Sep 2014, Vol. 27, Issue 7. Further, since 2008, “volatility” in choice states has tended to be characterized by downward price movement in contrast to the upward price movement.