Energy Choice Fact Check: Assessing the Truth About What’s Been Learned About Competition

The Arizona Energy Policy Group (AEGP) recently published a report entitled “Retail Competition in Electricity: What Have We Learned in 20 Years?” in an attempt to quash momentum in Arizona to allow customers to choose their service provider.

Energy choice, when adopted by states like Arizona, allows for open markets where customers are able to finally have a say in who generates their electricity as well as how that electricity is made. Providing customers with the ability to identify the power provider who most aligns with their priorities, whether that’s the lowest price, the cleanest energy mix or the most innovative program offerings is a popular idea that is both saving consumers money and driving the transition to cleaner generation sources in the electricity sector.

While end users appreciate the ability to break from their monopoly electric utility, the resulting competitive markets have made incumbent utilities quite nervous.

Organizations representing utilities have poured unprecedented amounts of funds into political groups to oppose market reforms. The recent report from the AEGP is just the latest attempt to dissuade consumers from taking flight.

Unfortunately, the facts and the history of energy choice across the United States don’t line up with the claims AEGP makes in its report. We’ve pulled together this handy review of AEGP’s main claims and see what’s what.

Claim: There’s no evidence that energy choice consistently reduces rates for residential customers.

Fact: Markets that have embraced competition and consumer choice have demonstrated consistent energy price reductions compared with comparable markets without energy choice.

Monopolies have little incentive to reduce prices, innovate or improve efficiency because their customer base has nowhere else to go. Even when a traditionally integrated utility makes a bad investment decision it doesn’t pay the price because it is guaranteed a rate of return on investment that is covered by its customers. 

The anecdote to monopolistic behavior is competition. As noted by South Carolina State Sen. Tom Davis in a letter advocating for competitive energy markets in his state:

“The legislature has given the big utilities service-area monopolies and guaranteed them (on average) a 10.2 percent return on invested capital – even when they make poor decisions. Predictably, these big utilities pursue capital-intensive projects in order to maximize their return.  That’s why, despite a steady decrease over the past decade in the wholesale price of power in our country, retail rates charged by the utilities in our state have soared.”

Several studies have shown this to be the case. An Ohio State University study showed that the lack of competition in the state was responsible for increasing power costs. The American Public Power Association tracked electricity data and found that since 1997 electricity rates on average have increased 56 percent overall. In states with energy choice, however, rates increased 47 percent compared with non-reorganized states with incumbent utilities that saw 66 percent increases.

Long-term trends aren’t necessary to see the difference in rates, though, as looking at changes from 2016 to 2017 by the Energy Information Administration found that the only fives states that saw average rates decrease were states that had enacted energy choice. On the flip side, the largest year-over-year increase was in Florida, a state where energy choice advocates are battling to open the market to competition.

Claim: Residential electric rates in competitive states are higher on average than those in traditionally regulated states.

Fact: Comparing electric rates where the only main variable in power markets is the presence of energy choice shows the movement in the right direction for customers.

Opponents of competitive markets tend to cherry pick data from states that have only partially reorganized their electricity markets. These markets can have higher electricity rates for a host of reasons unrelated to competition. In fact, one of the main reasons for higher prices is that partially reorganized markets leave up many of the barriers to competition. When governments don’t trust markets to work and continue to try to direct it through regulation, it adds costs and discourages competition and innovation.

For a more direct comparison of competitive vs noncompetitive markets, it’s useful to look at regions where certain customers have the right to choose their energy service provider and others have not – but where power providers are subject to the same regional factors such as fuel prices, grid infrastructure, demographics and weather patterns. 

The best example in that case is Texas, a state that’s had energy choice for almost two decades. A longitudinal study by the Texas Coalition for Affordable Power found that those with energy choice saw a rate decrease of more than 23 percent over a decade, while those without energy choice saw rates increase. The only real difference between the markets was whether there was a competitive playing field for service providers.

Claim: Energy choice requires an ISO (independent service organization) or RTO (regional transmission organization) and states without such wholesale market mechanisms face prohibitive resource planning and reliability challenges.

Fact: ISOs and RTOs were only created in 2000 to operate the grid and their establishment has made markets where they operate more efficient, effective and reliable.

AEGP is correct that energy choice would require Arizona to establish an ISO or RTO to manage the state’s electricity grid and its connection with the West’s wider transmission system in place of the incumbent utility.

Prior to 2000, ISOs and RTOs didn’t exist and utilities maintained exclusive control over their vertically integrated operations, from generation to transmission and distribution. The Federal Energy Regulatory Commission (FERC) changed that with its Order 2000 after finding that “there were still significant barriers to ensuring that the United States had an abundant supply of electricity at the lowest price possible for reliable service.”

FERC Order 2000 created RTOs and ISOs to ensure “nondiscriminatory access to transmission infrastructure.” An RTO or ISO is responsible for controlling and monitoring the use of the transmission grid in their respective territories and for making sure competitors can get their energy services on the regional delivery network.

It does require some upfront cost to setup an RTO or ISO, the expense is a long-term investment in the electricity grid that will improve service, reduce consumer utility bills, spur innovation and increase deployment of renewable energy sources. The average utility rate in Texas in areas with energy choice was 23 percent lower than parts of the state without energy choice.

All of the benefits that have been achieved by the over one dozen states that have implemented energy choice required the establishment of such ISO or RTO systems and association transitions that are less than 20 years old today. That implementation did not serve as an impediment, and in fact over two-thirds of Americans get their electricity through ISOs or RTOs.

Claim: There is meaningful adoption of innovation in markets without energy choice as well as those with choice.

Fact: The free market is the best engine for innovation as it frees entrepreneurs  

Besides lower electricity bills, another benefit of competitive markets is that they drive innovation and the adoption of technological advances that incumbent market participants often pass over or at least delay.

Monopolies simply don’t have the same incentive to innovate and adapt to customer requests and changing market conditions as private companies in an open market do. Incumbent utilities around the country are investing in utility scale wind and solar projects because they see the threat to their business model from competition.

Look no further than the debacle in Nevada for proof that monopolies will spend and do whatever it takes to defend their guaranteed rate of return. Florida is currently headed down the same dead-end path as Nevada.

There’s an easier, less expensive way to drive clean energy adoption.

If the threat of competition is enough to scare incumbent utilities into building more renewable generating sources, just think what full competition could do. Monopolies are incapable of giving consumers the range of choice in products and services they desire. The only way incumbent utilities can compete is to lobby public officials to erect barriers to competition and keep customers trapped.

Customers who desire the cleanest energy mix possible should have the ability to dictate that through the power of their individual choices.

Claim: The AEGP report is an unbiased and data-backed assessment of competitive energy markets.

Fact: The AEGP report is clearly biased toward incumbent utilities

As noted earlier, incumbent utility companies have immense political capital and they have not been shy in wielding that influence to protect their market position and bottom lines. The Arizona Energy Policy Group was formed in 2018 by the incumbent utility companies. It is not surprising then that AEPG is advocating for policy measures that would directly benefit the utilities rather than Arizona customers.