Current state of Competition in Retail Electricity Markets

Current state of Competition in Retail Electricity Markets 

After the Freeze

Retail market competition has been introduced more than a decade since the federal energy regulatory commission (FERC) approved Order 888 and 889 in April 1996. The orders required utilities to open their transmission lines for all generators on a nondiscriminatory basis. In other words the orders restructured electricity industry by separating electricity industry into power supply service, transmission and distribution (retail) service. As results customers have an access to choose competitive power supplier (direct access) and competition in power generation level (retail competition) is possible. In addition the regulators also defined default supply (basic service) for particular customers that do not choose their competitive suppliers. It seems that a significant percentage of large industrial users are direct-access customers, most residential and small-business consumers are served by the default supply option.

NRRI  reported that at the beginning of restructuring at least 24 states have taken necessary actions to introduce retail electric competition in their respective states. The progress varies from state to state. Furthermore, NRRI also mentioned that of the original 24 states, there appear to be 17 that have continued with their original respective electric restructuring plan schedules and the introduction of competition to the retail electric market. Even though restructuring progress may not be compared between states, we can distinguish the level of retail competition among those states. Based on market growth criteria such as regional market growth and customer class market growth, it can be concluded that Illinois, Ohio, Pennsylvania, Texas and New York are the most competitive states. Those states recorded significant increases in customer migration to competitive supplier. On the other hand based on state of regulation of Montana, Nevada, New Jersey and Oregon are the least competitive states. Nevada and Oregon decided to limit the competition only for eligible customer classes (large customers) while in New Jersey and Oregon government decided to step in the market. Finally Arkansas, California and Oklahoma have decided to suspend the retail competition in electricity market. The following graph depicts the state of retail competition in terms of competitiveness and spatial information.

 

Graph 1. State of Competition

As already mentioned observing retail competition progress also can be done in terms of regional market growth and customer classes. In regions where the rates were relatively higher than other regions the report shows that the retail competition was able to bring the rates down. Illinois, Ohio, Pennsylvania and Texas showed the regionalized market growth not only in urban areas but also in rural areas. 

Based on customer classes it is shown that development of the markets for small commercial and residential users were well behind the large industrial users market. Commercial and Industrial (C&I) customers switched to competitive supplier in nearly all active states with various percentages from state to state. Main factors inspiring C&I customer classes to migrate are the need to get lower rates due to the high consumption and aggregation among them in increasing the buying power.  Report shows that about 60 percent of customers with demand above 1 MW have switched to competitive suppliers in Illinois. In Ohio more than 88 percent of commercial switching and nearly 20 percent of industrial switching was from aggregation. In Texas savings of over $134 million dollars was attained by 18 aggregators. Furthermore switching in New York accounted a total C&I load migration of 33.6 percent, or some 1.93 million MWh.

In addition aggregation of residential customers in Ohio accounted for 93 percent of all residential switching. Another positive report also released by Texas Public Utility Commission (Texas PUC) whereas as many as 80 percent of 400,000 customers had switched to competitive suppliers. Finally increasing migration accounted for 17 percent was reported in New York.

Different options
The major concern regarding retail competition in electricity markets is further steps after the transition period end. Five different options are available for policy makers to determine the appropriate future actions as follows.
•    Encourage choice (going forward)
To encourage migration to competitive supplier policy makers may offer (i) financial incentives to people who switch from regulated suppliers; (ii) raise the prices for people who do not switch such that they see the economic value in switching; (iii) easier switching; and (iv) real time pricing with some retail customers.
•    Go Slow
This approach can be called as hybrids of regulation and competition. Apply lessons learned from restructuring even if retail competition is not permitted. Do not rush ending default service by extending transition period. The continuation of a transition period will not only allow more time for the market to develop but could also help to further diminish any stranded cost or deferred balances.
•    Go Back
This option is defined as the option of deciding that a competitive market is not achievable, at least in the near term, so a reversal of electric restructuring plans is in order. In fact, Go Back can be a “partial” reversal instead of a “drastic or full” reversal. Arkansas and California chose to reverse the restructured industry. In addition Nevada and Oregon chose to limit the restructuring industry. Nevada only allows large customers (more than 1 MW) to get direct access. While Oregon concluded that its residential customers “would not benefit at this time from a choice of competing power suppliers”. These two states are also examples of Government Step In option. 
•    Government Steps In
This option needs government involvement in the market. As in Go Back option, this option has degrees of implementation not only government direct involvement but also limited degree of government participation. The examples are New Jersey that conducted an auction through which the utilities purchased wholesale power that would be needed to serve their customers after rate caps expire and Montana that approved guidelines for electricity procurement for default customers. 
•    Transmission and public policy interest
There are several practices and policies that offer consumer benefits independent of the state of competition or the way the industry is organized. While the environment of change has sparked these innovations, they may apply in both competitive and monopoly states.