Restructuring Recharged: The Superior Performance of Competitive Electricity Markets

In Restructuring Recharged, originally published in April of 2017 with data from 2008 to 2016, Dr. O’Connor begins with a history of the restructuring of the electric power industry. He then takes us from this history into the empirical evidence (predominantly based on EIA data) with review of the price divergence between restructured and traditional monopoly states, the attraction of investment capital and the performance of merchant generation facilities in both types of jurisdictions. His conclusions are compelling as he explains the superior performance of customer choice policies and the unsustainability of the monopoly model in a world in which technological innovation is driving down demand for electricity and requiring investment to adapt to this constant change.

Top 3 Charts from Restructuring Recharged:
(Updated through latest data available as of August 2021)

Figure 3 – 14 Customer Choice Jurisdictions

These 14 competitive jurisdictions shown in green (13 states plus Washington DC) account for one-third of U.S. electricity power production and consumption. The designation of “competitive jurisdiction” in this paper is defined as a jurisdiction that: Enables nearly all classes of customers to be able to choose a retail supplier without cumbersome restrictions or limitations, and, that the utilities in these jurisdictions have divested all (or nearly all) of their generation assets and are therefore primarily wires-only delivery service companies. Consequently, the generating assets in these states are not included in the rate-base of these delivery service utilities and are therefore competing within the wholesale power market parameters in place for business revenues.

Figure 6 – Percentage of Load Switched in the 14 Competitive Jurisdictions

This figure shows the upward trend in shopping activity from both residential and C&I customers with respect to load served by non-utility suppliers. In 2020, 71.9% of load eligible to switch in the 14 customer choice markets was served competitively with retail pricing and products by non-utility suppliers. It is interesting to observe that the vast majority of C&I load (87.2%) has switched to non-utility supply. Meanwhile, about half (46.3%) of the residential load in the competitive jurisdictions had switched to supply procured by retail suppliers. Most of the remaining load in the 14 markets, a little less than one-third of total eligible load in those jurisdictions, is served with market- priced supply procured in the competitive wholesale market by wires utilities acting as default providers.

Figure 12 – Inflation-Adjusted Weighted Average Percentage Price Change by Customer Class, Competitive vs. Monopoly States, 2008-2020

The difference in risk allocation between monopoly and choice regimes is being manifested most clearly in the divergent electricity price trends during the flat-load era since 2008. This figure shows the aggregate inflation-adjusted percentage changes in weighted average prices of delivered supply for the groups of 14 choice jurisdictions and the 35 monopoly states from 2008 through 2020. It also shows stunningly different price trends in the competitive jurisdictions compared to the monopoly states from 2008 through 2020. The inflation-adjusted weighted average prices in the group of 35 monopoly states have risen inexorably. By contrast, in the 14 competitive markets, residential, commercial, and industrial inflation-adjusted weighted average prices have trended significantly downward.

In addition to the three figures from Restructuring Recharged updated above, Figures, 4, 5, 7-11, 13-20, and 22-25 have also been updated and made available here. Download all updated charts from Restructuring Recharged

Updated as of August 2021

In 2017 and 2018 RESA published two whitepapers by the late Dr. Phil O’ConnorRestructuring Recharged: The Superior Performance of Competitive Electricity Markets 2008-2016 (April 2017) and The Great Divergence in Competitive and Monopoly Electricity Price Trends (September 2018). RESA has continued to maintain the relevance of this work by periodically updating the price trend and related data that Dr. O’Connor compiled in these two whitepapers and is posting this data for all to reference on its website. The most recent data continue to support the same insights and conclusions that Dr. O’Connor presented in 2017 and 2018.

An introduction and overview of the whitepapers and updated charts based on this work was written by Dan Allegretti.

The Great Divergence in Competitive and Monopoly Electricity Price Trends

In The Great Divergence, originally published in September of 2018, Dr. O’Connor examines electricity price data across the United States in both competitive and regulated monopoly states and across a decade of time to reach a compelling set of conclusions. The insight from this paper is that by looking past price comparisons between or within particular states (or within particular years) a more profound trend emerges: states that rely on regulated monopoly power supply service have seen prices rise over time at a far steeper rate than those states that restructured to adopt competitive retail choice. In other words, regardless of the experience of any individual customer at any particular point in time, the states that made the decision to implement competition achieved a significantly lower weighted average cost of electricity than if they continued to rely upon a regulated monopoly structure. The paper refers to this startling trend as “The Great Divergence.”

Top 3 Charts from The Great Divergence:
(Updated through latest data available as of August 2021)

Figure 2 – All-Sector Weighted Average Percentage Price Change, Choice vs. Monopoly States, 2008-2020

U.S. Energy Information Administration (EIA) data allow for a comparison of trends in weighted average nominal prices between the monopoly group of states and the competitive jurisdictions. The All-Sector annual weighted average price in the 35 monopoly states was 21.1% higher in 2020 than in 2008. In contrast, the All-Sector annual weighted average price for the competitive retail markets was 7.4% lower than in 2008.

Figure 6 – All Sector Price % Price Change by State, 2008-2020

The large difference in percentage changes in weighted average prices between the monopoly and competitive choice jurisdictions is not the result of a few large states skewing the results in one direction or the other. Rather, when the states are ranked by percentage change in each state’s average All-Sector price change over this period, the competitive states tend to cluster in the lower range and the monopoly states tend to occupy the higher parts of the rankings. It is interesting to observe that the largest 25 all-sector price changes over this time period are all monopoly states. Additionally, all 14 of the competitive jurisdictions reside on the right-hand side of this chart. Furthermore, 50% (7/14) of the competitive jurisdictions had price decreases over the period compared to 11% (4/35) of the monopoly states.

Figure 12 – Change in Capacity Factor, 1997, 2008, and 2019 (Generation Output/Potential Output)

The explanation of the Great Divergence between the monopoly states and competitive jurisdictions is not to be found in the similar trend lines moving from coal to gas and negligible differences in patterns of renewables and nuclear resources. There is, however, a knock-on effect that may partially explain the Great Divergence in price direction. Monopoly regulation and competitive markets accord fundamentally different treatment to power plant utilization. The decline in power plant portfolio capacity factor has been larger, both nominally and proportionally in the 35 monopoly states than in the 14 competitive states/jurisdictions as shown in this figure (note the increased slope of the black dotted line compared to the green dotted line).

In addition to the three figures from The Great Divergence updated above, all figures have also been updated and made available here. Download all the updated charts from The Great Divergence

Customer Reliability Analysis

Some opponents of restructured markets claim that introducing competition and allowing customers to choose their electric supplier will harm or negatively impact reliability for customers. This false narrative is often stated when restructuring and competition are introduced as an alternative in a traditionally vertically integrated monopoly state.  In search of the facts, RESA obtained the standard reliability metrics as measured and published by the U.S. Energy Information Administration (EIA) and grouped the data into two categories: (1) utilities in states that enable retail choice in their jurisdictions, and (2) those utilities in states that do not. RESA then created a weighted average for each reliability metric for each grouping by year and compared these reliability metrics side-by-side. Upon examination of this data, there is no evidence to support the argument that the wires-only utilities in the competitive states/jurisdictions have experienced detrimental reliability performance compared to the traditional vertically-integrated utilities which continue to operate as a monopoly from a generation perspective.

Utility Financial Performance Comparison

Some opponents of restructured markets claim that the consequences of introducing competition and allowing customers to choose their electric supplier will harm or negatively impact the financial performance of the utilities involved.   However, the history of electric restructuring has not borne out this concern.  In states/jurisdictions that have restructured,  formerly vertically integrated utilities have continued to hold strong credit ratings and provide investors with returns on equity substantially equal to those utilities that have retained monopoly status (albeit at times on smaller rate-bases post-divestiture of generation assets). To support this conclusion, RESA obtained both the most recent credit ratings and returns on equity figures from the S&P Global MI database and grouped the data into two categories: (1) utilities in states/jurisdictions that enable retail choice, and (2) those utilities in states that do not. From there, RESA created an average for each state and for each category and compared these two metrics (credit rating and return on equity) side-by-side. Upon examination of this data, it is clear that both credit rating and returns on equity are nearly identical across both categories.