The History Of Retail Energy

For most of the 20th Century, homeowners, businesses and industrial manufacturers had no choice when purchasing electricity and natural gas for their homes, companies and factories. That’s because policymakers determined that it was more efficient, and energy consumers would benefit from economies of scale if retail sales of electricity and natural gas were made by utilities with monopoly-protected service territories at regulated rates. Utilities were provided rates that guaranteed recoupment of investment dollars by the utility and a reasonable profit as determined by state regulators.

Utilities had encouraged the establishment of monopoly price regulation by noting that it was economically inefficient for there to be competition for sets of wires and pipes bringing electricity and natural gas to consumers. Price competition was increasingly difficult for utilities to make a profit. Under monopoly price regulation, utilities could keep their costs low because of economies of scale and dedicated infrastructure (wires and poles). For electric utilities, the economies of scale were particularly applicable when it came to electricity generation facilities. Large protected electric service territories led to the development of large power plants serving millions of customers.

This arrangement worked well for the first half of the 20th Century. Energy prices declined, thanks in large part to economies of scale and ever-increasing demand. But in the second half of the 1900s, this “regulatory compact” began to break down. Wellhead regulation of natural gas removed incentives for companies to speculatively drill for natural gas, impacting supplies and prices. Federal law prohibited the use of natural gas for electricity production, and monopoly-protected utilities were unprepared for the price shocks caused by the oil embargoes of the 1970s. In a rush to move away from oil-fired power plants and build large nuclear power generating plants, massive cost overruns were passed along through regulated rates to electricity customers already reeling from rising prices.

This occurred as leading economists were concluding the monopoly-protected price regulation was inefficient and needlessly imposed costs on consumers. They argued that consumers would be better served if regulated industries were exposed to competitive forces to provide strong incentives for businesses to be efficient and cut costs. Over time, competition, by way of energy restructuring, was injected into the trucking, oil and natural gas, telecommunications and airline industries, and the end of monopoly protections and price regulations resulted in billions of dollars in economic savings for U.S. consumers.

Energy Restructuring – Opening Energy Markets to Competition

  • Beginning in the 1990s, the federal government acted to inject competition into markets for wholesale power production and bulk sales of electricity. At the same time, many states worked to end monopoly protections for retail sales of electricity and natural gas. Gradually, large competitive wholesale power markets overseen by large regional grid operators were enabled by federal regulation. Those successful competitive wholesale power markets and the introduction of energy restructuring of natural gas have provided a necessary foundation for successful competition at retail for electricity and natural gas.
  • California was the first state to open its retail electricity market to competition. Unfortunately, its market design, a result of stakeholder compromises, was severely flawed and resulted in a high-profile energy crisis in 2000 and 2001. This prompted several states that had adopted energy restructured programs to either delay the implementation of retail competition or regulate their retail electricity sectors.
  • Other states, however, quietly persisted with retail electric competition programs that benefited from better market structures (thanks in some part to the lessons learned from California’s spectacularly failed initial attempt at competition). In those states, competition has been extremely successful, and customers are increasingly choosing to purchase from competitive retail suppliers.

Competition Today

As a result, today, energy consumers in 14 states and jurisdictions benefit from retail energy competition, while consumers in the remaining states still only have one option – a monopoly utility provider – when it comes to purchasing electricity and natural gas.

RESA is dedicated to preserving customer choice in those states that provide a competitive market structure and is working on expanding customer choice in other states where consumers’ retail energy options are limited. Experience shows that retail competition results in better value for consumers. Additionally, innovative products and services provided by competing customers are more apt to meet consumers’ individual needs than a monopoly-protected utility company.

Competition Today