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Free markets, and not monopolies generally present the best outcomes for consumers. But since Thomas Edison began to wire up and light up New York City with his light bulb in 1879 and the first power plant in 1882, the model of vertically integrated monopolies for electricity generation and distribution has mostly remained the same. It is time for that to change.
Despite the fact that consumers now have more choice than ever, more than half of Americans receive electricity through a single entity that owns all levels of the supply chain and has an exclusive right on the production and sale of power. Known as a “cost-based regulatory model,” utilities earn a guaranteed rate of return on capital expenditures and captive consumers are sent the bill. The burden of managing how electric utilities plan and pay for projects and set electricity rates falls on state regulators who are responsible for keeping prices in check for consumers. Oftentimes, it fails to deliver as promised.
Since this model places the rate-risk on the consumer and rewarding profits on the supplier, there is little incentive to innovate or manage expenses. For example, the $2.4 billion Kemper Project in Mississippi which began construction in 2010 on a gas-fired electrical generation station, billed as a first-of-its-kind, was projected to be generating power in 2014. By 2017, the cost exploded to $7.5 billion. It is still not in service. The dangers of shielding a market from competition are evident in a New York Times report on what went wrong with the project,
In the end, the Kemper project is a story of how a monopoly utility, with political help from the Mississippi governor and from federal energy officials who pressured state regulators in letters to support the project, shifted the burden of one of the most expensive power plants ever built onto the shoulders of unwitting investors and some of the lowest-income ratepayers in the country.
Mississippi citizens will probably continue to pay for the management debacle even if the power plant is never completed. As the public policy cliché goes, when the government is in the business of picking winners and losers, the politicos always pick the losers.
Fortunately, in the 1990s a new system was adopted in many states across the country. Known as a “wholesale competitive” electricity market, it offers a combination of market competition for power generation while providing regulated prices and service requirements for transmission and distribution. This in effect offers consumers the best of both worlds, providing them with lower costs (as much as $4 billion annually according to one marketplace estimate) while maintaining the grid reliability they have come to expect. It also provides consumers with greater autonomy in selecting their power source.
Edison’s electric grid was powered by coal and even today fossil fuels are still the energy source for some 60 percent of electrical generation, but things are starting to change. Indeed, many customers want wind and solar power and are often willing to pay more for those services. Sometimes, cost is not the only motivating factor when making a purchase decision and for consumers who care about reducing carbon emissions, they deserve such a free market option as well.
In fact, competitive power markets are already delivering such results. For instance, the Pennsylvania, Jersey, Maryland Power Pool (PJM), one of the largest regulated competitive markets, reduced CO2 emission rates 39% from 2005-2020. In New York, the New York Independent System Operator has reported emissions reductions of 55% since 2000. Contrary to a perception that we need more regulation to address environmental concerns, the opposite is true in the electricity market: market forces have been best at addressing the public’s growing demand for more widespread use of renewables.
At the end of the day the best interests of electricity customers are seldom prioritized under rigid regimes of cost-based regulatory models and ratepayers are waking up to this fact. A recent poll confirmed that customers are demanding greater reliability and lower costs. At the same time, “Americans view competitive electricity markets as more effective than utility monopolies at driving an array of positive outcomes for reliable electric service, consumers, and the environment.”
Competitive electricity markets have lowered costs and are able to adjust much more quickly to consumers’ changing supply circumstances and needs. End-users should determine the value of a product and service under the freedom of the free market — not regulators. Luckily, we are moving closer to that reality.
• Jack Yoest is a consultant and assistant professor of practice in Leadership and management at The Catholic University of America in The Busch School of Business, in Washington, D.C.
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