Retail competition not developed as expected in U.S.


Washington, DC, U.S.A  — (METERING.COM) — April 20, 2007 – Retail competition has not developed as expected for all customer classes in the U.S., a new review on competition in the wholesale and retail markets has found.

The review, the work of the Electric Energy Market Competition Task Force pursuant to the Energy Policy Act of 2005 (EPAct 2005), found that by 2006, 16 states and the District of Columbia had restructured their retail electric service and allowed competitive suppliers to provide service to some, if not all, retail customers at prices set in the market.

Most of these restructured states required the local utility to continue to offer service under regulated ‘provider of last resort’ (POLR) rates for all retail customers who did not switch suppliers or who lost or discontinued competitive service. These POLR rates were typically fixed for extended periods of time. In many of these states, vertically integrated utilities divested or transferred their generation assets as part of restructuring plans. As a result, in these states the retail load serving utilities obtain electricity from wholesale markets to meet the needs of their retail customers, including POLR obligations.

In the states in which the implementation of retail competition was examined in detail (Illinois, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, and Texas) common goals for retail competition included lower electricity prices than under traditional cost of service regulation through retail suppliers’ (and eligible customers’) access to competitive wholesale markets, better service and more options for customers,  technological innovation and new products and services for consumers, and   environmental improvements.

However in most of these states few residential customers have switched to alternative providers (exceptions include Massachusetts, New York and Texas). In most of them, few residential customers have a wide variety of alternative suppliers and pricing options. While commercial and industrial (C&I) customers have more choices and options, in several states the large industrial customers have become increasingly dissatisfied with retail market prices. To the extent that multiple suppliers serve retail customers, prices have not decreased as expected, and the range of new options and services is often limited.

Nevertheless, there is some evidence that alternative suppliers have offered new retail products, including ‘green’ products that are more environmentally friendly for residential and non-residential customers and customized energy management products for large C&I customers.

The report says that legislative or regulatory limits on the POLR prices have hampered entry by competitive suppliers in retail markets. In the states reviewed, regulators often capped the POLR electricity price for ‘transitional’ multi-year periods that are now just ending. Several states also required price reductions for the POLR service below existing regulated rates (in order to proxy the expected benefits of competition). Over time, these capped and discounted POLR prices have fallen below prevailing wholesale market price levels. Thus these POLR price caps have had the unintended effect of dampening competitive price signals and discouraging entry by competitive suppliers.

The Task Group comments that the POLR rate caps and the sharp increase in fossil fuel costs affecting all retail suppliers across the country complicated its efforts to discern any price differences attributable to the introduction of competition. The implementation of retail competition is a relatively new exercise, and retail competition policies involve a number of unresolved issues (including regulatory issues) that can inhibit vigorous competition. It should be easier to evaluate the impact of restructuring in retail electricity markets once some of these issues have been resolved.