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Competition is a core value of the American free-market system. Competitive markets produce the most efficient results in our economy, providing lower costs and a greater array of choices for consumers than government regulators. That was true in the 1980s with the deregulation of the telecom and natural gas sectors, and it’s still true today for electricity markets.
The traditional model of vertically integrated utilities — where a single company controls production, transmission and distribution of power in a geographic area — that has long held a monopoly over electricity markets is being transformed as consumers demand more influence over their energy decisions. Competitive electricity market reforms are spurring innovation and the deployment of new technologies that offer consumers lower prices, greater control over how they use energy and more freedom in choosing fuel sources, which is driving demand for cleaner renewable energy.
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States began deregulating their electricity markets about 20 years ago. Texas, which has the most competitive retail electricity market in the nation, deregulated both its wholesale and retail markets in the 1990s.
So far, 13 states and the District of Columbia — accounting for one-third of all electricity generation and consumption in the country — have entirely restructured their retail electricity markets to allow consumer choice. Four others — Michigan, Nevada, Oregon and Virginia — have partial retail electricity choice, primarily for commercial customers.
In states without competition, government regulators continue to set electricity prices that are requested by utilities, and monopolies continue to tighten their stranglehold on the market. As a result, consumers and businesses often have less access to renewable energy and fewer energy options when it comes to products and services in regulated monopoly markets.
Even in places where deregulation hasn’t been adopted, people and businesses are finding ways to introduce competition. Eight states have adopted Community Choice Aggregation rules that allow local governments to pool their electricity needs to purchase cleaner and cheaper power for retail and commercial users within their service territory. Cities such as Boulder, Pittsburgh and San Francisco are taking control of their electricity generation to give residents more choices and greater control over their energy options.
In competitive markets, independent energy suppliers sell electricity directly to residential and business customers on the open market. Direct competition among suppliers increases access to affordable and reliable electricity as suppliers try to win and keep customers. Transparent pricing also encourages customers to be more efficient in their use of energy, while pushing providers to create the kind of products consumers want, including the option to use renewable energy or to save money if they choose to shift their usage to off-peak hours.
Under the competitive market model, utility companies continue to maintain the poles and wires that deliver energy to consumers, but those consumers have options when it comes to what type of electricity they want to buy and from whom. That allows homeowners to get more creative with managing their energy usage, and it empowers industrial and manufacturing customers to meet corporate sustainability goals and address shareholder environmental concerns.
Consumers in states with competitive electricity markets tend to fare better regarding price, investment and efficiency than those in monopoly markets. According to a 2017 report by the Retail Energy Supply Association, weighted average electricity prices in monopoly states rose nearly 15 percent between 2008 and 2016, compared to a decline of 8 percent in the competitive markets studied.
Consumer-driven energy markets deliver better results than either traditional monopoly markets or partly restructured markets because they allow choice — the ability to choose a lower cost energy supplier, to manage personal energy use, to become more efficient, or to choose among diverse energy options, which are all decisions consumers should control.
Today, more consumers than ever before can choose their electricity providers, but competition is still not available in all states, and incentives built into current federal regulations are holding back the transition to a modern electricity system. The role of government in electricity markets should be to encourage what is best for consumers: free and fair market competition.
As regulators and policymakers debate the pros and cons of pricing reforms, carbon-emission restrictions, renewable energy mandates, storage, advanced metering, distributed energy resources and other changes affecting electricity markets, they should remember that competitive markets are the most effective way to give consumers what they want — abundant, affordable electricity that is reliable and clean.
Robert Dillon is the executive director of the Energy Choice Coalition, an educational and advocacy organization committed to promoting competition and innovation in electricity markets.
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