Location:
UTILITIES-ELECTRIC-RESTRUCTURING; UTILITIES - RATES;
Scope:
Background;

OLR Research Report


October 4, 2011

 

2011-R-0274

STATUS AND IMPACT OF ELECTRIC COMPETITION

By: Kevin McCarthy, Principal Analyst

Lee R. Hansen, Legislative Analyst II

You asked for a status report on retail electric competition in Connecticut and other deregulated states. You wanted to know the proportion of consumers that have chosen competitive suppliers and how prices have changed over time in states that have opened their markets compared to those that have not. For Connecticut, you also requested a comparison of price trends in areas served by municipal utilities (which have not opened their markets to competition) and areas served by electric companies.

SUMMARY

Fourteen states, including Connecticut, currently permit all or most retail electric company customers to choose their electric supplier. In Nevada, only very large customers can choose a supplier and only one has done so. Oregon permits commercial and industrial customers, but not residential customers, to choose a supplier. As a result, we treat Nevada as a regulated state and omit Oregon in our analysis of rate trends, although we include in the analysis of customers who chosen suppliers (migration). While Michigan allows all customer classes to choose a supplier and is treated as a deregulated state in this report, the relevant law limits choice to 10% of each electric company's average load (electric demand) in the prior year.

The proportion of customers who have chosen a competitive supplier varies dramatically in deregulated states, ranging from less than 0.1% in Oregon to more than 55% of customers in Texas. In Connecticut, 41.8% of all customers have chosen competitive suppliers, among the highest in the country, and these customers account for more than two-thirds of the electricity sold in the state. Only Texas has a higher migration rate. In all of the deregulated states, the proportion of large customers that have chosen suppliers is substantially higher than small customers. As result, the proportion of total load served by suppliers is higher than the proportion of customers they serve.

At a national level, deregulation appears to have had little impact on rates, positive or negative, on an aggregate basis. In 1998, the year Connecticut passed its deregulation legislation, the unweighted average rate in the 14 deregulated states was 3 per kilowatt-hour (kwh) above the average in the other 35 states covered in this analysis. Since then, the difference has remained between 2 and 4 per kwh and was 3 per kwh for the first four months of 2011 (the latest available data). To the extent that competitive suppliers have been able to offer lower rates for their customers, these data suggest that these savings may have been balanced by increased costs for customers who buy their power from electric companies.

The rate trends vary widely among the deregulated states, and there does not appear to be any relationship between the proportion of customers who have chosen suppliers or the suppliers' share of the market and rate trends. There are also geographical differences in the rate trends among the deregulated states. All of the New England states that are deregulated (all but Vermont) experienced larger rate increases than deregulated states outside of the northeast.

The rate trend in Connecticut diverged significantly from the trends in the rest of the country starting in 2006. In 1998, the average rate in Connecticut (which includes the 5% of Connecticut customers who are served by municipal utilities) was 5 per kwh above the average for the regulated states. The gap stayed in the 3 to 5 per kwh range through 2005, but then increased steadily peaking at 9 per kwh in 2008-2010. For the first four months of this year, the gap was approximately 7.5 per kwh. OLR Report 2010-R-0256 discusses some of the possible reasons for Connecticut's high rates.

These data suggest that the ability to choose a supplier, in and of itself, had little impact on rates in the aggregate. As noted above, the rate trends in the deregulated states have been very similar to those in the other states. Until 2005, the rate trends for Connecticut's municipal utilities, where competition did not exist, were very similar to the trend for the state as a whole. Similarly, the extent of competition in the deregulated states, measured by the suppliers' share of customers or load, does not appear to be related to rate trends. However, other factors associated with deregulation may have affected rates. For example, Connecticut and many other deregulated states required electric companies to sell off their generation facilities, requiring them to buy power on regional wholesale markets. The rules governing these markets may account for part of the observed difference in rate trends.

Some have suggested that rates in deregulated states would have been higher if customers had not been allowed to choose their supplier. There is no straightforward way to test this hypothesis, since deregulation was accompanied by a number of major changes in the electric industry, such as the formation of regional transmission organizations and new rules governing the wholesale market.

STATUS OF COMPETITION

Fourteen states (Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, and Texas) permit all or most retail electric company customers to choose their electric supplier. In Texas, the Public Utility Commission has delayed retail competition for customers of Entergy Gulf States, Southwestern Public Service Company, El Paso Electric Company, and Southwest Power Company because it determined that there is not adequate competition in the wholesale electricity market for retail competition to work successfully in these areas. In addition, competition is generally not authorized in areas served by municipal utilities or electric cooperatives. In Oregon, commercial and industrial customers, but not residential customers, can choose a supplier. As a result, we omit Oregon from the analysis of rate trends.

Seven states (Arizona, Arkansas, California, Montana, Nevada, New Mexico, and Virginia) either chose not to implement their restructuring legislation or suspended competition soon after it began. In Nevada, the state limited competition to very large customers (those with one megawatt of demand or more), but only one firm has done so and thus Nevada is not treated as a deregulated state in this report. Michigan allows all customer classes to choose a supplier and is treated as a deregulated state in this report. But, the relevant law limits choice to 10% of each electric company's average load in the prior year and to date few if any residential customers have chosen suppliers.

Migration

In Connecticut as of June 30, 2011, 41.8% of all electric company customers had chosen competitive suppliers. The proportion is higher for United Illuminating (UI) compared to Connecticut Light and Power (CL&P), 46.2% compared to 40.6%. For both companies, the migration rate varies dramatically by class. For residential customers, the proportions of customers that have chosen suppliers are 45.0% for UI and 38.7% for CL&P. For small and medium size commercial and industrial customers (up to 500 kilowatts of demand), the proportions are 54.7% and 57.1%, respectively. The vast majority of large commercial and industrial customers have chosen suppliers, 92.7% for UI and 84.3% for CL&P. More than two thirds (67.6%) of the total amount of power sold in the state is sold by competitive suppliers.

As Table 1 indicates, the proportion of customers in Connecticut and other deregulated states that have chosen suppliers varies dramatically. In all of the states, the proportion of large customers that have chosen suppliers is substantially higher than small customers and this is reflected in the amount of load served by suppliers. For example, although only 3.0% of Maine's customers have chosen suppliers, they account for more than 40% of the load in the state.

Table 1: Migration to Competitive Suppliers

State

% of customers

% of residential customers

% of load

Connecticut

41.8

40.0

67.6

Delaware

5.3

3.1

47.4

Illinois

1.1

0.1

56.5

Maine

3.0

2.4

40.0

Maryland

19.7

17.2

46.7

Massachusetts

14.4

12.1

55.5

Michigan

0.2

0

Approx. 10

New Hampshire

37

n.a.

37.3

New Jersey

10.1

8.6

36.2

New York

21.0

19.6

50.8

Ohio

29.7

28.5

52.4

Oregon

<0.1

0

2.6

Pennsylvania

22.3

20.7

49.6

Rhode Island

2.4

n.a.

33.8

Texas*

55.5

54.7

71.5

Source: state Public Utility Commissions

* Percentage of customers and load eligible to choose suppliers

In some cases, migration rates vary dramatically by electric company within a state. For example, in Ohio, the proportion of customers served by competitive suppliers ranges from 2.5% for the Columbus Southern Power Company to 74.6% for Cleveland Electric Illuminating Company.

IMPACT OF COMPETITION ON PRICES

Deregulated States vs. Other States

Most of the states that chose to deregulate their electric markets, including Connecticut, historically had high rates. When Connecticut passed PA 98-28, all but one of the states that currently allow all or most customers to choose their supplier had rates that were above the average rate in the remaining states. The exception was Texas, where the average rate was .08 cents per kilowatt-hour (kwh) below the national average.

The trends in rates in the deregulated and other states was similar during the period 1998 through 2011 (the bottom two lines in Figure 1, below). During this period rates increased by an average of 42.9% in 14 states (including Connecticut) that allow all or most customers to choose their supplier, compared to 48.9% in the 35 states that do not allow competition. From 2000 (when deregulation was implemented in Connecticut) until 2011 rates increased by an average of 45.7% in both sets of states. These averages are not weighted by state population or electricity demand.

Figure 1: Electric Rates in Deregulated and Regulated States

However, as Figure 1 indicates, after 2005, the trend in rates in Connecticut (the top line) was substantially different from that in the other deregulated states and the states where retail competition is not allowed. During the 1998-2011 and 2000-2011 periods, rates in Connecticut increased by 59.8% and 72.9%, respectively. The comparable average increases for the other deregulated states were 41.3% and 43.4%, respectively. For the states that do not allow competition, the average increases were 48.95 and 45.7%, respectively. As Figure 1 indicates, the trends in Connecticut, the other deregulated states, and the regulated states were similar through 2005. At that point, the rate increases accelerated significantly in Connecticut compared to the rest of the country. The difference peaked in 2009 and has declined somewhat since then.

The rate trends in the states that allow competition vary significantly. There is no apparent relationship between the extent of competition within these states and the rate trend. For example, the 1998-2011 rate increase in Texas, which had low rates in 1998 and the greatest migration rate in the country, was 48.6%. On the other hand, Illinois, which had low rates in 1998 and low migration rates, saw an increase of 13.5%. The rate increase in Rhode Island, which had high rates in 1998 and a low migration rate, was 43.2%. As Figure 2 indicates, there is a similar lack of relationship between rate trends and the proportion of load served by suppliers.

Figure 2: Relationship between Level of Competition

and Rate Trends

Areas in Connecticut Served by Municipal Utilities vs. Electric Companies

Connecticut has six municipal utilities that serve about 5% of the customers in the state. The municipal electric utilities are allowed, but not required, to open their territories to competition and to date none have.

As Figure 3 indicates, the average rates for the municipal utilities were virtually identical to that of the state as a whole (labeled as CT) through 2004, although there was a wide variation in the rates charged for the individual municipal utilities. In 2005, the average rate for the municipal utilities was 2 per kwh lower than for the state as a whole. The gap widened to 4 in 2008 before falling to 3 per kwh in 2010 (latest comparable data). These figures slightly understate the gap between rates in deregulated and regulated parts of the state because the state average includes the customers served by the municipal utilities as well as those served by electric companies and competitive suppliers.

Figure 3: Electric Rates in Municipal Utility Areas vs.

the State as a Whole

KM/LH:ro