Another reader responding to one of my energy posts wrote back a friendly e-mail saying what Arizona really needs is competition in retail electricity.  His point was competition will lead to more choice for consumers, better customer service, and lower prices.   He mentioned his personal experience with deregulation in Texas.  Although I hadn’t planned on writing about the subject of retail electricity competition, since the point was raised I thought it was an opportune time to lay down a few thoughts on the topic.

After all, the theory of competitive markets for most products and services is a compelling one.  Anyone who has ever taken a course in economics quickly learns that competition provides businesses incentives to control costs and offer prices in line with those offered by the most efficient competitor.  This competitive model, however, is predicated on technical and economic factors that support numerous producers and consumers in the market.  Producers can easily move in and out of the market, and customers armed with information about products and prices will make “smart” purchases from the producer of their choice.

While a competitive model works for some products and services, it does not work well for others.  Transforming a regulated natural monopoly like the retail electricity industry into a competitive industry is particularly tricky.  For example, in addition to the capital-intensive nature of the power industry, there are health, safety, and equity concerns with the delivery of an essential, complex, and integrated service like electricity that might not exist in other industries. 
Arizona regulators were wise to back-off our state’s experiment several years ago, and deregulation experiences elsewhere have failed to meet expectations.

According to former RUCO director, Stephen Ahearn, the ACC’s mid-course correction on electric deregulation “. . . sav(ed) Arizona from the parade of horrors experienced by California since 2000.”  Without doubt, California offers the most explicit cautionary tale.  That state’s unmitigated disaster with deregulation a decade ago led to price spikes of 200-percent and more, and severe political fallout for the sitting governor.  Electricity deregulation has a poor track record in other states as well and has led to large price increases for residential consumers in places like Illinois, Pennsylvania, and Maryland.  In Texas, the jury of public opinion is still out on whether deregulation has been a boon or a burden for customers.

Rather than lowering prices for all consumers in Arizona, my take is deregulation will lead to lower prices for the largest customers like manufacturing plants and mines, and higher prices for residential customers.  Nor do I believe the type of retail competition proposed by potential suppliers to the Arizona market will promote energy policy goals for conservation or investment in renewable energy sources desired by consumers and policymakers, and currently being implemented by Arizona incumbent power companies.

Let’s start with the fact that incumbent electricity providers like SRP, APS, and TEP have already invested billions of dollars in generation plants, transmission lines, and distribution facilities – all necessary to deliver electricity to you and me.  The electric system is integrated and complex, and requires long-term planning.  Providers make investments in the system based on their obligation to provide safe and reliable service to all customers within their service territory– not just the most profitable customers.  The prices we, as customers, pay to these utility companies for service recover the costs of generating and delivering electricity through this complex and interconnected grid.

Competitive providers seeking to serve customers in Arizona have expressed the desire to serve electricity only to certain customers – the largest and most profitable.  (Does this surprise anyone?)  While this arrangement can benefit both the competitive provider and the large customer, it leaves the incumbent provider with excess capacity and stranded investment.  To remain financially viable, these costs must then be recovered from the remaining customers, who happen to be residential customers and those least profitable for the utilities to serve.  Without imposing artificial price restraints, the price of electricity for residential customers will rise beyond normal expectations – see Illinois, Pennsylvania, and Maryland as a few of many examples.

Second, since planning generating capacity and transmission lines to meet future demand and fuel diversity requirements, including meeting renewable energy source mandates, the introduction of competition in the retail market increases uncertainty and risk for the incumbent utility companies who are required to make sure everyone’s lights stay on.  Retail competition will unnecessarily complicate and disrupt Arizona’s resource planning process and movement toward renewable energy sources and energy efficiency.  I’m not saying competitors can’t be integrated into these requirements, but it will likely prove a difficult, contentious, and expensive process.  In fact, the last time Arizona tried it, our utilities collectively spent more than $100 million to implement the first “deregulation” experiment and Arizona consumers only recently completed paying for those costs.

My last point is that the state statute, rules, and regulatory processes governing Arizona’s move to a competitive regime must be revisited and changed.  Arizona’s competitive rules are over a decade old and the courts have ruled sections of the rules invalid.  The public process required to implement new rules will be extensive and costly.  Any action by the ACC to update its competitive rules must be coordinated with similar action by the legislature to update the statute governing retail electricity competition.  

At the end of the day, the question that regulators and legislators must answer is whether competition in retail electricity is in the public interest.  Will it benefit all Arizonans?  Will it improve our quality of life; our environment; our economy? Or will it simply advantage large customers at the expense of residential customers?

In addressing these questions RUCO, the state agency charged with representing residential customers at the ACC, had this to say in 2007: 

Residential utility consumers are, intuitively, the least likely to benefit from retail competition, although select market participants in other consuming classes might.  On the contrary, residential utility consumers are put at most risk with so-called deregulation. . . The public interest would be better served by preventing any retail competition.