Retail Electricity and Gas Restructuring

Background

For much of the past century, regulated gas and electric utilities have exclusively controlled retail service to consumers. Electric utilities provided power generated at a plant and delivered it to community wires and poles that distributed the power to customers’ homes. Similarly, local distribution companies sold gas to residential, commercial, and industrial end-users at rates set by state regulators. In return for having a monopoly, utilities were obligated to provide all customers in their service area with reliable service at terms, conditions, and prices established by government regulators.

Beginning in the mid-1990s nearly half of the states considered or adopted changes to restructure the utility industry, allowing retail consumers to purchase electricity generation and natural gas supply from competing providers, rather than through the traditional regulated monopoly structure. In theory competitive pressure, instead of regulators, would keep electricity and gas rates just and reasonable.

In practice, deregulation has generally failed to produce the rate decreases, service improvement, and retail competition its supporters had predicted. Price manipulation, as was seen in the California energy crisis of 2000, as well as market power and wholesale market price volatility, has resulted in significant price increases and caused some states to repeal or suspend their moves toward restructuring. Today, one-third of states have restructured retail gas and/or electricity markets, including most Northeast and Mid-Atlantic states, Illinois, Ohio and Texas.

Even as lower natural gas and wholesale energy prices are providing some rate relief, restructured markets in many states are not benefiting consumers due to added fees approved by regulators, misleading marketing, variable-rate contracts, and threats to standard offer service. For example, consumers in states with restructured markets have been subject to providers’ misleading and even fraudulent marketing claims, resulting in them paying excessive rates for service. Retail electric providers in Connecticut and Pennsylvania have sought to end standard offer service, which provides a safety net to consumers who do not choose an alternate provider or do not have an alternate provider from which to choose (see this chapter for more on standard offer service.) Typically, the distribution utility companies provide standard offer service by purchasing generation from wholesale suppliers according to a regulated competitive bidding process. In addition, generators in some markets are seeking multibillion dollar subsidies from consumers to support high-cost aging nuclear and coal generation plants. For example, First Energy requested, but was denied, ratepayer support of more than $8 billion to close or keep uneconomical plants operating. While unregulated generators earned profits when wholesale prices were high, they also sometimes seek ratepayer subsidies when faced with a loss.

Retail Electricity and Gas Restructuring: Policy

Consumer protections in retail energy markets

In this policy: State

Policymakers in states that have not introduced retail competition should refrain from doing so.

Policymakers in states that restructured or deregulated their electric or retail natural gas utility industry should:

  • evaluate the experience of residential consumers;
  • adopt and retain the default, or standard offer, service (see this chapter’s section Standard Offer Service);
  • adopt consumer protections related to disclosures, contracts, codes of conduct, service quality, and marketing practices of retail providers (see this chapter’s section Marketing Practices and Consumer Protections);
  • prohibit variable-rate contracts; and
  • prohibit subsidies or bailouts of generation facilities.