Retail Electricity and Gas Restructuring


Traditionally, both gas and electric utilities have been monopolies subject to government regulation. This helps ensure that all customers in the service area receive reliable service under fair terms, conditions, and prices. Since the mid-1990s, one-third of states have opened up part of these markets to competition. These states have opened energy generation to competition. The existing electric utility has been required to sell its generation facilities to unregulated companies. The distribution part of the system remains under state regulation with traditional cost-of-service regulation. Consumers in these states can now purchase electricity, natural gas, or both, from competing providers. 

Some argue that retail energy prices are lower in restructured markets. However, other factors can drive up the total cost of service for consumers above the base rate. Price volatility, market manipulation, and regulator-approved fees and charges are a few factors. Additional consumer challenges in restructured markets include: 

  • misleading marketing practices. 
  • variable-rate contracts that can result in exceptionally high bills during periods of price volatility. This is because the price passes through short-term wholesale market trends. 
  • threats to eliminate standard offer service. 
  • bailouts to maintain high-cost nuclear and coal generation plants that cannot compete in deregulated wholesale markets. 

Regulators play a key oversight role in all states, regardless of the regulatory approach. Vigorous oversight is essential to ensure fair treatment of consumers (see also the Ethics, Transparency, and Public Participation in Regulatory Proceedings section of this chapter).

Aggregation occurs when an entity brings together retail electric or natural gas customers into buying groups. The purpose is to increase each consumer’s purchasing power. Local governments often implement aggregation by allowing residents of the entire city to band together for more purchasing power or to ensure most of their power comes only from renewable sources. State regulators typically establish and enforce rules and policies related to aggregation. 

Standard Offer Service: Sometimes known as default service, standard offer service is offered to residential customers in nearly all deregulated states. The only exception is the deregulated part of Texas. Standard offer service is what consumers receive when they do not select an alternative provider or when they select a provider who later goes out of business. It is intended to provide service at stable rates approved by regulators. They are typically selected from competitive bids from the wholesale market. 

Some industry groups representing retail energy providers have sought to end standard offer service. They want to force residential customers into the market. Consumer advocates have strongly opposed such action. Most studies have documented that retail energy providers charge more than default service over a reasonable period of time. These higher prices have especially harmed customers with lower incomes. This has, in turn, increased the costs of the ratepayer-funded bill-payment assistance programs. In addition, several states have documented that retail energy providers engaged in deceptive marketing practices while engaged in door-to-door marketing in neighborhoods with lower incomes. 



Consumer protections in retail energy markets

Policymakers in states without retail energy competition should refrain from introducing it. Strong regulatory oversight is essential to ensure consumer protections. 

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

  • adopt consumer protections; 
  • provide vigorous oversight to protect against unfair, deceptive, or abusive practices, including deceptive marketing materials; 
  • prohibit variable-rate contracts; and 
  • exclude subsidies or bailouts of generation facilities. 

Policymakers should adopt consumer protections against marketing and service provision abuses related to disclosures, contracts, codes of conduct, service quality, and marketing materials. 

Policymakers should regularly report on the experience of residential consumers in the restructured market with respect to prices, fees, the level of competition, and other relevant factors. 

Pricing evaluation should include apples-to-apples comparisons of the total paid by consumers for the energy service. For example, if the energy provider is able to add new fees under a restructured market, those fees should be added to the total price that is published to compare to the default service. 

The evaluation should also consider changes in unfair terms and conditions, for example, misleading marketing practices. 

Standard offer service

State policymakers in deregulated states should make standard offer service the default for residential customers. It should be stable, predictable, and affordable. Standard offer service should be offered to all residential customers at rates that have been approved by regulators and are just and reasonable. 

Standard offer service should include the same consumer protections that historically have been provided by traditional gas or electric utility service to these customers prior to restructuring. 

Policymakers should reject proposals to eliminate standard offer service and force consumers to choose a supplier. 

Policymakers should reject proposals to offer variable standard offer service linked to short-term wholesale market prices or other volatile pricing strategies. 

Planning, participation, and protection

Federal and state policymakers should permit local entities to participate in planning for appropriate energy supply arrangements, including aggregation. Federal and state policymakers should ensure that all aggregators abide by state consumer protection statutes. 

Where local entities have implemented such plans, consumers must still have the ability to opt out and choose their own supplier.