By Kent Singer, CREA Executive Director
In the late 1990s, many state legislatures debated whether it would be a good idea to restructure the electric industry. This notion was sometimes called “retail wheeling” or “retail competition,” and it referred to the creation of a new system of providing electricity.
Under the new system, electric utilities would no longer be monopolies with exclusive rights to serve consumers in certain areas. Instead, individuals and businesses would have the right to choose which utility provides their power.
Who initiated the retail choice movement? In most cases, including in Colorado, the main proponents of retail choice in the electric industry were the largest consumers of electricity. These proponents included such businesses as manufacturers, large retailers, oil and gas developers and other big users of electricity. These companies argued that if they had a choice in their retail supplier of electricity, competition would drive rates lower and they would save money.
Electric co-ops across the country adamantly opposed retail choice because they understood that it would harm rural ratepayers. Why? Under retail choice, suppliers of electricity (perhaps Xcel Energy, perhaps new suppliers) would be authorized to sell power to any co-op customer. While that might sound like a good thing on the surface, the “alternative” suppliers are, in fact, only interested in serving the largest loads in co-op territory. If those large loads, or consumers of electricity, are “cherry-picked” from the co-op system by another supplier, they would no longer be responsible for their share of the expenses of a system that was built to serve them. This would leave the remainder of the co-op members responsible for those costs, resulting in rate increases for the residential, agricultural and small-business members of the co-op.
In our free market system, it may seem like something of an anachronism that the electric industry in Colorado is a monopoly that does not allow competition in the provision of electric service. But when you understand how the industry was started and why this policy was adopted, it makes more sense.
There was a time in Colorado when competing electric companies erected poles and strung wires along opposite sides of the same city street. Over time, our legislature and public utilities commission came to realize that this was an extremely inefficient way to provide a crucial commodity like electricity. Given the extremely high costs of building utility facilities, the legislature and the regulators determined that ratepayers would be better served if these facilities were not duplicated by competing companies. The idea of a “regulated monopoly” was born: This means that in exchange for an exclusive service territory, the utilities must provide affordable and reliable service.
This system worked well for Colorado ratepayers for decades. However, today some interest groups hope to reignite the retail wheeling debate for the same reasons they did some 20 years ago—that is, to change the system so that the largest consumers of electricity can have lower rates.
The Colorado legislature rejected the retail wheeling movement back in the ‘90s. We at the Colorado Rural Electric Association were key players in those legislative debates because we were certain that a move to retail competition would not be in the best interests of rural ratepayers. We believed then, and continue to believe, that the Colorado transmission grid limits a true market from developing and that the largest incumbent providers would likely be able to unfairly “game” the system.
In 1998, the Colorado legislature appointed a group of industry experts to evaluate whether retail restructuring was in the best interests of Colorado ratepayers. In the final report of the Colorado Electricity Advisory Panel (issued on November, 1, 1999), the majority concluded that retail restructuring would result in higher rates, particularly for low-income, fixed-income, rural, residential and small-business consumers.
Of course, that report came out nearly 20 years ago, and a legitimate question is whether circumstances have changed such that retail restructuring makes more sense today. In my view, it does not. Colorado is still transmission-constrained, the incumbent providers of electricity are still likely to possess unfair market power and co-op members are still at risk of higher rates resulting from the cherry-picking of our best loads.
Many studies evaluated whether retail restructuring has been good or bad for electricity ratepayers. In a study completed in 2016, a consulting firm out of Madison, Wisconsin, took a look at all of the states where retail choice was implemented and concluded that: “Retail choice states, from the beginning of retail choice up to the present, have had retail prices persistently higher than those in other states.
Retail choice is not an idea whose time has come.