Many of the expected benefits of retail electricity competition haven’t materialized, the Federal Trade Commission staff said in a new report, because states are still in a transition phase between regulation and deregulation.
No state has completed the transition period, the government agency said in an update to a 2000 analysis. Most policy choices that confront states during this transition period involve tradeoffs, with each option presenting potential costs and benefits.
But the staff concluded “nothing that has happened so far, however, indicates that competition — once the transition period is completed — will not produce additional benefits to electricity customers.” The staff said competition provides stronger incentives for the efficient deployment of capital for generation investments and for suppliers to offer innovative services and products to consumers.
Among the main conclusions of the report and the reasoning underlying these conclusions are the following:
— Competitive wholesale markets are important to achieving effective competition in retail markets. For all of the expected benefits of retail competition to be realized, it is imperative that wholesale markets be competitive, the report said.
— Policies are needed in retail and wholesale markets that will increase demand-side responsiveness. The FTC found that generally, retail customers do not have price information and time-sensitive rates that reflect the changing price of obtaining electricity at various times of the day. Increasing the price sensitivity of demand will help constrain existing or potential market power in generation. In conjunction with variable pricing for generation services, retail suppliers should be permitted to offer competitive metering and billing services to their customers.
— Policies that set the price of standard offer service for non-choosing customers have a substantial effect on the entry of new retail suppliers. The FTC report recommended states design standard offer service policies that provide entrants with sufficient incentives to offer service and do not, unintentionally, create a barrier to entry. Ensuring that standard offer service providers can pass on changes in fuel costs and wholesale electricity prices will aid this goal. Initial rate reductions for standard offer service, which are not based on cost reductions, tend to distort entry decisions and reduce incentives for retail customers to search for alternative suppliers, said the FTC staff.
— State consumer protection policies can affect both consumers and the likelihood of new entry to increase competition. Consumers’ choices will be made most efficiently if consumers are exposed to accurate, timely, and comparable information about retail suppliers of electricity, the report concluded.