Redundant Restructuring: How the Dual-Retailer Model Makes Electric Markets Too Complex
A call for utilities to leave the marketing business.
Many of us on the front lines can identify with Stanley Klein's observation that, in terms of its implementation, the restructuring of the electric power industry is "fundamentally an information technology event." 1
Consider all the collaborative groups working on EDI standardization. Building flexible billing systems and capabilities for electronic data interchange makes electric restructuring an expensive and sometimes convoluted task. Think of how much cost this process adds to the final product. All things equal, you wouldn't want to impose that cost on any more firms than is absolutely necessary. But as I contend here, we may be doing just that.
The potential for savings in the final price remains the primary focus for those debating the benefits of competition. If deregulation doesn't increase consumer surplus, why go through the trouble? However, under the pressure to demonstrate immediate price reductions, firms often overlook operational efficiency. To generate consumer surplus, industry restructuring must encourage all firms, both regulated and competitive, to become more efficient in the aggregate.
Are we there yet? Anyone who has mapped an EDI transaction or modeled a new "competitive" business process might well wonder when we might arrive.
The problem, as I see it, lies in the prevailing model for energy retailing. By charging the regulated local distribution company (LDC) with the job of supplier of last resort, we add redundancy to the process. Retailing costs are duplicated in both the regulated and competitive sectors. When the smoke clears, will we realize we overlooked a simple, market-driven alternative for managing operations in competitive electric markets?
The Record So Far
If retail electric markets were roaring to life, the energy industry would offer one more example of man overcoming adversity through technical innovation. But the facts of the matter show otherwise.
The results of restructuring have been mixed. The success of state deregulation programs can be evaluated through metrics such as the number of customers that switch to an alternative energy supplier and the potential savings that a customer could achieve by switching. Figure 1 shows the percentage of customers that have switched in three states on the forefront of restructuring.
Participation levels in California and New York indicate a residential market that is virtually stillborn. Pennsylvania participation numbers show a more robust market, but nothing that would imply a compelling incentive for customers to seek alternative energy suppliers.
In Pennsylvania, residential customers can save as much as 21 percent from the electric generation portion of their utility bills. However, actual savings vary depending on which incumbent utility is serving the customer. When savings are viewed in each of Pennsylvania's seven markets, one for each major distribution company, the results are more ambiguous. 5
Outside of PECO's territory, less than half of the suppliers offering energy to residential customers can save customers money. If "green" prices are excluded from the 56 pricing options offered statewide, only 29 of the remaining 47 prices provide savings to customers. Of these, 14 are concentrated between two dot-com utility companies. These data support