Ohio electric utilities are weary of competition. They want to return to the warm comforts of regulation, where their profits are virtually guaranteed and their old, uneconomic power plants can continue operating.
Yet studies overwhelmingly show that electricity competition is increasing efficiency, lowering costs, and enhancing customer choice.
Beginning In the late 1980s, Ohio and 16 other states (including Illinois and Michigan as the other Midwest jurisdictions) restructured their utilities, opening up electricity generation to competition and enabling customers to choose their power supplier.
Ohio utilities initially thought deregulation was a great idea that would allow them to make more money. Just in case, however, they demanded a bailout in order to make that transition, obtaining more than $9 billion in customer-funded “regulatory transition” payments during the first decade of the 21st century.
They also ensured deregulation was limited, so their parent utilities could own both a monopolized distribution subsidiary – with guaranteed profits – and a “competitive” generation unit.
Even with those benefits, Ohio’s traditional utilities now do not like the results. With many of their power plants facing stiff competition in regional markets, they want to re-regulate or re-monopolize. This plea is on top of their persistent entreaties to bail out their uneconomic generators.
Ohio utilities’ effort to re-monopolize is a step backwards. This utility lobbying is occurring at the very time that modern technologies – which lower the costs of batteries, natural gas, solar, and wind – are enabling far more competition in electricity markets. New players are willing to invest in innovation and bring more service options to consumers. The utilities want to re-monopolize so they can avoid competition from these cheaper and cleaner energy sources.
Whether to embrace more competition or return to monopolization is the key question recently addressed by the conservative think tank R Street Institute, which finds that even limited deregulation brings economic discipline to power markets. Competitive merchant generators operate their power plants more efficiently, build new natural-gas units to take advantage of lower fuel costs, and retire unprofitable coal and nuclear plants. Traditional utilities, in contrast, double down on the old, buying up more clunky coal units and spending billions of dollars on pollution controls for those dirty plants.
R Street also finds that competition brings benefits to customers. In the mid-1990s, Illinois and Ohio had the highest electricity rates in the Midwest. Now they have the region’s lowest rates. On average, says the think tank, Midwestern monopoly states have rates that are at least 11 percent higher for residential, commercial, and industrial customers than Illinois and Ohio. “The gap has become so prominent that Ohio and Illinois have lower commercial and industrial rates than every other Midwest state, and only Indiana has lower residential rates.”
Several other studies confirm the financial benefits of electric competition. Cleveland State University and Ohio State University found competition enabled $15 billion in consumer savings in Ohio since 2011. A similar analysis by the Illinois Chamber of Commerce and other business associations labeled the Prairie State’s restructuring a “triumph of market-based public policy” that resulted in $37 billion in consumer savings from 1998 to 2013.
The converse also has proven to be true: Monopolized electricity often means higher electricity bills. Having embraced utility monopolies rather than competition, Wisconsin saw its rates rise from the region’s lowest to the highest. Not surprisingly, Wisconsin industrialists are considering a move to lower-priced states.
The benefits of competition are not restricted to customer savings. Noting that Microsoft, Amazon, and other big companies are demanding clean energy, another study found that retail choice helps attract large corporations to invest and create jobs in Ohio. Preserving competition could lead Amazon to select an Ohio city for its second headquarters, bringing some 50,000 new jobs to the state.
Why has electricity competition brought such benefits? According to the R Street economist, Devin Hartman, “The advantages of markets under changing economic and policy conditions illustrate a critical benefit of a market-based system: name, that the private sector incurs investment risk, whereas the monopoly model socializes risk across captive customers.” In other words, when utilities must shoulder the financial risk, they are more likely to invest wisely. Think of competition as “survival of the fittest,” while utilities in a monopoly would be “revival of the fattest.”
Rather than move backwards toward re-monopolization, a growing number of voices are demanding more competition in the state. The Ohio Manufacturers Association, Ohio Consumers’ Council, Ohio Farm Bureau, and Ohio AARP are backing legislation that would achieve full deregulation of the electricity market. These influential groups argue that monopoly distribution utilities should totally divest their power-generating units, so that subsidies cannot flow from the monopoly to its affiliates operating in competitive wholesale markets. To do so, say two other conservative economists, would create robust retail competition as well as spur new investment.
Ohio – and the nation – are at an electric crossroads. Once again the Buckeye State is on the cutting edge of national policy debates associated with electricity. Pressured by FirstEnergy and Ohio coal companies, for example, the Trump Administration is trying to distort power markets and subsidize utility monopolies. Will they return to the past and embrace monopolies, or will they move forward with real competition and enjoy lower costs and more innovation?
Dick Munson is the Environmental Defense Fund’s Director, Midwest Clean Energy, where he works to advance the use of clean energy in Illinois and Ohio.