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Dallas Fed Study Finds Retail Choice Lowers Prices When Participation High
May 26, 2011
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"The effects of a competitive retail electricity market are mixed across states, but generally appear to lower prices in states with high participation and raise prices in states that have little customer participation," says a white paper from the Federal Reserve Bank of Dallas.
The study, in particular, considered different pricing mechanisms for those states that did restructure, such as the use of rate caps, or transitional pricing mechanisms.
"Our findings suggest that with a market design that encourages adequate participation, a competitive retail electricity market can benefit residential customers," said authors Adam Swadley and Mine Yucel.
The study concludes that, holding all other factors equal, having a competitive retail market in Texas caused the average residential electric bill to decline at approximately a 4.0 percent annual rate.
The study also reported that moving to a competitive retail market lowered retail prices in Connecticut, Maine, and Pennsylvania. With the exception of Maine, the study noted these three states all have high participation rates for choice. The authors cited Maine's unique Standard Offer program as likely contributing to lower rates despite little active participation, although they did not address what feature may lead to this result, since the Maine program is in many respects similar to other full requirements programs (the main difference being the potential awarding of all load to a single supplier under a "retail" bid instead of the use of tranches).
For the remaining states, the switch to retail competition did not necessarily lower retail prices. For California, Delaware, Illinois, Maryland, Michigan, New Jersey, and the District of Columbia, "having a competitive market actually appears to have raised rates," while Massachusetts and New York have statistically insignificant results, implying no change in retail prices in these states.
The results, "suggest that higher rates of participation in the retail market are necessary to successfully lower residential electric rates."
"Our results strongly suggest that if such a market is designed correctly, residential customers may benefit from competition among electricity providers. Although the level of benefit may vary, evidence also suggests that there is no single correct way to implement a successful competitive retail market, as demonstrated by the successes of states with very different approaches (Maine and Texas, for example)," the study notes.
Furthermore, "none of the retail electricity market designs yield instant price reductions for customers," the study adds.
"States that held prices artificially low during the transition to a competitive market may have seen lower prices initially; however, the long-run effect of artificially depressed prices is a misallocation of resources and an inefficient electricity market. Consumers have no incentive to switch to an alternative electricity provider and providers have no incentive to enter the market to serve residential customers. A successfully designed market must provide profit opportunities for providers as well as incentives for consumers to switch providers. Although this may result in higher-than-desired rates initially, in the long-run intensified competition is more to likely yield sustainable lower rates," the report concludes.
The study used data primarily from the U.S. Energy Information Administration (EIA) and state Public Utility Commissions.
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