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Donald J. Kochan column: Harness market wisdom for lower-cost electricity
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Consumer empowerment

Donald J. Kochan column: Harness market wisdom for lower-cost electricity

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With record-breaking heat and air conditioning blowing full blast, Americans are thirsty to save on their electric bills.

Indeed, whenever electricity is in high demand, consumers become energized about efficient and low-cost power. Competitive market models can bring relief, but they’re under attack, and consumers need the understanding and will to embrace and keep them.

Let’s start with basics. Normally, when we want or need something, it helps to shop around. And for most goods, competition among suppliers exerts downward pressures on prices.

When it comes to electricity, some of the most vigorous competition is among wholesale providers of power. Yet traditional utility companies, which have thrived on their monopolies, are trying to block this innovation in supplying electricity.

For example, controversy currently is raging in Virginia over a 2020 law favoring incumbent monopolies such as Dominion Energy, denying households the benefits of competition and forcing them to pay much higher rates for cleaner energy.

As state Sen. David Suetterlein, R-Roanoke County, wrote in a recent Roanoke Times op-ed, “We allow Virginians to choose which gas station is best for them, their wireless phone carrier,” yet “the electric monopolies would have you believe that Virginians are not intellectually equipped to understand what’s best for their budget and green energy preferences when it comes to electric rates.”

Choice is the currency of consumer empowerment. Economist Ludwig von Mises reminded us in his book “Human Action” that “entrepreneurs are forced, by the necessity of earning profits and avoiding losses, to consider in every regard ... the best possible and cheapest satisfaction of the consumers as their supreme directive.”

Policymakers should craft rules that let consumers make their own decisions, and assist them in applying natural market pressure on suppliers of goods to keep quality high and prices low.

For most goods and services, that pro-consumer environment exists. Indeed, the government encourages competition and polices monopolies. But when it comes to electric utilities, governments often do the opposite: encouraging monopolies and discouraging or even prohibiting competition.

Traditionally, government-sanctioned territorial monopolies built the utilities infrastructure and owned and operated the entire electricity supply chain. Without competition, utilities in these territories had control over the power generation, transmission, and distribution system in what has been known as a “vertically integrated model.”

They could set the prices of their supply and pass the costs of their operations and infrastructure investments on to consumers. Because cost-shifting allows these companies to make their customers shoulder the consequences of even inefficient decisions, there is less incentive to be careful with expenditures.

Under this monopolistic model, consumers cannot switch to lower-price competitors. There are none. Not surprisingly, then, electricity prices prove to be substantially higher than they are in newer models, which embrace competition and innovation in electricity supply.

Some areas of the country still suffer under these monopoly models. Worse yet, in regions where consumers have been liberated to consume electricity much more like they do gasoline, doughnuts or diapers, anti-market activists and incumbent utilities seeking to preserve or regain their monopoly status are lobbying for a retreat from consumer choice.

So, how do the competition-friendly models work? Currently, there are seven Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) in the United States. Each runs their own competitive wholesale power market.

Publicly regulated utilities in these markets still have a monopoly on distribution. But, companies now compete for the generation, transmission and purchase of retail power. Hence, consumers get to choose an electricity provider.

Having multiple competing suppliers generates real electricity price competition, as well as competition over quality, reliability and satisfaction of other customer preferences like environmental protection.

“These market platforms have been proven to attract substantial clean energy investment and will be the key to implementing needed climate solutions and achieving the goal of clean, reliable and affordable electricity for our entire nation,” concluded a June 2 letter to the Federal Energy Regulatory Commission (FERC) from nine former FERC commissioners, including four chairs appointed by both Republican and Democratic presidents.

In recent years, customers still under monopoly systems of electricity supply have regularly witnessed substantial price increases, while those in competitive electricity supply markets have regularly seen record increases in affordability. Removing consumer choice in electricity supply benefits only the monopolists.

Donald J. Kochan is a professor of law and deputy executive director of the Law & Economics Center at George Mason University Antonin Scalia Law School. Contact him at: dkochan2@gmu.edu

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