Retail choice states OTHER THAN TEXAS have higher power prices than monopoly states

As a follow up to the previous post (Retail electric choice states have higher prices than states with monopoly. Why?) here is a chart that separates Texas from the retail choice average.

We may want to separate Texas from the other “choice” states for a few reasons.

1. A significant number of customers in the state remain served by monopolies: all utilities outside of the ERCOT wholesale market remained traditional monopolies, and municipal utilities and co-ops within ERCOT were allowed to remain monopolies as well. (These utilities could choose to allow competition. So far just one co-op in ERCOT has enabled competition. The municipal utilities in Lubbock, Texas, joined ERCOT in 2021 and intends to allow competition beginning in late 2023.) So in a chart with blue = choice and red = monopoly, Texas is purple.

2. Texas implemented retail choice differently than most other states. Some retail electric policy advocates say Texas implement reforms better than most other choice states. Some reasons for the claim: Wholesale and retail markets are better integrated in Texas; the residual regulated “wires” businesses are entirely separate from any businesses owning electric generation or selling retail power in Texas; and retailers bill their customers in Texas, not the legacy regulated wires utility.

3. In addition, unlike almost every other state that seriously considered reforms, Texas power prices were near the national average when it began implementing the reforms.

And if we look at inflation-adjusted average prices in Texas relative to other retail choice states and to monopoly states, the prices look a bit different too.

In these posts I am not making claims about causal relationships, I am only observing differences in average prices. But these simple averages are a good place to start asking questions. Questions like: Why are prices in most retail choice states higher? Why did prices in Texas go up faster than most from 2001 to 2008, then fall faster than others from 2009 to 2022? How could Wall Street Journal reports look at EIA data and think that Texas consumers would have been better off sticking entirely with monopoly utilities?

Retail electric choice states have higher prices than states with monopoly. Why?

Advocates of retail electric choice hear two kinds of arguments over and over. First: reliability of the power grid is threatened by retail reforms. Second: consumers pay more in states with retail choice when compared to states with monopoly utilities. In this post I want to explore the second argument.

It is true, on average consumers pay more in states with electric choice. The question to ask: “Why?”

The chart below summarizes the data. Using data from EIA’s Electricity Data Browser I categorized states as either “retail choice” or “monopoly,” then took a simple average of state average prices in each category. To smooth out the month-based variability I took a 12-month rolling average for each category. In addition, the prices were adjusted for inflation so the averages reflect 2022 dollar values.

Author’s calculation based on EIA data.

Some choices may be controversial. Similar analysis sometimes puts California, Oregon, Montana, Michigan, and Virginia in the “retail choice” category. Each of these states started down the path to reform in the late 1990s, but all subsequently backed out in whole or in part. Many of these states have allowed a few larger customers to keep competitive suppliers, but others are locked into their monopoly supplier. In my view these states lack real customer choice.

The obvious feature: on average prices are higher in states allowing customers to choose. This feature of the data is what led the Wall Street Journal to publish a pair of stories claiming consumers in retail choice states paid billions of dollars extra (WSJ mistaken view on Texas, and the bad analysis for all choice states). The main problem with the WSJ analysis is in the baseline they chose for comparison: the average price of states that stuck with monopoly. (More on flaws in the analysis here.)

Notice the starting points of both lines: in 2001 average prices in retail choice states were about 3.8ยข kWh higher than monopoly states. This higher price is also in EIA data before 2001, but not yet accessible via the very handy Electricity Data Browser. Generally speaking, these higher than average rates represent past regulatory choices in those states and differences in the general cost of doing business in different states. States that reformed to allow retail electric choice mostly passed laws between 1997 and 2001, and began implementing their reforms two or three years later. In many cases rate caps or other transition mechanisms applied for another 5 to 8 years, so the full effect of the reforms were not in place until after 2008 or 2009.

These higher-than-average prices cannot be attributed to state decisions to reform retail power markets since the higher-than-average prices existed before the states reformed. Only if prices tended to increase in choice states relative to monopoly states after retail choice policies were fully implemented, then maybe one would have reason to blame the policies for higher prices.

A non-energy example may make this point clearer. Rents in New York City and San Francisco are much higher than rents in Houston or Miami. New York City and San Francisco also have rent control laws. Can I conclude that cities with rent control laws have higher prices than cities without them? Yes. Can I conclude that rent control laws cause cities to have higher prices? No.

Should I assume that without rent control laws the prices in New York City and San Francisco would be similar to Houston and Miami. No, that would be ridiculous. But that is, in effect, what the WSJ reporters did to come up with their clickbait headlines.

States with retail power choice have higher-than-average prices, but you cannot conclude that retail power choice policies have caused the higher-than-average prices based on this kind of simple comparison.