West Virginia regulators favoring coal owners at expense of captive utility customers

It is no surprise to hear the U.S. coal industry has been under a lot of stress over the last decade or two, nor to learn that West Virginia has seen some of the biggest stresses. In West Virginia coal output has fallen from its peak level of 25 years ago and employment in the sector is down to under 13,000 workers, just 1/10th of peak employment reached in 1948.

The regulators of the West Virginia Public Service Commission are reacting to coal’s decline by siding with coal owners over the interests of West Virginia electric consumers. When regulated utility Appalachian Power sought a rate increase earlier this year, the PSC decided the increase was the result of parent company AEP not using enough coal. In response the Commission wants to require consumers to pay for more use of coal power whether or not aging coal plants are the cheapest source of power available. Last week the PSC saddled consumers with the $84.5 million cost of upgrading two Appalachian Power coal plants.

A few years ago I wrote a report with Patrick O’Reilly, then working at West Virginia University, describing the West Virginia consumer’s interest in switching to retail electric competition. The report, published in January 2019, noted that once-low regulated electricity rates in West Virginia were rapidly approaching the national average.

From the report, The Consumer’s Interest in Reforming West Virginia’s Electric Power Industry, p. 8:

West Virginia once had one of the lowest residential power prices in the nation, while Texas fell in the middle of the pack. As of the end of 2016, residential prices in Texas averaged below those in West Virginia. These price trends emerged despite Texas’s steadily growing economy and West Virginia’s slow decline in population over the period shown.

While average prices in the reformed states are still higher today than in regulated states, they started higher – often because of state taxes, regulations, and other factors that affected the cost of doing business. For the Top 10 reform states, inflation-adjusted prices are just over 1 cent per kWh higher on average when compared to prices in 2001 (about 9 percent higher). In regulated states, on the other hand, comparable prices are up over 1.5 cents per kWh since 2001 (about 15 percent higher). West Virginia prices started lower than the national average but rose faster. West Virginia prices rose nearly 3 cents per kWh, and were nearly 36 percent higher in 2017 than they were in 2001.

State politics work almost exclusively to the benefit of, first, coal owners and producers, secondly, coal miners and other workers, and more distantly to the benefit of others who work in communities surrounding coal production. Protecting the interests of electric power consumers is purportedly the job of the West Virginia PSC, but the PSC has chosen to side with coal producers instead.

Maybe had consumers in West Virginia given careful consideration to the reform option in 2019 they would now have a plan to respond to a regulatory commission clearly captured by industry.

The next best time to start is now.

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 3.8¢ 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.

Arizona Corporation Commission GOP Candidates Debate Retail Electric Competition

The Arizona Corporation Commission regulates privately-owned electric utilities in the state (and more, here is their self-description). Many states have their regulators appointed, but in Arizona the ACC commissioners are elected in state-wide races. Two positions are open in the November election. Recently the three Republican candidates appeared in an informal debate hosted by Arizona PBS.

About midway into the program the candidates were asked whether retail electric power should be opened to competition. The discussion begins at the 31:24 mark. Below I mostly summarize some key points, though I cannot help but to interject when necessary.

Candidate Kim Owens replied, “No, it is very clear. … We tried it, it did not work.” As part of her answer she claimed that “in every state, in every year” consumers ended up paying more (referencing the fundamentally unsound analysis published by the Wall Street Journal in 2021.) She reiterates this “always, everywhere worse” claim multiple times.

This is a false claim, but not necessarily one that even reasonably informed people would know is false. (Some discussion and links here.) If Owens wasn’t competing for a position of power over electric consumers and producers in Arizona she could be forgiven for not knowing. However, she is competing for a position of power; she is morally obligated to become better informed.

Candidate Nick Myers responded, “Unknown,” adding that the court case that paused implementation of retail competition in Arizona required the ACC to take additional steps before competition could begin. Those additional steps were never taken. Myers disputed Owens’s remark about Texas, citing a Baker Institute report (but he appears to be confusing this report on competition and prices with a second report on Winter Storm Uri). Myers said that until additional conversations are had over competition in Arizona we do not know whether retail competition can work here.

Candidate Kevin Thompson began by suggesting Republicans tend to favor free markets whether for energy or anything else, and he is always going to lean toward customer choice. He then explained why he thinks California’s failed experiment does not apply (it was wholesale competition that failed, but retail competition under discussion in AZ) and Texas’s winter storm failures do not apply (FERC’s report shows retail competition in Texas was not to blame, other policy choices caused the problems).

Then the candidates began a, um, let’s call it a “more interactive discussion.” Owens said Texas prices during the storm hit the maximum of “$9,000 kWh” (actually it was $9,000 MWh, so she is off by a factor of 1,000; it is an easy thing for a non-specialist to confuse, but again, Owens wants to be one of the power elite). “They kept the lights on, but it was a pretty price that they paid,” she concluded.

Of course, they (ERCOT) did not keep the lights on for everyone. Importantly for the discussion, it was shareholders of competitive power suppliers in Texas who paid most of that “pretty price” but customers of monopoly utilities in Texas will be paying that “pretty price” through bill adders for many years to come. The outrageous power bills Owens mentioned befell the roughly 0.5% of retail customers who signed up for a type of market-rate power contract that cannot be offered in Arizona (as per that 2004 court case and the Arizona state constitution).

Myers next pointed out the kWh vs MWh hour distinction, suggesting Owens is inexperienced, and Owens retorted, “Did someone get a $16,000 electricity bill?” She’s made opposing competition a theme of her campaign. The interactive discussion continues.

Myers noted, as I injected above, that very few customers made a very deliberate choice to accept a pure wholesale rate and take on the risks that come with it, and he added such rates cannot be offered in Arizona. Thompson jumped in to say the $9,000 MWh price was in the wholesale market, it was not a bill that retail customers paid. He is totally missing her point about customers of Griddy, some of whom received outsized electric bills (though the company did not collect on these bills after the storm).

Thompson said, “deregulation–well, not deregulation–customer choice is a such a complex issue, and that’s why we need to have stakeholder meetings.” I heartily approve of the term “customer choice” over the misnomer “deregulation” or the aspirational term “electric competition.” Consider that no candidate for the Arizona Corporation Commission has ever proposed not regulating the sale of electric power in the state. (Is there a Libertarian Party candidate?) The alternative up for discussion is whether or not some sort of regulated market might be better than the current regulated monopoly approach. Regulated vs. regulated, not regulated vs. deregulated.

Owens reports she is the only candidate that has committed against allowing competition in the state. There is a bit of back and forth about the law passed a few months back that repealed the remaining pro-competition parts of the state’s 1998 law. All candidates agreed that the law was passed and they would uphold that law. Owens said the opposition to the law came from the big environmental groups who want to push through the Green New Deal. <Insert eyeroll emoji here.>

The topic shifts to water utilities about the 43:15 mark, yielding just under 12 minutes of discussion on the possibility of retail electric competition. Just 12? It felt much longer. It seems like there is a “time flies when you are having fun” joke to be made here, but I can’t come up with one.

Of course these are just the three Republican candidates. Two of them will survive the Republican Primary and land on the general election ballot in November. There they will face two Democratic candidates: incumbent Sandra Kennedy and newcomer Laura Kuby. There is, in fact, a Libertarian candidate: Nathan Madden is running a write-in campaign.

There are two positions to be elected this fall, so the Republican primary features competition while the Democrats managed to avoid competition in the primary. There is probably a joke to be made here, too. I guess watching candidates engage in debate has drained the humor out of me.

The Libertarian slate is either half full or half empty, depending on how you look at it.

Vertical disintegration for electric utilities: A half-serious proposal

At Utility Dive Ari Peskoe tries answering the question, “Can FERC convince utilities to build modern transmission systems?” Peskoe directs Harvard Law School’s Electricity Law Initiative. The summary up front succinctly states the problem.

For FERC’s rules to be successful, they must overcome utility incentives to overlook cost-saving technologies, prioritize local projects over regional investments, and thwart development of projects that might threaten their generation interests.

Notice that the incentive problem is inherent to the nature of vertically-integrated electric utilities. If a company owns transmission assets and generation assets in the same region, then decisions about transmission assets affect payoffs expected by generation assets. Similarly, decisions about generation assets affect payoffs expected from transmission.

A company board and management cannot be made to be ignorant of the interactions. The board and management of vertically integrated utilities have inherent incentives to invest in transmission assets in ways that do not detract from the value of their generation assets. No code of conduct erases the incentives. Executives may be prohibited from stating the obvious, but they cannot be prohibited from thinking the obvious.

Peskoe said, “Rather than expanding transmission to increase interconnectedness, utilities have recently been mired in small-scale projects that often simply rebuild last century’s grid.”

Not too surprising, right?

The grid built up last century primarily served to connect a monopolist’s generation to the monopolist’s locked-in customer base. That grid and the companies generation fleet were developed together in ways that made sense to utility shareholders last century. That grid enhances the value of old generation assets to utility shareholders even while it may reduce the overall value of the grid to society.

One possible fix is an old idea that was mostly ignored in the US: the transco.

The federal government should prohibit ownership ties between transmission and generation. (Ownership ties between transmission/distribution and retailing are also suspect, but that is less of a federal issue.) Spin off all transmission in an RTO to a single transmission owner with no financial ties to generation or retailing companies. That transco would remain a FERC-regulated public utility. Competition among generation is heightened when the bias created by vertical integration is removed.

So, half seriously, I’m proposing a ban on vertical integration in the electric power industry.

Only half seriously because it would be a fairly heavy handed regulation. Vertical integration often provides economies that dis-integration would eliminate. But here it seems that vertical integration of transmission and generation assets is driving anti-competitive behavior that itself has high costs. Two decades ago FERC and most utilities involved in the formation dismissed the transco idea. Might have been a mistake, as two decades of FERC frustration around transmission investment suggests.

Virtical disintegration. It’s a half serious proposal that requires serious consideration.

Retail power rates before and after retail restructuring

How have retail power prices changed due to reforms enabling customer choice of electric power suppliers? Here is a chart summarizing average changes before and after 1997, the year the first state began to reform.

Source: Presentation by Brattle Group economist Johannes Pfeifenberger to the National Council of State Legislators Energy Policy Forum, Dec. 6, 2016).

Prior posts have discussed the effects of allowing electric power customers to choose their own electric suppliers (here and here). Many states initiated reforms to allow customer choice explicitly to bring retail power prices down, so many assessments of reform have been concentrated on the price effects.

It seems like an easy task to compare prices before reform and prices after, but easy comparisons can be misleading because they ignore other influences on power prices not directly related to allowing customer choice. For example, natural gas prices have seen dramatic ups and downs over the last 20 years and those fuel price changes will affect retail power prices. We would only want to credit retail price reforms for the benefits of low natural gas prices (or blame them for the burden of high natural gas prices) if the reforms themselves caused those price changes.

Wholesale market reforms may have enabled growth in natural gas generation capacity, but it does not seem that retail customer choice independently has increased demand or otherwise directly affected natural gas markets. Instead, the fracking-driven boom in supply and, more recently, increasing exports of LNG seem to have driven natural gas price trends over the past two decades.

So I’ll repeat the warning from one of the previous blog posts which also applies here:
“[T]he chart above isn’t a sophisticated analysis of the causes of electricity rate changes. It would take a lot more advanced analysis to solidly back the claim that competition produced lower rates.”

Some economists and data analysts have sought to produce the necessary analysis. I’ll discuss some of these works in future posts.

Surprised to see NFIB promoting electric monopolies in Arizona, especially as competition is bringing rates down for small businesses elsewhere

“Over the period [2001-2020], Arizona’s electric rates for commercial customers have increased 2.74¢/kWh (a 37% increase over 2001 rates) whereas similar rates in New York, Illinois, and Ohio have increased by only 1 to 1.5¢ and rates in Texas and Pennsylvania have fallen.”

Last week the Arizona Senate discussed SB1631, a bill that would repeal the state’s stated policy of promoting competition in electric power service. It’s the companion of HB2101 that I discussed in a post two weeks ago: “Electric monopolies in Arizona fear their customers would leave if given the chance.”

I was listening to the Senate’s Natural Resources, Energy, and Water committee discussion of the bill and was surprised to see the AZ representative of the National Federation of Independent Business stand up in support of this bill, which is to say for monopoly and opposed to competition. (Video of the committee’s discussion is here. The link takes you to the start of the discussion at the 0:49 mark, NFIB’s Chad Heinrich appears just after the 1:19 mark.)

Now Mr. Heinrich reports that the position is the result of a vote by his members, and that is a perfectly respectable way for a group to choose positions. But the organization should also help its members understand the context of the vote. Arizona’s commercial ratepayers may be paying a little extra because consumers are locked into monopoly providers.

The following chart shows the change in average commercial electric rates since 2001 for several states. I’ve shown the U.S. average (blue) and Arizona (light green) along with the five largest states to allow commercial customers to choose electric suppliers: Texas, New York, Pennsylvania, Illinois, and Ohio. (You can look at the data yourself. Click the link to see this data via the EIA’s Electricity Data Browser. Go explore.)

Now the chart above isn’t a sophisticated analysis of the causes of electricity rate changes. It would take a lot more advanced analysis to solidly back the claim that competition produced lower rates. (Some relevant advanced analysis was discussed in my HB2021 post.)

Still, at first glance, over the period available in EIA’s Electricity Data Browser, Arizona’s rates for commercial customers have increased 2.74¢/kWh (a 37% increase over 2001 rates) whereas similar rates in New York, Illinois, and Ohio have increased by only 1 to 1.5¢ and rates in Texas and Pennsylvania have fallen. Again, the chart is not conclusive evidence, but if a monopoly lobbyist wants to reject the suggestive picture above or dispute the data collected by the U.S. Energy Information Administration, ask them to show their work.

NFIB members in Arizona may want to hear from NFIB members in New York, Pennsylvania, Illinois, Ohio and Texas about the advantages and disadvantages of competitive power markets.

Electric monopolies in Arizona fear their customers would leave if given the chance

Recently Arizona electric utilities convinced a few state lawmakers they should repeal a 20-year-old law and fast! That law, which was never implemented, said Arizonans should be allowed to choose their own electric power suppliers. The anti-customer freedom bill is HB2101.

Last year Green Mountain Energy requested permission to sell 100 percent renewable power directly to Arizona consumers, citing that 20-year-old law as the basis for its request. The state regulator might not grant permission, but the power monopolies fear even the possibility of customer freedom. The monopolists are lobbying fast and hard against it.

The claims monopolists make about customer choice are predictable and largely groundless. They claim reliability will suffer and that rates will go up. They’ll point to California, which stumbled on its early attempt to create competition, and Texas because of its energy failures in February 2021.

Arizonans need not fear the California or Texas scare stories. Here’s why:

California’s early attempt at creating competition did fail 21 years ago. That failure has been well studied and is well understood. California regulators invented a new market, it was badly designed, and it fell apart under stress. Everyone now knows better. None of the fourteen states now allowing customer choice copied California regulations, and none have seen similar failures. None.

Arizonans should only fear the California example if Arizona regulators were considering implementing old California policies. There is no chance of that kind of mistake, so Arizonans should ignore this bit of fearmongering.

What about the Texas disaster in February 2021? It was catastrophic, but it was not caused by allowing customer to choose their own power suppliers.

Many power plants failed in Texas as components iced up or fuel supplies froze. As a result many homes were without power for hours and sometimes for days during the storm. It was some of the deepest, longest lasting cold to hit Texas in past 100 years.

Here’s the thing: these were power plant and natural gas supply failures, not failures caused by retail customers.

It is easy to see that customer choice was not to blame. Parts of Texas remain served by electric power monopolies, for example Austin and San Antonio. These monopoly areas saw power system failures like those in Houston and Dallas where customers choose their suppliers.

It’s worth noting, too, that electric reliability remains regulated. Federal regulations dictate reliability standards that apply nationwide, even in Texas. That’s why federal regulators led a major investigation of the failures, issuing a massive report last November. Nothing in the regulator’s report hints customers caused power plant failures.

Under state law Texas regulators have responsibility for overseeing the state’s power grid. That’s why every Texas public utility regulator at the time of the failures resigned or was fired by the Governor. Regulations were inadequate, as the massive failures revealed, but they were regulatory failures.

All this talk about regulation should make clear customer choice is not “deregulation.” Policymakers in fourteen states have chosen regulated markets for their electric power industry instead of regulated monopoly.

What about rates?

A detailed academic study by Rice University economists published in 2019 compared the parts of Texas allowing customer choice to those parts of the state still using monopoly. Power customers with choice saw their prices decline on average while customers locked into monopoly saw their rates remain about flat.

A 2018 analysis by the late Phil O’Connor, a former Illinois state regulator, compared prices in the fourteen states allowing customer choice to rates in the states locking customers into monopolies. customer choice states saw prices drop by 7 percent while rates in monopoly states rose over 18 percent.

A recent survey of rates by the Pacific Research Institute found similar patterns in rates and higher reliability performance and better environmental outcomes in the fourteen states allowing customer choice.

Opponents of customer choice will point to a story in the Wall Street Journal claiming customer choice led to billions in excessive power bills. The WSJ calculation assumes, without explaining or justifying the assumption, that rates should be the same everywhere. This baseline assumption is obviously false and the conclusions are useless.

Note again the more careful study done by Rice University economists that found competition pushed prices down overall in Texas. Some still unpublished academic research finds lower prices in some states with customer choice and higher prices in others, so a full understanding of power prices would require thoughtful digging around.

Arizona’s monopoly utilities are not encouraging thoughtful digging around in the evidence. They want to stop everything without time for any thinking through the evidence.

Monopoly utilities are telling Arizonans scary stories about customer choice because monopolies are afraid of one thing: A customer with a choice might not choose them.


More about Michael Giberson here. While I’ve linked to supporting information above, obviously there is more that can be said on the topic. I’ll continue to build on and explore the issues discussed in this blog.

Comment here or email me at contact@mgiberson.com.