If Willie Phillips, President Biden’s nominee to serve on the Federal Energy Regulatory Commission (FERC) is confirmed by the U.S. Senate, Democrats will take a 3-2 majority on this important body that oversees the delivery of reliable and affordable power for the American people.
If the Biden administration really wants to make progress in its stated goal of expanding America’s clean energy future, it should embrace competitive electricity markets. Expanding electricity competition would be a rare win-win policy that would improve consumer welfare and lower greenhouse gas emissions.
It is not unprecedented for a Democratic administration to implement cutting edge market reforms that enhance the competitive landscape. Over forty years ago, President Jimmy Carter’s administration led the way by embracing deregulation in the airline industry, for oil production, and in the trucking and railroad industries. These reforms improved the competitive environment and set the stage for tremendous consumer gains.
As Alfred Kahn, the father of airline deregulation noted, “the two most important consequences of deregulation have been lower fares and higher productivity.” And these benefits are already being generated where competitive wholesale electricity markets currently operate.
Around 60% of the nation’s electricity is supplied through competitive markets managed by regional transmission organizations (RTOs). The remainder of the country — primarily the Southeast, Northwest, and Southwest — rely on the traditional monopoly generation model.
Monopolies are rightly viewed as harmful to consumers, but proponents claim that the electricity market is different because monopolies avoid costly and wasteful investments. The reality, however, shows otherwise.
Electricity monopolies operate without the fiscal discipline and positive consumer incentives created by robust competitive markets. Instead, monopoly producers operate to please the regulators because, so long as all investments are allowed by the regulator, the monopolist can mark-up the approved costs and earn a healthy profit.
This cost-plus operating model blunts the incentives to innovate and learn from mistakes because neither the government nor the utility suffer the consequences from making incorrect decisions. Ratepayers do. And there are too many instances where ratepayers receive the short end of the stick.
Customers of the Southern Company, for example, had to pay increased costs to partially cover the billions of dollars in a failed integrated gasification combined cycle (IGCC) technology at the Kemper power plant in Mississippi.
There is also the problem of outright corruption. In one example, FirstEnergy Corporation in Ohio agreed to pay a $230 million criminal penalty for bribing state officials, the largest ever imposed by the U.S. Attorney’s Office for the Southern District of Ohio. In the settlement, the company admitted that it conspired with public officials to ensure the passage of a ratepayer-funded bailout for older power plants and transmission lines.
Due to these flaws, there is a growing realization that nationwide competitive electricity markets are necessary to improve service and affordability.
FERC originally established competition at the wholesale level — or firms that purchase electricity from generators with the goal of re-selling it to the final customer — to “ensure that electricity consumers pay the lowest price possible for reliable service.” Data from the Energy Information Administration and the Independent Market Monitors confirm that wholesale electricity prices have been trending downward and were at or near 6-year lows in 2020.
Wholesale competition also enables power generators to offer electricity across a broader region and to more customers, improving the incentives and ability to produce electricity more efficiently.
Due to this wider geographical coverage, competitive markets can provide more reliable service without the need for increased investment in additional transmission or generation assets. Studies have also found that electricity generation costs were cheaper in states with competition, but not in states with monopoly markets.
Electricity competition also incentivizes more efficient investment in power-generating infrastructure by ensuring that utilities bear the consequences (both good and bad) from their investment decisions. This benefits customers with better pricing and higher quality electricity services.
From an environmental perspective, nine former commissioners and chairs of the Federal Energy Regulatory Commission (FERC) argued in a letter to Congress that RTOs “provide compelling platforms for renewable energy development and are achieving considerable consumer benefit.”
Expanding wholesale electricity market competition will ensure more Americans receive affordable and reliable electricity. It would be an important pro-growth economic reform to improve economic competitiveness and support sustainable low-emission technologies.
The forthcoming Democratic majority on FERC should follow the example of Democratic administrations past and empower markets over monopolies to lower costs for customers and make further progress on the Biden clean energy goals.