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Quarantining the utility: State regulators should adopt a competitive retail electricity market 2.0

EDITORIAL: We’re way past due for a competitive retail electricity market 2.0. On a whim I answered the phone despite knowing it was a telemarketing call. The robocaller invited me to press 1 if I wanted to save 30 percent on my electricity bill. The invitation was too good to pass up. I was soon patched through to a man who identified himself as being with the “supply department” for my local utility company. I asked him to confirm what he said, that he was calling from my local utility, which I knew to be a lie. He repeated the misrepresentation and asked me to get a copy of my electricity bill. He hung up on me as I scolded him for scamming people.

The next day I answered the phone again, this time a woman invited me to save 10 percent on my electricity bill. I was entitled to the savings because of a state law, she said. The telemarketer, reading from a script, got flustered as I interrupted her to ask that she repeat her introductory misrepresentation that she was calling from my local utility provider. She returned to her script and asked me to get a copy of my electricity bill. I put the phone down while I attended to something else, determined to waste as much of her time as possible.

When I returned to the phone and told her I couldn’t find my bill, she patched me through to her supervisor. When I asked the supervisor to confirm that she was with my utility company, she admitted she wasn’t and attributed the initial misrepresentation to that person, who was clearly reading from a script, being new to the job. She said if I could just get my utility customer number she could see to enabling me to obtain a 10 percent savings in electricity. So if she wasn’t with my utility company, who did she represent, I asked. “Choice Energy,” she replied.

So I asked, since she wasn’t representing my utility provider, if having Choice Energy provide me with a 10 percent savings on electricity wouldn’t require me to enter into a contract. She said there was no contract involved. There would be no signup fee or cancellation fee either, she said. After some more pointless dissembling I lost patience and hung up without bothering to explain that a contract is the predicate for signup and cancellation fees.

When you go to the website for Choice Energy, the tag line is “America’s Trusted Choice.” Headquartered in Iowa, I reached Mike Needham, the company’s owner. He said the company wasn’t marketing in my area, and wasn’t even licensed to be a supplier in my state. He suggested it might be another company, based in Houston, which has “choice energy” in its name, or another company altogether. “We’ve received complaints similar to this in the past,” he said. Calls to the Houston-based company were not returned.

These experiences aren’t unique to my area or me. State regulators in several states where consumers can choose among competing energy suppliers – particularly Connecticut, Illinois, Massachusetts and New York – are increasingly alarmed by these sorts of misrepresentations by marketers. After gaining the trust of the customer, either at the door or over the phone, these marketers, once they’ve obtained the utility customer number, switch the customer to another supplier, either with some form of consent or without their knowledge. There may actually be a savings involved for a few months, but then the price gets jacked up and the customer ends up paying more for electricity than if they’d stayed with the default service of their utility company.

This is a huge problem that threatens the future of retail electricity competition and the great promise of competition-driven innovation in products and services. In many cases the competitive electricity supplier doesn’t even necessarily know these questionable marketing practices are happening. They typically contract out the marketing effort, and the marketing contractor engages marketers on a commission basis, providing a financial incentive for playing fast and loose.

At the recent conference, “Growing the Power Business & Cutting Carbon Emissions,” sponsored by the University of Pennsylvania’s Kleinman Center for Energy Policy, Pennsylvania Consumer Advocate Tanya McCloskey cited concerns about “false and misleading marketing” and called on competitive suppliers to be part of the solution.

That’s fair but too many policymakers are painting the entire industry with a broad brush. Rather than take meaningful steps to reform the utility-dominated market structure, which in most states utilizes a 20-year-old market model badly in need of a major revamp, they have proposed shutting down entirely the residential customer market except for municipal aggregation. In the end that will deprive consumers of not only their right to choose, but will blunt the wave of innovation in electricity products and services policy makers can enable by quarantining the utility from the competitive marketplace.

The current model for retail electricity competition, employed by all the states with competitive retail choice except for Texas, makes utility service the default option that customers receive unless they choose to purchase from a competitive supplier. The incentive to shop is muted since the utility is purchasing power on behalf of its default customers in the wholesale power market and passing that product through at cost. The utility can do this because it is making money from its monopoly-regulated transmission and distribution services. And if it makes a mistake or the wholesale power market takes a twist it didn’t anticipate, the utility can go to state regulators and ask to be made whole through regulated rates.

These are not options that competitive retail suppliers have. They, too, must obtain power for their customers in the wholesale market, but they don’t have transmission and distribution wires with monopoly-guaranteed rates that allow them the luxury to provide power at cost. They have no recourse if they bet wrong on the market price. And the utility doesn’t incur any marketing costs to obtain its commanding share of the market. Given this, it is wholly unfair and unreasonable to compare the rates of competitive suppliers with the price of default service, as all too many state officials are doing.

Further, competitive suppliers are often relegated to a line item on the utility bill, and that line item may not even list the supplier by name. The ability of competitive suppliers to interact with their customers through the bill is virtually nonexistent, hindering their ability to offer value-added products and services that differentiate the supplier from their competitors.

We need to find a better way. Yes, competitive suppliers can and must do more to police their ranks and help regulators oversee the marketplace. In particular, they must move beyond simply offering free airline miles as an example of innovation in the marketplace. But the unfair and anticompetitive market structure used in all the competitive states except Texas needs a major overhaul. We need a competitive retail electricity market 2.0. Only once the market power-wielding utility is quarantined from the market will electricity consumers begin to enjoy a truly competitive market offering innovation and value beyond simply providing electrons.

By moving to a competitive retail electricity market 2.0 state officials will unleash the same kind of sweeping innovation we saw in telecommunications, which led to incredible technological change benefiting consumers and the economy as a whole. Today’s electricity system is the equivalent of a black rotary phone with a wire running into the wall. We need to move to an electricity equivalent of the smart phone. If we do, we’ll not only unleash unquantifiable economic benefits, but sweeping clean energy development and energy efficiency that benefits the environment as well.

Yes, competitive energy suppliers can and must do more to police their ranks. But state policy makers must move beyond a decades-old market design that helps perpetuate problems for consumers and adopt a competitive retail electricity market 2.0. Retreating to failed monopoly-regulated rates for residential consumers is a betrayal of consumers and a recipe for inefficient clean-energy development.

[Disclosure: The writer formerly was a consultant to the Retail Energy Supply Association.]

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