EMRF Study: Retail Choice Benefits C&I Customers More Than Others

The non-profit Electric Markets Research Foundation released a study on February 11 that asserts that the retail choice offered by 14 U.S. states and the District of Columbia is working better for large organizations than it is for residential customers.

Conducted on behalf of the foundation by Christensen Associates Energy Consulting of Madison, Wisconsin, the report – Retail Choice in Electricity: What Have We Learned in 20 Years? – notes that, in utility service areas with retail choice, roughly half of commercial and industrial load has switched to competitive suppliers, while under one-tenth of residential load has done so.

“Because the gross benefits of switching suppliers are roughly proportional to a customer’s size, larger customers are better able to overcome the transaction costs of switching than are smaller customers,” the researchers believe.

Indeed, overall, the authors maintain that there have been mixed results from retail programs. In assessing the effects of deregulation on the integration of new technology into the energy sector, as well as energy efficiency, the study found that retail choice:

  • Improves the efficiency of use of power system resources, lowers the average costs of producing power, and tends to improve resource adequacy;
  • Promotes renewable resources – but accompanying increases in intermittent generation such as wind and solar may raise demand issues because of the non-dispatchability of such resources;
  • Has a mixed record in promoting demand response; and
  • Has not generally promoted smart metering.

What’s more, they believe that the effect of retail choice on pricing varies, depending on location and a host of market factors (such as wholesale electricity market prices).

The researchers state that, where retail choice is available, retail prices persistently have been higher than those in other areas, with the price gap varying over time with changes in fuel prices and other factors. The overall trend has been toward a lower price gap, the researchers said, although that is at least partly attributable to the low cost of natural gas at the moment.

In addition, the dynamics of the retail choice market favor certain customers, according to the report. “Some retail energy suppliers cherry-pick customers,” the researchers found, noting that such suppliers are more likely to select industrial and large commercial customers … which may result in other customers bearing disproportionate shares of utilities’ generation costs.”

Another advantage commercial and industrial customers enjoy is the expertise to truly exploit the retail system. “Retail choice decisions require business savvy that many consumers lack,” the researchers found. “Less educated or low-income consumers are more likely than other consumers to make poor retail supplier choices.”

The study lists a number of “future changes” that the energy industry should adopt in order to make retail choice benefit more customers. For example, to limit cherry-picking in retail choice states, customers who choose an alternative retail energy supplier should be ineligible to return to a conventional utility tariff. Instead, customers who want to return to the incumbent utility should be required to accept its real-time pricing rate or some other market-based rate.

In support of their thesis, the researchers found that – of the states that have suspended or rescinded retail choice (California, Nevada, Oregon, and Virginia) to date – four still allow large industrial customers and some commercial customers to choose their suppliers.

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