Based on the information provided in an article written by Midwest Energy News earlier this month, the recent increases of electricity rates in Ohio seem to be cause by of the lack of competition.  While Ohio does have deregulated energy markets, some areas of the state are still controlled by utilities.

Competition, Retail Choice, and Deregulation

‘Competition’ or ‘retail choice’ are terms that people sometime use to describe an energy market that is deregulated.  In the United States, energy deregulation refers to the process of opening up the energy market to competition.

A competitive market implies that there is a lot of choice, especially for the consumer. When it comes to the energy market, this is particularly important because a competitive market means that there are many electricity providers that offer supply related services. These electricity providers offer plans, products, and pricing that appeal to the customer. If a customer is unhappy with the services provided, or finds lower rates elsewhere, they have the option to switch to a different electricity supplier. A deregulated market gives the consumer the option to pick and choose the company that best suits their needs. It also incentives electricity suppliers to keep their rates low.

Monopolistic Market vs Competitive Market

Let’s compare an energy deregulated market to a regulated one. In a regulated market the utility is the only company a consumer can purchase electricity from. In many cases, there is one utility that provides service to a particular city or town. It doesn’t matter if the consumer agrees or likes the utility. They have no choice but to receive all their electricity services from that utility.

In many cases, this creates a monopoly. Monopolies generally don’t end up considering the best interest of the consumer. With a service like electricity, something that everyone needs, monopolies often end up raising prices because there is a lack of competition. If a consumer is unhappy with the new rates, they can’t switch to another utility because there isn’t another option.

Deregulated States

At the moment, there are 15 states that have adopted electricity deregulation laws. These states include:

  • New York
  • Maine
  • Texas
  • New Jersey
  • Connecticut
  • Illinois
  • Pennsylvania
  • Michigan
  • Massachusetts
  • Oregon
  • Washington D.C.
  • New Hampshire
  • Maryland
  • Delaware

Despite the fact that these states allow electricity consumers to choose their energy supplier, some of these states still have limited options for consumers as the rollout of deregulation has been limited or restricted by policymakers.

Deregulated Electricity Market in Ohio

Ohio and energy deregulation have a long history that starts in 1999.

History of Energy Deregulation in Ohio

In 1999, eight utilities provided power to 91% of the state. Out of those eight utilities, four had complete power over how electricity reached both homes and businesses. These utilities included:

At the time, none of the utilities took ownership of customer representation. That job fell to the Public Utilities Commission of Ohio (PUCO).

This changed in the summer of 1999 when the state passed Senate Bill 3. This Bill outlined the process for restructuring the energy market to provide consumers with more choice. The choice would be with energy providers, effectively giving them the ability to sell supply related services to consumers.

At first there were several challenges, many which were resolved in 2008. Senate Bill 221 was signed in order to tweak the initial Bill. The biggest change in Bill 221 was that it made sure that utilities provided their customers (the ones who did not choose an electricity provider) with a Standard Service Offer. The offers were monitored by the PUCO to ensure customers continued to receive reasonable rates and fair services.

Electric Security Plan vs. Market Rate Offer

Part of the PUCO submission process allowed the utility to provide the Standard Service Offer (SSO) as an Electric Security Plan (ESP) or a Market Rate Offer (MRO). The difference between the two is that an ESP uses a traditional rate plan structure while the MRO uses a market-based pricing system.

According to a policy brief written by The Ohio State University, ESPs “allow for allow for regulated provisions, including cost recovery and surcharges for transmission, distribution, and related services, in addition to a CBP auction. The ESP is less of a fully-market-oriented approach to setting an SSO than the MRO.”

At their core, a utility that provides a Standard Service Offer using an ESP means that they have to get its energy capacity via wholesale auction. As a result, the rates at auction end up defining the utility’s generation prices. In addition, if the utility files an ESP but doesn’t agree with the PUCO terms or conditions, the utility can start the application process from scratch.

If a utility applies for a Standard Service Offer with MRO, they are restricted from switching to ESP at a later time.

Impact of ESP Standard Service Offers

To date, all utilities have only filed ESPs. Based on the information provided in Midwest News and and The University of Ohio’s press brief, “ESPs are the goose that laid the golden egg”.

What this means is that ESPs, “basically guarantee utility costs, and that lowers incentives for efficiency. That’s even more true when a utility has not been fully and functionally separated from its generation affiliate”.

While it is true that electricity rates increased after Senate Bill 221 was passed, the policy brief suggests that the real reason why is thanks to the, “current rate system, which basically guarantees profits for the utilities”.

Another result of the way Ohio’s current energy deregulated system is set up means that utilities are choosing investments that are more expensive, not the most efficient. According to Midwest Energy News the reason for this is because the current system allows utilities to, “earn a return on investments they make in their systems”, and The University of Ohio press brief states that it is because of this that utilities are, “getting profits through the roof under the ESP system”.

The Future of Energy Deregulation in Ohio

It is difficult to say what will happen to energy deregulation in Ohio. Many utilities want the markets to change back to the way they were before 1999 and Senate Bill 3. Midwest Energy News indicated that a new bill, House Bill 114 does not address many of the current energy issues, nor does it tackle the utility’s ability to continue to generate more profit.

One thing’s for sure, it will be very interesting to see how the state of Ohio approaches energy in 2017 and beyond.