For those who don’t know, an oligopoly is a situation in which a small number of companies dominate the market, and to answer the question posed in the title, that’s exactly what we have in the Connecticut energy market. The big surprise is that those companies are not the utilities.
Electricity on the wholesale market in Connecticut is being scalped by wholesale suppliers, corporations that have inserted themselves between power plants and the regulated utilities (Eversource/UI). In addition to selling to the utilities, wholesale suppliers are selling directly to consumers on the retail market.
With the same companies supplying both the public option and the retail alternatives, competition has stagnated, and Connecticut consumers are paying the price.
Wholesale suppliers are the unacknowledged middlemen of the Connecticut energy market. Most Connecticut residents are aware of and unhappy with the regulated utilities, but most do not know that they sometimes pay more than half of their bills to wholesale suppliers via pass-through costs.
At the heart of this dynamic is a government mandated electricity purchasing scheme (“the procurement process”) which requires the utilities to buy from wholesale suppliers, who then set prices that have little connection to the cost of electricity generation. The utilities are not allowed to shop around and must select from the prices the suppliers offer. The suppliers add premiums, which push the price of electricity far above the average wholesale costs reported by the ISO-NE. In 2023, those same premiums reached a new high, leading the prices paid by customers of Eversource and UI to reach more than 200% of the wholesale market average.
The chart below tracks the estimated difference between the price Eversource and UI paid for electricity and the average price of electricity on the market from 2000 to 2023. Note that prices paid by utilities rose immediately after the first version of the current procurement process was implemented. The spikes prior to 2023, only look small in comparison to the massive bump that took place that year, in 2007 for example customers paid almost 100% more than the average market price.
Wholesale suppliers were active participants in the discussions that took place around shaping the procurement process in 2006.
At the time, one supplier lamented that few consumers had switched from Eversource and UI to their alternative services. As you can see, the price of electricity purchased by the utilities prior to the procurement process was consistently below the market average. It was very difficult for a third party to offer something lower. So, the suppliers lobbied for a process that, we can see with the benefit of hindsight, allowed them to add significant extra charges to the electricity purchased by the utilities.
The residents of Connecticut have been paying premiums ever since.
What are these premiums and why do we pay them? The premiums are the profit, they are charges added on top of the costs associated with buying the electricity. This is the primary way that wholesale suppliers make money. They buy electricity from power plants in Connecticut and then sell it to the utilities for considerably more than they paid for it. The current procurement process ensures that the utilities cannot search for cheaper options, allowing the suppliers to maintain very healthy profit margins.
Ostensibly, the suppliers deserve these premiums because they are protecting us from price variability, and in a way, they do provide that service. You will never notice powerplant prices fluctuating from $50 to $75, if your wholesale supplier consistently charges $120.
Who are these wholesale suppliers? Eversource and United Illuminating are legally obliged to reveal the identities of the winning suppliers after each round of electricity purchasing is finished. The table below provides all of the disclosed names of wholesale suppliers that I was able to find in the public record since 2018.
For those who buy their energy on the retail market, at least one of these names may be familiar. Constellation is the number one provider of both residential and commercial electricity in the retail market, with 47% market share amongst residential consumers and 54% market share amongst commercial consumers in 2023 according to federal reports. NextEra, Calpine, and Direct Energy also sell on Connecticut’s retail market.
Major actors on the retail market are setting the price of energy for the regulated utilities.
Why is this a problem? Constellation and other suppliers can set a high price on the energy they sell to Eversource and UI and then collect customers as they head to the retail market looking for cheaper energy options. The customers are simply moving from one supplier provided product to another. So, wholesale suppliers can raise the rates they charge the utilities aggressively without fear of losing customers. For instance, in November of 2022, Constellation had 39,210 customers on the retail market, then Constellation and other wholesale suppliers raised Eversource and UI’s rates dramatically the next year, and in December of 2023, Constellation had 104,320 customers.
There is no escape for consumers. Either you pay wholesale suppliers indirectly through the utilities or you pay them directly on the retail market, and the retail market offers no reprieve from the high rates. In 2023, only nine companies sold residential electricity on the Connecticut retail market. Two of these companies offered relatively competitive rates, but they only served 152 customers, or .05% of the total market. The remaining seven companies, which claim 99.95% market share amongst residential consumers, charged an average of 13.6 cents per kilowatt in 2023, while the ISO-NE reported that the average wholesale generation costs were 6.5 cents per kilowatt. In the same year Eversource and UI residents were paying 19.27 cents and 18.1 cents respectively for the same electricity.
In 2023, the current system forced consumers to choose between paying double or triple the going market price for electricity.
While paying double is better than paying triple, neither is good. The wholesale electricity market was originally deregulated to avoid this situation, but today on top of the wholesale electricity market, which is competitive, sits the wholesale supplier market which is not competitive at all. It is more of a private garden for energy companies and institutional investors than a market.
As it stands, electricity must pass through the supplier market before it can reach residents. Entering the supplier market is difficult and requires an investment grade credit rating from Standard & Poor’s or Moody’s. The procurement process needs to be reformed to directly connect Connecticut consumers to the wholesale electricity market and cut out the middlemen.
More reasonable rates are possible. Utilities should be free to both negotiate and shop around. They should also be incentivized with the carrot and the stick to find us the best deals. Large bilateral deals like the Millstone PPA should be used to supply electricity when it makes sense to use them. That is how procurement worked in the early 2000s prior to the current auction process, when electricity purchased by the utilities was cheaper than the market average.
With a healthy public option, which benefits from the competition that already exists in the wholesale market, the retail market will be forced to offer more reasonable rates.
What should be done? In the short term, write to your local representatives. Let them know that you are unhappy with the current procurement system, which protects suppliers and hurts Connecticut.
In the long term, the procurement process needs to be reformed, and oversight of the process needs to be taken more seriously. The Connecticut energy market shouldn’t be dominated by a handful of companies and PURA and DEEP should be raising the alarm when prices accepted in procurement exceed 200% of the wholesale market cost.
A note on the estimates: The estimates presented in the price difference chart compare the standard service rate (the utilities’ passthrough cost of generation) to an estimate of the average cost of full requirements electricity in the same year, which is calculated as the average wholesale cost of electricity reported by the ISO-NE (New England’s grid operator) in its annual market reports, which includes generation, capacity, and ancillary costs, plus a conservative $12 per MWh for RPS requirements.
Additionally, to see the statistics from the retail market in 2023 quoted in this post, follow the hyperlink in the text to the Energy Information Administration’s 861 report page, download and extract the 2023 zip file, open the excel sheet labelled ‘sales_ult_cust_2023’, filter the state value for ‘CT’.
Finally, the ISO-NE publishes annual reports which include estimates of wholesale costs broken out by the component parts. After downloading an annual report search for “wholesale cost”.
Michael Webb PhD. is a researcher in New Haven.