An electricity meter. (Stock photo from Getty Images.)
When you get cornered at the store or by a telemarketer selling electricity in Ohio’s deregulated retail market, they often tell you they can get you a better deal than you’re getting. However, an investigation by Ohio State researchers published in December concluded that the deal they’re offering is usually a lot more expensive than if you simply stick with the one you get by default.
In other words, you’d save money by doing nothing.
The Ohio General Assembly in 2008 deregulated the electricity market on promises that “competition” would result in innovation and better prices. But after reviewing more than 2 million records over the span of a decade, the researchers at the John Glenn School of Public Affairs found that 72% of the time, the offers the companies made were more expensive than the default price.
They also found that on the relatively rare occasions that the offers were cheaper, the potential savings were much less on average — 5% to 10% — than the higher offers were more expensive — 25% to 30%.
The findings might be even worse than they sound. Noah Dormady, the public policy expert who led the study, said the default price wasn’t designed to be the cheapest.
“Basically, three quarters of the offers over the last 10 years on net across the whole state have been more expensive than the” default price, he said in an interview Monday. “The (default price) is oftentimes referred to as ‘provider of last resort.’ It’s not meant to be the cheapest offer in the room. It’s already marked up 75-ish percent above the wholesale market. So when the lion’s share of offers are above the (default price) over 10 years, no one can look at that and say, ‘Yes. That’s an efficient market.’”
The findings raise the possibility that Ohio’s electric retailers are just another set of middlemen; extracting money from a marketplace by raising prices without adding value.
An industry group, the Retail Energy Supply Association, didn’t respond to questions for this story.
Big idea
Before it collapsed in a wave of accounting scandals, Houston-based Enron led the charge to partially deregulate electricity markets in Texas and California in the late 1990s and early 2000s. Those measures were also sold on the claim that they would create competition, and that would be good for consumers.
But there were important differences between those laws and the one in Ohio. In Texas and California, aspects of the generation markets were deregulated, which allowed Enron to engineer rolling blackouts in the Golden State and profiteer from the resulting price spikes.
By contrast, Ohio’s deregulation law applies only to retail sales. The retail companies buy power off the wholesale market and make various offers to consumers. Some are variable-rate contracts, others are for fixed rates over a set period of time, for example.
The default rate — the price you pay if you decline to shop in the retail market — is determined by a series of auctions conducted by PJM, the power grid that serves 13 states, including Ohio.
Some cities, such as Columbus, also offer power they buy off of the grid, but the Ohio State researchers didn’t look at the prices those plans offer as part of their study.
Given the finding that the retail companies usually offer power at higher prices than one fixed by a blind process, it can be hard to see what value they offer to consumers.
“The argument that a lot of stakeholders in these markets have made over the years is that if you deregulate, you open the market to competition, and that encourages innovation,” Darmody said. “I have to push back on that and ask, what are they innovating? It’s not like they can lower their production costs. It’s not like they can do it better or cheaper. They’re buying the same, homogenous product from the wholesale market and retailing it. There’s not a lot of innovation to be had in this market. The only innovation is finding new and more crafty ways of extracting more consumer surplus.”
Middlemen
There are growing concerns that consumers are being harmed by companies that set themselves up in the center of everyday transactions and skim money out without providing a fair benefit to those paying it. Out of those concerns, federal antitrust authorities are going after pharmacy middlemen, Ticketmaster-Live Nation, and Visa.
“One of the most consequential things we’ve done at the Justice Department is to think harder about the middleman economy,” Doha Mekki, the No. 2 official in the U.S. Justice Department’s Antitrust Division, said during an October visit to Columbus.
The companies making retail electricity offers in Ohio might not raise any antitrust concerns, but Dormady said they might still be acting as price-hiking middlemen.
“They are all buying from the same wholesale market and they’re turning around and retailing it, and their profit margin is simply the degree to which they can extract additional consumer surplus from consumers,” he said.
The study by Dormady and his colleagues cites numerous instances in which the Public Utilities Commission of Ohio accused the electric retailers of making misleading sales pitches and asking unconscionable prices. Instead of relying on the PUCO to police the market, Dormady and his colleagues recommend the creation of an independent system monitor.
Under the PUCO, “what happens is very reactionary,” he said. “Consumer relief comes years later. The consumer protections need to be prospective. You need to warn consumers ahead of time. Before they get involved in these contracts, not years later after they’ve suffered through month after month of kitchen-table conversations with their significant others.”
Dormady added that reforms are needed because something is clearly broken in Ohio’s retail electricity market.
“If you were driving down the interstate and you saw gas prices for $3 a gallon, and at another gas station for $6 a gallon and another gas station for $10 a gallon, and that persisted every day for a decade or longer, you would ask yourself what is wrong with this market?” he said. “And yet we see that persist in Ohio’s (retail electricity) market. Nobody’s asking the question, ‘Why is that?’”
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