Electricity bills keep climbing, and politicians and pundits are searching for someone to blame. Data centers have become a popular scapegoat — a narrative the Taxpayers Protection Alliance has been busy debunking.
Others point the finger at utilities, arguing they are incentivized to build more and spend more to goose a guaranteed rate of return on the capital they invest in infrastructure. Former Director of the U.S. Department of Energy’s Loan Programs Office Jigar Shah made that case in a recent Newsweek op-ed. Meanwhile, as Shah himself notes, proposals in some states would allow utilities to own and operate regulated generation alongside independent power producers.
Advocacy groups such as the TPA and its Consumers for Affordable Electricity project have pointed out the many merits of that approach. Genuine competition in power markets can exist, but must be unlocked by removing outdated rules holding back supply. The problem with electricity markets is not utilities, but rather a fundamentally broken system that limits who can generate power. In multiple states across the PJM Interconnection (the grid operator for many “restructured” mid-Atlantic states), consumers are forced into a system where IPPs sell into tight markets while customer-serving utilities are prevented from building generation. This framework rewards low supply that keeps prices high while new power is slow to come online.
Vertical integration — basically the idea of keeping everything under one roof — routinely offers significant savings and efficiencies in the private sector. For example, instead of buying input materials from third parties and having to contract out delivery to consumers, Ashley Furniture owns its manufacturing plants and distribution fleet. Similarly, the e-commerce giant Amazon offers its own branded “private-label” goods and often delivers these goods through a dedicated fleet. Markets operate best when companies are allowed to use their efficiencies and cost savings to vie for consumers’ business.
This is especially true in the utility sector. When a single entity is permitted to manage the entire lifecycle of power, from the power plant to the light switch, and offer that bundle of services to consumers within a genuinely competitive framework, it unlocks cost savings and operational advantages. As Cato Institute adjunct scholar Robert J. Michaels has noted, “The movement to restructure electricity began with generalities about the desirability of markets coupled with claims that vertical integration in utilities was either unimportant or that its effects could easily be duplicated in markets. The econometric evidence, however, makes clear that there are substantial economic advantages associated with vertical integration.” Critically, states with vertically integrated utilities, such as Michigan and Oregon, have put in place (limited and imperfect) systems to enable competition.
Michigan’s Electric Customer Choice program permits business consumers to shop around a market of licensed alternative electric suppliers. While the incumbent utility retains control over the physical distribution system for consumers who switch (as they would under any system), AES becomes responsible for procuring wholesale power, matching capacity requirements to cover the consumer’s hourly load profile, and scheduling this power into the regional transmission grid.
The utility still bills the consumer for distribution charges and adds a line item reflecting the AES supply contract rate — the payments for which are passed along to the AES.
While the Michigan Public Service Commission notes that “no more than 10 percent of an electric utility’s average weather-adjusted retail sales for the preceding calendar year may take service from an AES at any time,” and legitimate questions remain over whether the distribution charges paid to utilities reflect the “stranded costs” arising from utility power investments, the truth is clear: it is possible to have vertically integrated utilities alongside consumer choice provisions.
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Allowing incumbent electric utilities to own generation would not crowd out IPPs. It would make them compete with another class of builders. In restructured PJM states, utilities are largely restricted from owning regulated generation to serve customers directly, leaving families dependent on merchant generators and wholesale market auctions for supply. In a genuinely competitive system where utilities could vertically integrate and supply power, if an IPP provided power at lower cost or with better terms, customers would reward it with their business. This would lower power bills and give families and businesses greater choice. Shah claims, “Americans deserve a serious response to the growing demand surge, but expanding monopoly control just when competitive alternatives are working would be a costly mistake.”
The truth is, allowing utilities to bring generation to the marketplace in restructured PJM states would increase competition, not curtail it. It’s time for a new approach to bring down power bills.
Ross Marchand is the executive director of the Taxpayers Protection Alliance.