COLUMBUS, Ohio – Ohio’s retail choice electricity market – which lets consumers choose which company provides their electric generation service – has provided residential consumers with mostly cost-increasing offers.
Researchers found that 72% of the most popular type of retail electricity offers over the past decade have been significantly above the default price consumers would pay if they didn’t shop around.
The results suggest that there are persistent market failures in the deregulated market, said Noah Dormady, lead author of the study and associate professor at The Ohio State University’s John Glenn College of Public Affairs.
“The bulk of the offers provided to Ohio consumers are way above what those consumers would pay if they did nothing,” Dormady said.
“Historically, consumers would be better off if they just stayed with their electrical utility’s default price, rather than switching service to the median retail choice offer.”
Dormady noted that these markets have offered many Ohio households and businesses with cost-saving supply offers over the years, and those suppliers that have offered competitive pricing based on market fundamentals have delivered value to Ohio. “It’s unfortunate that cost-saving offers have been so few and far between,” he added.
The study was published recently in the Journal of Critical Infrastructure Policy.
The study was done in Ohio, but it has relevance throughout the United States and even internationally where similar retail choice marketplaces have existed for years.
“The problems we document here exist in other states and in parts of Canada and Australia, too,” he said. “We are continuing the work we did here in other states to learn more.”
Dormady and his colleagues built the largest and most detailed database of retail electricity choice offers ever in a published study. They examined every electricity offer made to Ohio consumers by retail marketers over a nine-year period from 2014 to 2023 – more than 2 million records.
Households that cannot or choose not to shop for retail electricity generation service stay with their utility’s default service. This excludes areas where default service is provided through municipal aggregation. Customers who choose to shop can purchase service from among competing supply offers from one of about fifty different suppliers in each of the six major utility service territories in the state. All customers, whether they purchase their generation from a competing supplier or stay on the utility’s default service, continue to receive their distribution service from their local utility.
Consumers are overwhelmed with choices, Dormady said. Every day, between 90 and 150 different supply offers are filed by about 45 different suppliers with the Public Utilities Commission of Ohio (PUCO), which is the state agency overseeing the market.
Offers vary widely, some offering a fixed rate for a defined period and others offering variable rates. And some offer “gimmicky” deals, he said, with deceptively low initial costs combined with high monthly fees and consumption caps of how much electricity can be used before rates jump or financial penalties.
The study found that with the most commonly sought-after rate by residential customers – a 12-month fixed rate – competing electric companies offered rates above the default utility standard offer 72.1% of the time.
What’s more, the study found that competing companies historically made offers that averaged 25% to 30% above the standard offer. But when they offered cost savings, they were only 5% to 10% below the standard offer.
“The savings are considerably smaller than the price increases they offer,” Dormady said.
Dormady noted that all the competing companies buy their electricity from the same wholesale markets. Under standard economic theory, the retail prices would be set based on the wholesale prices. Instead, it appears that companies are competing based on the standard price, which is already marked up about 73% over the price on the wholesale market.
The median retail choice offer by competing companies is 98% above the wholesale cost of electricity, the study found.
Another issue is that the best prices are not always available to consumers. The researchers found that cost-savings offers were available between 43% and 59% of the days of the year, depending on the year studied.
“Even if consumers shopped for the best prices on electricity every day – which most people are not going to do – they would only find savings about half the time,” he said.
Dormady said future studies will examine more thoroughly the issues consumers face in shopping for retail electricity. But it appears that the markets as they are currently set up are too complex for most households and make it too difficult to identify the deals that are best for them.
Despite the problems with the current market, Dormady said he and his colleagues don’t believe the answer is to move back to a regulated system. That will not create the best situation for consumers.
Instead, there is a need for more efficient markets and greater transparency. One suggestion the researchers have is creating an Office of the Independent Market Monitor to ensure that the markets operate efficiently. While existing offices such as PUCO and the Consumers’ Counsel play key roles, they have multiple functions and can’t be considered a replacement for a dedicated independent market monitor. Independence and market expertise are key, Dormady said.
Another suggestion is to establish a “supplier scorecard” that rates the quality and competitiveness of competing electric suppliers. This scorecard would function similarly to a Better Business Bureau, Fitch or Moody’s rating, he said.
“We need to make it easier for consumers to identify the electricity offers that will save them money and that are right for them,” Dormady said. “Unfortunately, it is too easy to confuse consumers in a complex market like this.”
The study was supported by the Alfred P. Sloan Foundation.
Other Ohio State co-authors were Yufan Ji, Stephanie Pedron and Abdollah Shafieezadeh. Additional co-authors were William Welch of Welch and Associates Consulting; Alberto Lamadrid and Samatha Fox of Lehigh University; and Matthew Hoyt of Exeter Associates.
Journal
Journal of Critical Infrastructure Policy
Method of Research
Data/statistical analysis
Subject of Research
Not applicable
Article Title
Efficiency and consumer welfare under retail electricity deregulation: Analysis of Ohio's retail choice markets
