Change may be coming to a plug near you

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It’s easy to be blasé about electric power: Flip a switch and the lights come on. Plug in your phone and it recharges. Maybe you have a vague sense that behind the plug is a vast infrastructure of lines and junction boxes, all leading back to far-away power plants that generate electricity. But new technologies and growing interest in ‘green’ energy sources are prompting policymakers to rethink public utility regulation – and suddenly, what happens behind that plug could get a whole lot more interesting.

Until recently, the textbook model of electric utility generation and distribution was a vertically integrated monopoly that generated power in large plants (usually powered by coal, nuclear fission, or water), distributed the power to distant communities, and then delivered it into consumers’ homes through a local grid. In this model, consumers have only one choice – either buy the electricity from the local power company or do without. To protect consumers from monopoly utilities, federal and state regulators created a complex system of price regulation and reliability standards.

But changes in technology and consumer preferences are challenging the status quo. Now electricity can be generated efficiently in smaller plants (often powered by natural gas) and through the use of renewable resources such as solar or wind power. Improved batteries help store electric power more efficiently. Just as important, consumers’ preferences have also changed. They increasingly desire to choose not only their electricity distributor, but also the generating power source. And many consumers appreciate an opportunity to lower their power bills and simultaneously help grid operators by trimming their power use during periods when the grid is stressed.

Forward-thinking regulators have embraced these changes and used them to inject competition into wholesale and retail electricity markets. For instance, the New York State Public Service Commission (NY PSC) is in the midst of a restructuring reform process that began in the late 1990s with the restructuring of wholesale transmission markets, led by the Federal Energy Regulatory Commission (FERC) and in coordination with the NY PSC. These early reforms facilitated wholesale electricity trading and created increased incentives for generators to operate efficiently. During the next several years, the NY PSC worked on introducing and refining retail competition so that customers could pick their own alternative electricity suppliers, offering preferred pricing plans and/or desired environmental impacts.

Now the NY PSC is turning its attention to reorganizing distribution utilities so that Distributed Energy Resources (DERs), such as onsite solar panels or small wind turbines, can compete more effectively with centralized power generation. As a bonus, DERs should also help the distributed utilities find lower-cost ways to improve reliability and resiliency, even at the level of the local, individual circuit. The NY PSC’s proceeding, known as Reforming the Energy Vision (REV), also is designed to induce and optimize supply and demand responses in the changing local retail electricity markets. As part of the REV process, the NY PSC staff recently published a proposal to improve market incentives for efficient DER investments and operations, and invited comments.

The FTC has long played an active role in this area by advocating principles of competition and consumer protection in the endeavor to restructure the electric power business. The FTC and its staff have a more than 20-year history of advocating for effective competition and consumer protection in the markets for power generation and distribution, at both the national and state levels. FTC staff filed dozens of comments in support of wholesale-level grid restructuring by FERC, in tandem with several state regulatory commissions. Last week, FTC staff filed comments on the latest proposal to reform retail distribution regulations pertaining to DERs in New York State. As technology and consumer interests evolve, additional reforms will be needed to align electricity regulation with market realities.

The DER movement essentially rejects the one-size-fits-all model of retail electric services in favor of a model that reflects consumer preferences and the availability of new supply sources. What are the elements of the new regulatory model? Dynamic retail prices that track wholesale prices. Renewable resources in generation. Aggregating demand responses from multiple customers to stimulate new investments. Conservation incentives. Bundling energy management services with retail electric services.

FTC staff supports these proposed benefits but recommends that the NY PSC take a broader view of DERs’ potential benefits by putting competition and consumer choice on the list. Measuring performance of new regulations against the goal of more choices and consumer-driven demand would strengthen competitive forces in retail markets and induce efficiency improvements and more rapid innovation. Meeting consumer preferences for a broader range of products and prices will lead to a more efficient market at all levels that incorporates all costs and benefits of production and distribution, including environmental and other social costs.

The deregulation and restructuring of electricity markets is an ongoing process. Changes at the generation and wholesale distribution levels have introduced the benefits of competition to upstream markets. Now state and local regulators across the country are working to make retail markets more responsive to consumer demand. The FTC supports these efforts and FTC staff will continue to advocate for regulatory changes that promote competition and protect consumers in critical energy markets.

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