Articulating The Benefits Of Competition

Lynne Kiesling

One of the focal discussion topics at the Center for Advancement of Energy Markets convention was how to articulate the benefits of competition. Competition has been absent from the electricity industry since 1907, when the first states established public utility commissions and began granting monopolies to utilities in retorn for their obligation to serve all customers in their territory. Add to that the federal hydro power projects of the New Deal, the subsidized loans available to cooperatives and municipal utilities, and this industry is rife with deeply-meshed distortions of price signals.

Notwithstanding all of these distortions and perverse incentives for the past century, the industry has evolved, largely through exogenous technological change like the “jet engine on a platform” that is the combined-cycle gas turbine generator.

The initial selling point for competition was lower prices to customers, as competition squeezed out excess capacity that had been built under regulation. This process had occurred in trucking, in airlines, and in natural gas when competition was allowed. But those price decreases are long-run phenomena, not short run, and in times of rising fuel costs the relevant comparison is the price you are paying relative to the price you would have paid under regulation. Calculating that counterfactual is not necessarily something that customers are going to do. And those who do not support competition will certainly not do it, and will point to the price increases as evidence that competition is bad. This rhetoric has been pervasive in the post-California, post-Enron era.

So the challenge faces all of us who know that competition and market processes enable customers and innovative, entrepreneurial producers to mutually and jointly achieve the best possible outcomes in an imperfect world. We have to articulate those benefits. But most of them are dynamic benefits, arising from the application of human creativity through innovation and the development of new products, new services, and new business models. Those benefits arise from the freedom to choose.

Here’s an example: if we focus only on the bottom line for telecom, I am paying much more for my telecom services now than I did in the late 1980s. I pay $40/month for a cell phone with 600 anytime minutes, $25/month for a land line with unlimited local calling, and $55/month for a DSL line with huge up-and-down broadband capacity. In 1988 I paid, on average, $50/month for local and long distance service.

In real terms my telecom expenditures have more than doubled, but so has what I can do with what I get. In 1988 I didn’t talk much to my friends, just occasional, quick phone calls to places like New Haven, New York, Cambridge (MA), and England (those ones were really quick!). Now I can keep in touch with a much broader and more far-flung group of my family and friends and business colleagues. I pay more, but boy do I get a lot more value, satisfaction, and well being out of my 2005 telecom consumption. Telecom entrepreneurs have developed these new products and services because of my freedom to choose, and their necessity of attracting my business.

Most of that value comes from products and services that were not available from the regulated phone company that didn’t face competition. This is the type of value proposition we have to articulate for electric power. It’s not just selling electrons, it’s selling the variety of things that you can do with electrons. To take an example from one of the convention’s speakers, she would get great value (and thus be willing to buy) a service where she could program her refrigerator to send a text message to her cell phone if the refrigerator opened during the day; that way, she would know when her teenage sones were home.

That’s the kind of benefit to articulate. We have to say more things like “in 1950 if you asked a phone customer if they would like a cell phone, or a Blackberry, they’d either say ‘what for?’ or ‘what’s that?’ Imagine the new products and services for your use of electricity if that kind of innovation happened.” Or “Look how much more you get for your money in telecom than you did 20 years ago. Freedom to choose would bring that innovation to electricity, too.”

Electricity customers, which is every single one of us, deserve freedom to choose. It’s unfair to all of us to let elite groups of officials make our decisions for us. We’ve realized this in most other dimensions of our lives. We must realize it for electricity, one of our most essential services.