Retail Competition in Electric Power: The Chicago Cubs Go Shopping

Lynne Kiesling

The Chicago Cubs will buy their power from Constellation New Energy, a competing retailer in Illinois (as well as several other states). Constellation will purchase the power from generators, transmit it to the local distribution network, where they will pay ComEd to distribute it to 1060 W. Addison St. [Note: technically, because of the physics of AC power, they won’t distribute those exact electrons to Wrigley, but you get the idea.]

David Kolata of the Citizen’s Utility Board noted that what anemic retail competition we have in Illinois is for larger customers:

“For medium- and big-sized business there is some competition,” Mr. Kolata said.

But that doesn’t help the average citizen or homeowner, Mr. Kolata said.

“For residential customers there’s not a single competition option whatsoever” because suppliers are only interested in working with large consumers of electricity, he said.

All of Constellation’s Illinois customers are businesses, Ms. Hextell said.

But we must be careful not to infer from Mr. Kolata’s comments that blame rests with Constellation and other competing suppliers. Incumbent utilities (i.e. ComEd in northern Illinois) have been very effective at structuring what’s called “default service”, which is the provision of power service to customers who “choose not to choose”. They have structured default service in such a way that (even with a 25% rate increase to residential customers) they get to continue to charge low and stable rates, against which it is really hard for competing suppliers to enter the market. In econ-geek-speak, profit-maximizing incumbents have done an effective job of using the political/regulatory process to construct an entry barrier into the market to serve residential customers.

And even though residential service is very profitable to the incumbent utility, profitable enough that you would think it would attract entry, the cost of acquiring new customers is very high to potential competitors, because there are lots of customers, and the value proposition per household is likely to mean only a small profit margin per household if the competing supplier does win the customer, so that means that the competing supplier has to “make it up on volume” and sign up lots of customers. When the incumbent can use default service as an entry barrier, that volume hurdle becomes insuperable for most, if not all, potential competitors.

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