Retail Electric Competition and Natural Monopoly: The Shocking Truth

May 21, 2020

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Regulated monopoly remains the dominant paradigm for electricity retailing in the United States. Scholarly research, however, clearly refutes the idea that monopoly is the most efficient market structure for retail electricity sales. In 13 states and the District of Columbia, the electric wires are still regulated monopolies but customers have the right to choose their electricity retailers. The available scholarly evidence suggests that well-designed and fully implemented retail competition programs more closely align prices with marginal costs, can reduce prices below the level where they would be in the absence of competition, and might promote some product differentiation. But attaining these results depends crucially on whether the competition program is well-designed and fully implemented. Studies of duopolistic competition between utilities that engage in both retailing and distribution produce results qualitatively similar to the studies of states that implemented retail competition while treating the wires as regulated monopolies. Contrary to natural monopoly theory, no studies find that retail competition, per se, increased prices, although several studies find that flaws in market design have led to higher prices.