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May 18, 2011

Electricity retail choice is mandated in Texas and growing in three States

Source: Form EIA-861; Annual Electric Power Industry Report

Retail choice programs let electric power and natural gas customers choose among competitive suppliers in some States. Today we look at four States with significant participation in electric power retail choice. Texas requires retail choice. In New York, Connecticut and Massachusetts, voluntary participation in retail choice is growing.

In Texas, eligible residential customers must either choose a competitive supplier or be assigned one. Customers in investor-owned utility service areas outside the ERCOT Regional Transmission Organization are not yet eligible, and municipal and cooperative utilities in the State can opt out of the program. Even so, the percentage of residential customer sales provided by competitive suppliers has been high, about 60%, since the program started in 2002.

Voluntary residential retail choice programs in other States have not seen Texas' level of adoption. But competitively supplied residential sales have been growing in three States and now represent a small but significant share of total residential sales (see chart). New York's program has grown steadily since 1999 and now accounts for almost 14% of total residential sales.

Massachusetts' retail choice program started in 2000, but did not really see significant interest until 2004. In 2009, competitive sales topped 12.5%. Connecticut's program had a slow start, but grew by five percentage points between 2008 and 2009 to 12%. Residential retail choice accounted for 3.3% of total residential sales in the United States in 2009.

The growth in these three States' retail choice programs may reflect lower wholesale electricity prices since 2008. These lower prices reflect the combined effect of the recent economic downturn and the rapid growth in the supply of natural gas from shale resources, leading to a significant reduction in the price of natural gas that is reflected in wholesale electricity prices in areas where natural gas fuels the generators that set the wholesale price.

Lower wholesale prices reduce costs for competitive suppliers and allow them to offer attractive prices compared with alternative service rates, often called standard offer service rates. These standard offer service rates are set either by auctions or administratively, and are intended to shield customers from rapidly changing wholesale prices. These rates only slowly adjust to reflect changes in wholesale prices. Currently, these standard offer service rates are significantly higher than wholesale prices.

In all, 15 States and the District of Columbia have active retail choice programs for residential electricity customers. Tomorrow's Today in Energy will examine participation in other State programs.