Lack of Competition Leaves Maine’s Energy Consumers Frustrated

Last week, lawmakers in Maine held a public hearing on a bill that would seize the private assets of two of the largest electric utilities in Maine (Central Maine Power and Emera Maine) and replace them with a consumer-owned utility. If passed, this decision is likely to exacerbate the cost and reliability problems that ratepayers are currently facing in the state.

Before diving into the problems with L.D. 1646, it’s worth explaining how Maine’s electricity market is presently set up. Currently, customers in Maine enjoy some degree of freedom in their electricity markets as the generation phase of the industry was deregulated in 2000. However, when the laws were changed, deregulation did not extend to the retail phase, leaving the existing regulated monopolies intact at the retail level.

Under this current system, the investor-owned, regulated utilities handle the transmission and distribution phases of the electricity market. If passed, the bill would seize the assets of these companies and set up a quasi-governmental organization with an “independent board” that would oversee the operations of the transmission and distribution phases of the electricity market.

The formation of this bill is in response to legitimate concerns by ratepayers in Maine. Earlier this year, it came to light that Central Maine Power has had problems with its metering and billing procedures, generating hundreds of flawed bills on a daily basis. This alone would be a major failure on the part of the utilities in Maine, but the bigger picture shows that it is part of a trend of generally poor performance by the utilities as the state routinely ranks last in terms of the average frequency and duration of electric distribution outages. On top of all of this, over the past few years, customers have seen steadily increasing prices as well. With all of these compounding factors, it’s easy to understand why people in Maine would like to see something done about the electricity markets in their state. With that said, L.D. 1646 is unlikely to solve these problems, and, instead, it is likely to make them worse.

L.D. 1646 does not address the underlying problem

It’s politically advantageous for advocates of L.D. 1646 to blame the profit motive for the poor performance of Maine’s utilities as it is frequently the scapegoat of populist economic movements. However, this criticism is misplaced because there is plenty of evidence that shows that investor-owned utilities are more than capable of providing quality service for their customers at reasonable prices. The problem that Maine’s electricity market faces has nothing to do with the profit motive but rather a lack of competition at the retail phase of their energy markets.

Although customers in Maine have some choice over who is generating their power, they do not have a choice over whom they deal with at the retail level. Maine’s electricity market is best thought of as an example of how deregulation can be done poorly, as the monopoly utilities retain control over significant aspects of the supply process such as transmission and billing. By shifting those monopolized services from an investor-owned setting to a publically owned setting, L.D. 1646 fundamentally does not address this problem. Instead, it takes an uncompetitive system out of private hands and lets the government run it. When combined with the other provisions outlined in L.D. 1646, under this institutional arrangement, the problems that are currently plaguing ratepayers in Maine are likely to get worse.

Problems with municipalizing utilities and unintended consequences of L.D. 1646

By shifting ownership from an investor-owned setting to a public setting, L.D. 1646 would introduce new obstacles that are likely to further erode the quality of utility service in Maine. The new system would replace the profit-and-loss calculus that disciplines decision-making in a private setting with a political board comprised of 10 members appointed by the governor of Maine. Service is likely to be worse under this system for a number of reasons, the most important of which is outlined below.

For starters, there’s little reason to believe that appointees to this board will be selected based on their knowledge of electricity markets or a commitment to operating in the public interest. Given the opportunities the board has to facilitate rent-seeking and political exchange and the information asymmetries that exist between the industry and the public at large, the proposed system is extremely susceptible to regulatory capture. In other words, these appointees will likely be made based on appeasing special interests rather than doing what is best for the ratepayers in Maine. Furthermore, L.D. 1646 does not limit the number of times these appointees can be reappointed, making it even easier for special interests to retain their influence within the bureaucracy over time.

The proposal also requires the new authority to retain,

any person who was an employee of the investor-owned transmission and distribution utility at the time the authority acquired the investor-owned transmission and distribution utility who is a qualified, nonexempt employee subject to collective bargaining agreements of the acquired investor-owned transmission and distribution utility, to the extent of the contractor’s need for personnel to provide sound operation, and shall retain these employees for a period of 5 years after the beginning of operations.

In other words, the proposal would place strong restrictions on the new authority’s ability to fire existing employees of the investor-owned utilities once their assets are taken under public control. This creates additional incentive problems that go beyond those that already exist under public management. By making it difficult to fire employees at the new authority, employees have less of an incentive to provide quality service, making it even more unlikely that ratepayers would see an improvement under this new authority.

Finally, setting aside the constitutional questions that would arise if the government were to seize the private assets of the current utilities, the economic effects of such an action would likely be detrimental to Maine as it would signal to businesses that property rights are not secure in the state. Businesses will be less likely to invest in Maine if they can’t be certain that their ownership of those assets is secure from government seizure.

What should Maine do? 

The current state of electricity markets in Maine is not ideal to say the least, but the proposed course of action is likely to make things worse. L.D. 1646 does not address the underlying issues in Maine’s electricity market, namely the lack of competition and choice at the retail level. Instead, the proposal simply takes an uncompetitive system out of private hands and turns it over to bureaucrats and special interests, introducing a litany of additional bad incentives along the way. Instead, Maine should introduce competition at the retail and transmission phases, providing ratepayers more options than what exists under the status quo.

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