COMMENTARY: How Nevada can make a smooth transition to electricity choice for consumers

In 2016, Nevada voters easily passed Question 3, a constitutional amendment intended to promote competition in the energy market. That means Nevadans will have their eye on the electric utility of the future in 2018. Here are a few lessons drawn from other states that have trod the path of retail electricity choice and competition.

Lesson No. 1: Drop the word “deregulation.”

No electricity market in the country has deregulated, not even Texas where reform has gone the furthest. Restructuring means regulating the power sector differently. Instead of setting prices, the state fosters fair competition so that no player controls prices and customers are protected from deceptive practices.

“Deregulation” is a scary fiction that diverts attention from the real issues: choice, competition and rules needed to keep both consistent with the public interest.

Lesson No. 2: Nevada needs a market maker.

Passing Question 3 was a recognition that retail delivery of electricity isn’t a natural monopoly anymore. What may be less obvious is that choice and competition require a new utility function: the market maker.

Successful competition requires a level playing field. Rules must be nonpreferential and transparent. All competitors need access to common infrastructure, such as transmission and customer meters.

The grid always operates as a single machine. Thousands of generation and demand points have to be coordinated in real time, regardless of whether these points are controlled by a monopoly or by dozens of retailers and generators that are all commercially independent.

Running these market-making platforms is a natural monopoly, and NV Energy could do it. The first step: Surround NV Energy’s market-making divisions with a code of conduct to ensure public transparency and independence from the company’s other operations.

Lesson No. 3: Starting with full wholesale competition isn’t necessary.

In Nevada’s case, it would be a mistake to even try. The reason is that NV Energy owns too much of Nevada’s generating capacity.

As the market’s 800-pound gorilla, NV Energy could strategically suppress wholesale prices long enough to scare competitors away from Nevada. At other times, it could push prices artificially high. It doesn’t matter whether NV Energy plays nice. The ability to exercise market power will have a chilling effect on companies unsure about entering the Nevada market.

Market power remedies do exist. Forced divestiture is the most draconian but the most likely to increase costs to end users. A less disruptive approach used successfully in Texas is a market power mitigation plan. Regulators would give NV Energy a detailed and enforceable list of do’s and don’ts. If NV Energy voluntarily sells or retires assets, the plan can sunset once market concentration falls below a threshold set by the state.

Lesson No. 4: Be patient.

Retail choice and competition come with a learning curve for everyone. All-renewable service and creative time-of-use pricing will arrive quickly, but systematic cost savings will take longer.

Average retail rates in Texas and New York rose faster than the U.S. average during their first years of retail choice. Since 2009, however, inflation-adjusted averages have fallen 3 percent per year in Texas and 2.3 percent per year in New York. The U.S. average fell only 0.5 percent per year.

Those numbers don’t count all the benefits of choice, however. Right now Nevadans wanting green energy pay an extra 4.2 cents per kWh. In Texas’ competitive choice market, the typical premium is less than 1 cent.

The devil is in the details, of course, but these lessons are useful reference points. Choice can boost the public interest, but the benefits are not automatic. Doing it right takes mindful work.

David Hurlbut is author of “Creative Destruction and the Electric Utility of the Future” and was a wholesale market monitor with the Texas Public Utilities Commission from 2001 to 2006.