The Electricity Usage Reduction Mandate was passed in Ohio in 2008 and mandates that Ohio’s electric distribution utilities (EDUs) reduce their customers’ electricity usage. The mandate was introduced on the theory that it would produce a retail reduction benefit that would lead to lower electricity rates paid by Ohio consumers. However, the Ohio mandate has actually created a situation where residential consumers could pay close to $4.00 extra per month for a retail reduction benefit of only $0.37 cents per month.
The legislation mandates that Ohio’s EDUs increasingly reduce their customers’ electricity usage every year. The reduction requirement is projected to grow to 22% by the year 2025. In turn, Ohio’s EDUs are forced to take on a massive compliance burden that increases their compliance budgets by an estimated 12% each year. By the end of 2014, Ohio’s EDUs will have spent over $1 billion to comply with the mandate since 2009. If the current 12% compliance budget growth rates continue, by 2020 “Ohio ratepayers will be paying over $500 million per year as a result of the Ohio mandate.”
A recent study released in February by Dr. Jonathan Lesser, President of Continental Economics, examined the substantial impact the Ohio electricity usage reduction mandate would have on Ohioans. Lesser’s study comes in stark contrast to claims made by supporters of the Ohio mandate who oppose reform. Supporters of the mandate assert that Ohio’s retail electric consumers will receive a “free lunch” based on their claims that:
- the mandate suppresses the wholesale electric price in a multi-state region;
- the amount of this suppression flows directly into the retail electric prices paid by Ohio’s retail electric customers; and
- the effect of the retail price reduction produces a direct Ohio retail benefit in excess of the cost of the mandate paid by these same retail consumers.
Lesser’s study determined that not only are reform opponent’s claims incorrect, but that the “retail benefits” created are actually substantial retail burdens. For instance, the cost "paid by EDU customers on their electric bills to fund the mandate appear to be at least five to thirteen times larger than the possible price suppression benefits these same customers are allegedly receiving.” The three primary claims of reform opponents were analyzed by Lesser and are summarized below.
- The Mandate Suppresses the Wholesale Electric Price in a Multi-State Region
To understand the inefficiency of the Ohio mandate, it must first be pointed out that Ohio is part of the PJM Interconnection, LLC (PJM) regional transmission organization. The PJM oversees a wholesale energy market which covers all or part of 13 surrounding states and Washington, DC. Because the PJM wholesale market is integrated, the effects of the Ohio mandate are spread through PJM. According to Lesser, the result of this is that 80% of the price suppression “benefits” flow to customers outside Ohio and customers of Ohio municipal utilities and cooperatives. Of course the Ohio municipal utilities and cooperatives receive a windfall benefit from this because they are exempt from the mandate. Essentially, Ohio businesses are forced to subsidize their out-of-state competitors and in-state competitors not subject to the mandate. If the wholesale price suppression claim is correct, “the biggest winners from the Ohio electricity usage reduction mandate are the consumers and market participants inside and outside Ohio who don’t pay the mandate cost.”
- Suppression Flows Directly into the Retail Electric Prices Paid by Ohio’s Retail Electric Customers
In determining the effect the mandate has on the average wholesale price of electricity, Lesser found that 19.9% of the total retail sales within the PJM region are attributable to Ohio retail consumers. Based on this figure, Ohio EDU retail consumers would have accounted for 19.9% of the total PJM price suppression of $333 million, which equals an Ohio share of just over $66 million. The “remaining $267 million of the reform opponents’ wholesale price suppression benefits would have gone to customers elsewhere within the PJM region at no cost to the recipients.” Spread out over the total Ohio EDU retail sales, the $66 million price suppression benefit would equate to an annual average price reduction of $0.00049/kWh of electricity sales. Typical residential customer bills in Ohio are based on an average consumption of 750kWh per month. “At that consumption level, the typical Ohio residential customer would have received…a flow-through price suppression benefit of just under $0.37 per month, or $4.38 for the entire year." Thus the “flow-through price suppression benefit” of the mandate advanced by reform opponents totals $0.37 per month which, compared to the cost of the mandate paid by the same retail consumers actually has Ohio consumers paying more under the mandate cost than the actual benefit received.
- The Effect of the Retail Price Reduction Produces a Direct Ohio Retail Benefit in Excess of the Cost of the Mandate
Lesser’s study further found that the mandate cost paid by Ohio retail consumers is actually five to thirteen times larger than the $0.37 price suppression benefit that is claimed by reform opponents. Lesser used the Ohio EDU AEP-Ohio Columbus Southern (AEP-Ohio) to exemplify this huge discrepancy between the claimed benefit and the actual cost. AEP-Ohio began charging residential customers 0.289 cents per kWh ($0.00289) in September of 2012 to fund its energy use reduction mandate budget. A typical AEP-Ohio customer using 750 kWh per month would incur a charge of $2.17 per month to fund the energy reduction mandate. Thus, “the mandate cost paid by a typical AEP-Ohio Columbus Southern zone residential customer was at least seven times greater than the price suppression benefit theorized by the reform opponents for 2012.” Essentially, AEP-Ohio customers were required to pay one dollar for every 15 cents of claimed price suppression benefit they received. The results are the same compared to other Ohio EDUs. Dayton Power & Light residential customers were forced to pay $3.90 per month for a $0.37 cent benefit.
Ohio’s electric usage reduction mandate not only burdens Ohio’s own electric distribution utilities and electric retail consumers but benefits out-of-state consumers and out-of-state market participants. The Ohio mandate forces residential customers in Ohio to pay up to $3.92 per month for a $0.37 cent benefit. One doesn’t have to be an economist to realize that this is not fare to Ohio consumers and businesses. The Ohio electric usage reduction mandate inherently burdens the citizens and market participants in Ohio, the very parties the mandate is supposed to protect and as such is a clear example of failed policy.
Photo Credit: Ian Britton