How Customer Choice Saved Illinois $31 Billion
December 16th, 2012 marked the 15th anniversary of Illinois’ electric restructuring legislation being signed into law. In 1998, most Illinois customers received rate reductions mandated under the 1997 industry restructuring law, and one-third of larger industrial and commercial load became eligible to choose alternative suppliers in 1999. Over time, more and more customers became choice-eligible. Today, all customers served in investor-owned utility areas can choose their supplier.
Illinois’ experience, coincident with developing one of the most complete transitions to customer choice, has yielded (1) significant reductions in prices relative to neighboring states; (2) major benefits in the form of savings for consumers; and (3) prompt transmission of price signals to consumers. Let’s take a closer look at Illinois’ experience on these three measures.
Table 1 presents price ratios for Illinois against prices for each of the other four Industrial Upper Midwest states under discussion. The analysis here presents relative price information and takes out the impact of inflation by converting raw cents per kilowatt-hour (¢/kWh) prices into ratios in order to standardize the data.
Prior to industry restructuring, Illinois All-Sectors price (which includes all retail users) ratios for the 1990-2000 period averaged 1.42 against Indiana and 1.38 against Wisconsin. Following restructuring, Illinois’ average against Indiana swung downward by 19 points to 1.23 and downward by 39 points against Wisconsin to 0.99, which is below Wisconsin’s All-Sector 2001-2011 average price level. In 2011, the Illinois All-Sectors ratio against Wisconsin was just 0.88, a 12 point discount.
Consumer benefits and price signals
In the decade prior to the implementation of customer choice in 1999, electricity prices paid by Illinois consumers averaged 12% above the national average. Since 1999, Illinois prices averaged about 7% below the national average. This 19% swing in Illinois’ price position relative to the US average has been worth $31 billion in savings to Illinois consumers. The shaded area in Figure 1 illustrates this savings estimate. Market prices have effectively reflected changes in supply and demand and in fuel costs. In a period of economic stress and falling natural gas prices, electricity prices responded for Illinois power customers.
Figure 1: Illinois Restructuring Savings Estimate
Philip Novak and Vince Persico were members of the Illinois House of Representatives who co-sponsored electricity competition law in 1997. They commented in a recent op-ed that Illinoisans should take “some pride in public policy achievement that has become a model for much of the industrilaized world.” Illinois’ experience and lessons in retail competitive markets are not static but are evolving over time. We will continue to monitor the Illinois “case study” and report back. Stay tuned…