The Environmental Implications of Retail
Competition in the New England Electric Industry

Geoff Keith

Utility regulators across the country are facing the question of whether or not to introduce competition at the retail level into the electric industry. In New England, this decision has considerable environmental implications, as this industry emits more pollution than any other. Environmental advocates are caught in a dilemma. Acknowledging that current environmental regulations do not come close to internalizing environmental impacts fully, they are hesitant to do away with public utility commission oversight of utility planning and the environmental-review mechanisms and opportunities for public participation it includes. But the mere possibility of retail competition has created a sort of "virtual competition" in which utilities are cutting costs aggressively, and this includes retreating from higher-cost but cleaner generating sources and efficiency investments. Thus, from an environmental perspective, a "preserve the status quo" strategy is a poor one.

This thesis examines whether retail competition is fundamentally compatible with New England's wisest, long-term energy strategy. This question is examined with analysis of the ways economic incentives would change in a move to retail competition and ways the decision-making process regarding new investments would change. This work also examines the economic reasoning behind various assertions about how different technologies would fare under retail competition. Further, in light of the speed at which various interests are moving this issue in New England, this work also examines the implications of likely near-term events. The two most likely near-term scenarios are described, and the environmental implications of each are explored.

The results of the study support many analysts' fears that retail competition in New England could reverse the recent trend of environmental improvement in this industry. First, the possibility of retail competition has already created an incentive to extend the lives of old, fossil-fueled generators. This incentive will remain in place until these units are required to meet emissions standards close to those that new plants meet. Second, investment in efficiency measures and renewable technologies will fall far below the level consistent with optimal resource allocation if (1) there is a negotiated transition to retail competition that does not include mechanisms to support these technologies in the near term, or (2) there is continued "political gridlock" and virtual competition. Third, and most importantly, this work identifies fundamental, structural ways that retail competition could prevent the region from moving toward a more economically efficient and environmentally benign electric industry.