Paying the Price for Inattention: Electricity Costs in Retail Choice Markets, with Jenya Kahn-Lang

Notable Quotes

• Consumer inattention contributes to price discrimination: “Most households don’t even know what a reasonable price is for electricity, let alone a good price. Unfortunately, I also find evidence that suppliers are aware of this, and they price discriminate on this inattention.” (14:51)
• Suppliers use in-person marketing to target low-income communities: “The largest reason that this has unequal impacts is because there’s underlying residential segregation. Low-income households are just more likely to live in densely populated areas where in-person marketing is relatively cheap. It’s going to be cheaper to market door-to-door if the doors are closer together. This means that low-income households are more likely to be targets of marketers who offer high prices.” (16:31)
• Opportunities to reform retail choice markets: “There’s an argument for trying to improve retail choice markets, just because we’re in a good position to analyze them. We have uniquely good data access … and a clear agency to enforce and monitor many types of reform. So, I think these markets could provide a great learning experience about how to best protect consumers and promote efficient competition.” (26:59)

Top of the Stack

• “Competing for (In)attention: Price Discrimination in Residential Electricity Markets” by Jenya Kahn-Lang
• CirclesX lawsuit

The Full Transcript

Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future (RFF). I'm your host, Daniel Raimi. Today, we welcome RFF Fellow Jenya Kahn-Lang to the show. In today's episode, I'll talk to Jenya about retail choice in electricity markets, a topic where she's done lots of work. We're going to talk about how retail choice programs affect prices for households buying electricity in the United States, with a focus on Jenya's work in Baltimore.

Jenya's work finds that these programs result in significant variation across prices that households pay for each unit of electricity they consume. She also finds that some households pay more than twice as much as others for the same unit of electricity. To understand why that is, including how electricity is marketed to consumers in Baltimore and around the United States, stay with us.

Jenya Kahn-Lang from Resources for the Future, welcome to the podcast.

Jenya Kahn-Lang: Thank you for having me.

Daniel Raimi: It's great to have you with us. You're relatively new to RFF, so we always like to get to know the new fellows who are starting off. I'm really excited to talk to you about retail choice markets and the electricity system. Before we get into the substance, we always ask folks how they got interested in working on environmental topics or energy topics, whether you had some inspiration early in life or whether you came to it later. So, what drew you into the field?

Jenya Kahn-Lang: I've been interested in environmental and climate change topics since before I can remember. Even in middle school, I remember organizing an environmental action event. So, I don't think I have a good origin story for you. But if I had to guess what I was thinking as a nine- or ten-year-old, I really cared about animals and fairness, and I think I felt humans had a responsibility to reduce the harm that we unfairly imposed on other species. Of course, the interest definitely matured as I did, but as I learned more, I still thought climate change was important.

In terms of energy, since you asked about that, I really fell in love with energy when I was looking for an undergraduate thesis topic and came across electric utility coupling. I just found the economics of utility regulation fascinating. Energy really merged my long-standing dedication to climate change mitigation with my intellectual interest in what I now understand to be industrial organization and economics.

Daniel Raimi: Cool. Where did you grow up?

Jenya Kahn-Lang: I grew up in Brookline, Massachusetts.

Daniel Raimi: Awesome. Yeah, it's funny, your love of animals and focus on climate change— it's similar to my six-year-old's.

Jenya Kahn-Lang: Oh, there you go.

Daniel Raimi: He really loves penguins, and he's really worried about the ice in Antarctica. It's very cute.

Jenya Kahn-Lang: Penguins were also my favorite animal.

Daniel Raimi: Yeah, it’s hard to beat penguins. So, as I said, we're going to talk today about your work on electricity retail choice markets. To get us started, can you define that term for us? What are retail choice markets, and how do they differ from the other ways that people buy electricity in the United States?

Jenya Kahn-Lang: Sure. Broadly, we can think of the electric power sector as encompassing three core functions: First is generation, or the production of electricity; second is transmission and distribution, or the physical transportation of electricity; and third is this retailing function, or selling that electricity to individual customers.

Traditionally, these three functions were all provided by the same utility. But with the restructuring movement around the turn of the century, advocates pushed to unbundle these three functions and introduced competition into two aspects: the generation function, which was known as wholesale restructuring; and the retailing function, which was known as retail restructuring or retail choice.

In retail choice markets, there are individual firms. They have a lot of names, but I call them suppliers. These are for-profit companies, and they compete to buy electricity from generators and sell it to individual households or customers—I focus on the residential sector. They decide where the electricity comes from, how to charge their customers for this electricity, and, typically, how to hedge future power costs. But importantly, they don't deal with any of the electrons or the physical transportation of electricity. So, you can really think of them as financial intermediaries.

It's probably worth mentioning, because we're going to talk about my paper, that customers have to actively opt into these markets, and they have to select a retail supplier. If they don't, in most states that have retail choice, there's a default regulated option for customers who don't actively select an electricity supplier.

Daniel Raimi: Great. That's really helpful. You said a couple of minutes ago that there were activists that pushed for this decoupling to happen and pushed for the introduction of competition in different parts of the electricity sector. When we're thinking specifically about retail choice, what were the motivations for folks pushing that? In theory, what are the benefits that retail choice could provide?

Jenya Kahn-Lang: As I understand it—it was a little before my time—there were three key proposed benefits. The first was to reduce costs in retail prices. The idea being with a regulated utility, they're a monopoly, and so they may have inefficiently high costs if there's no competitive pressure to keep those costs low.

The second was to encourage innovation. There was especially a lot of interest in innovative rate designs. So, think of time-varying rates that better reflect the varying nature of electricity supply costs.

The third motivation was to mitigate market power in wholesale markets. The concern there was that wholesale restructuring without any retail restructuring might cause the utility to have monopsony power in wholesale markets.

Daniel Raimi: And can you just define “monopsony” for the noneconomists among us?

Jenya Kahn-Lang: Sure. Basically, that means they're the only buyer in the market, and if they exercise their power as being the only buyer, that could allow them to reduce the prices below what they would otherwise be in the wholesale market. Now, as you can imagine, not a lot of people are complaining about that right now, although I did hear it come up recently in a Massachusetts proceeding.

Daniel Raimi: Interesting. You mentioned time-varying prices. Can you, for folks, again, who aren't in electricity markets, explain why it would be useful to have prices that vary over time?

Jenya Kahn-Lang: Sure. Because electricity isn't easily storable (it is getting cheaper to store every day now) the actual cost of supplying electricity varies from hour to hour and even minute to minute. Right now, or at least 20 years ago, most customers were on flat rates that didn't actually reflect this time-varying nature of cost. So, no matter if they used their electricity in the morning or in the night, they would still get the same price for electricity. The idea of these rate designs is that they could actually be given the true cost signal, and they could respond to those true costs.

Daniel Raimi: Right. Econ 101, you want people to pay the full price, more or less, of the thing they're consuming.

Jenya Kahn-Lang: Exactly.

Daniel Raimi: Great. Let's now touch on your job market paper, which, of course, we'll have a link to in the show notes. The paper is called, if you want to look it up, “Competing for Inattention: Price Discrimination in Residential Electricity Markets.” An awesome title. The paper looks at some of the outcomes of the implementation of retail choice in Baltimore, specifically. Can you give us a little bit of an overview about what the data are that you're analyzing? And what are the questions you wanted to try to answer with this data? And also, why Baltimore?

Jenya Kahn-Lang: Yeah. I might do those in reverse order.

Daniel Raimi: Sure.

Jenya Kahn-Lang: As I mentioned, one goal of retail choice was to reduce prices for households. The literature is pretty mixed on whether retail choice actually achieved these price reductions, on average. But when I look at the prices in retail choice markets, it's not that the average price stands out, it's that the extreme variation in prices stands out.

I find that households pay very different prices for the same electricity in the same market or utility service area. There are a few households I see paying nothing for this electricity supply, and other households I see paying over five times my estimates of those marginal costs. I should say, this isn't just a geographic distinction—a household in this market could easily be paying $100 more on their electricity bill than a very similar neighbor, just because they're on a different electricity plan.

So, it's clear that some households are paying more, and others are paying less under retail choice than they would have under this traditional utility-regulation model.

Daniel Raimi: And when you say paying more, do you mean paying more per unit of electricity or paying more on aggregate? I think you're saying per unit.

Jenya Kahn-Lang: I’m saying per unit. Given how inelastic electricity customers are and how unresponsive customers are to prices, both are probably true. But I'm really thinking about per unit.

Daniel Raimi: Got it.

Jenya Kahn-Lang: Because some are paying more and some are paying less, I thought what was more important was to know, broadly, who's paying the high prices, who's paying the low prices, and why? And also if there are any broader implications of whatever's causing this price variation for societal well-being.

You asked about data. To answer these questions, I use data from a lot of different sources. Why Baltimore? Actually, I did this iteratively. I tried to look for data everywhere I could, and I have data from other states, especially Maine and Connecticut, and they show similar patterns. But I use a lot of different data sets. The main ones are the Baltimore Gas and Electric billing data, some commission administrative data on marketing activity, and data on offers and activity on the commission's plan comparison website. That's where people can go and actually compare electricity plans and start the process of signing up. And then, I also collected my own primary data using a survey of customers in Maryland, Connecticut, and here in Washington, DC.

Daniel Raimi: Great. You've told us a little bit about what you found in terms of prices and the variation that you saw. Can you say a little bit more about that?

Jenya Kahn-Lang: Yes. I see a lot of variation. I find that the standard deviation in prices in a typical month is a little over four cents per kilowatt-hour. A lot of people probably don't know what that means, but that translates to roughly $37 a month. I thought what was especially interesting is, while there's certainly price variation across suppliers, I was struck by the large variation within an individual supplier. So, even if I try to control for these differences across suppliers, that same standard deviation in price is only about three and a half cents per kilowatt-hour.

For reference, the average or the median price in this market is about nine cents, so that's really quite large. Households who don't participate in the market are paying about seven or eight cents. That's that default price I mentioned. So, these are large. It might be worth mentioning that there are a few people who pay really high prices. About five percent of households pay over double that median price.

Daniel Raimi: Wow. I think you said earlier some people were paying nothing for electricity. What's going on there?

Jenya Kahn-Lang: A few people, yeah. What I think is going on there—and I imagine we'll get into what I actually think is happening here—is that people are signing up at these really low prices, maybe zero dollars, and then, as their contracts renew, their price might increase.

Daniel Raimi: I see. So, there's an introductory offer where you get free electricity for a few months, or something like that?

Jenya Kahn-Lang: Exactly. But if you have a really savvy customer, you could kind of jump from one of those prices to the next and, maybe, always have zero-priced electricity.

Daniel Raimi: Totally. I remember I used to do that for credit cards until I realized how bad it was for my credit score. Whoops.

You mentioned that there's wide variation in prices. I know you also looked at different types of households and how prices varied across different types of households. Can you say more about that?

Jenya Kahn-Lang: Yes. I find that low- and moderate-income households and marginalized communities face especially high prices. Specifically, I see relatively high prices among low-income subsidy recipients and in ZIP codes with median annual household incomes below $60,000. I also see high prices in ZIP codes with a large percentage of Black, Latino, Hispanic, and immigrant households, as well as areas with few high school graduates, a lot of renters, and low English proficiency.

Now, of course, a lot of these demographics are pretty correlated. But I find that the share of Black residents is an especially strong predictor of price. It can actually explain about 45 percent of the variation in average prices across ZIP codes.

Daniel Raimi: So there’s a really big effect there. What do you think is going on?

Jenya Kahn-Lang: I find evidence that many customers are inattentive to the prices they pay and face large barriers to searching for other plans. I was especially struck by one survey question I asked. I just asked respondents to guess the price they pay for electricity in dollars per kilowatt-hour. And as we talked about earlier, a lot of people don't really understand that unit, and 82 percent of respondents guessed a price above 50 cents.

Daniel Raimi: Wow.

Jenya Kahn-Lang: Nobody was paying a price above 50 cents. This tells me that most households don't even know what a reasonable price is for electricity, let alone a good price. Unfortunately, I also find evidence that suppliers are aware of this, and they price discriminate on this inattention.

I show that they do this in two ways. First, as we talked about earlier, they gradually raise prices on their existing customers, who aren't paying attention. Households initially sign up at one price, but the contracts automatically renew if they don't actively change anything, and they can automatically renew at a higher price. I find evidence that the more times a household's contract gets renewed, the higher their price is, at least on average.

Second, suppliers also sign customers up at different prices. They offer low prices to households who search and higher prices through marketing, especially in-person marketing. You can really see this if you look at the impacts of the COVID-19 pandemic on this distribution of prices when households sign up with a new supplier. You typically see what they call a bimodal distribution, where you have a group of people signing up at low prices, and I see a larger group signing up at high prices. But during COVID, there was a moratorium on in-person marketing and I saw a large reduction in the number of people signing up at those high prices.

That's what's going on in general. I also dig into the price difference across low- and high-income communities, and I find that it's this marketing explanation that's the key driver. The largest reason that this has unequal impacts is because there's underlying residential segregation. Low-income households are just more likely to live in densely populated areas where in-person marketing is relatively cheap. It's going to be cheaper to market door-to-door if the doors are closer together. This means that low-income households are more likely to be targets of marketers who offer high prices. You can really see this difference in marketing prevalence if you look at the commission marketing activity data, and also in my own survey results.

Daniel Raimi: That's really interesting. I'd love to dig more into this in-person marketing idea. So, it's literally someone going door-to-door, they hand someone a piece of paper, and they say, "Have I got a deal for you. I'm going to offer you this amount on your electricity bill." And people believe the marketer that it's a good deal, when it's actually not a good deal?

Jenya Kahn-Lang: Yes, that's what my survey shows. There's a lot of different types of marketing, but my survey shows that this type of in-person marketing is the most common. That encompasses door-to-door marketing, but also tabling in Walmart, for instance.

Daniel Raimi: Another thing that I was wondering about is sometimes with subscription services, and I know this isn't exactly a subscription service, but it's not so different, it can be really hard to cancel your subscription. It's kind of hidden, where to go on the website to cancel your subscription, or you have to call someone or mail something to someone and fill out forms. Are those types of barriers in place here?

Jenya Kahn-Lang: Well, it sounds like they may decrease in the future given what's happening federally. I think so, anecdotally. I can't see it in my own data, but if you look at complaints, some customers do have that issue. There are ways to switch without actually going to your electricity supplier in most states, but that doesn't mean that customers are aware of how to do that.

In my survey, I do ask that. For people who signed up, I ask why they signed up with the marketer. Most often, it was to reduce their price, to reduce their bill, and yet a lot of them are signing up at a higher price. A lot of them said it was because they believed the marketer; they thought the marketer knew what they were talking about.

Daniel Raimi: Yeah. So, marketers are going out there and signing people up.

There are other mechanisms at play that are leading to these very wide ranges in prices that people are paying. I imagine it's contributing to energy burdens, and making it hard for people to afford their homes. So, it seems like this is a problem that public policy could address. When you look across the states where retail choice is in place, are state regulators acting? Are they aware of this problem? If they are, what are they doing about it?

Jenya Kahn-Lang: Yes, definitely increasingly so. Actually, a large reform bill passed in Maryland earlier this year, and my research was a big part of that policy—I don't know if it was a big part, but it was a part of that policy discussion.

Daniel Raimi: I'm sure it was the single most important thing that anyone ever ran on the topic.

Jenya Kahn-Lang: But I've seen recent reforms, or at least attempted reforms, in many other states, including New York State, Connecticut, Massachusetts, and Pennsylvania. If I have to summarize, I'd say the reforms generally fall into two camps. The first is small reforms that kind of chip away at these issues, like limiting the frequency of price changes by setting a minimum contract term. The other camp is large reforms that essentially require suppliers to offer low prices, or end the market entirely for some customers.

Daniel Raimi: Interesting. Are there states where they have gone back to the traditional model and said, "Let's just get rid of this whole retail choice thing. It's not working out"?

Jenya Kahn-Lang: I'm not sure if I want to be quoted on this. There are states who have not fully done that, but have implemented really extreme reforms that really move in that direction. There was some legislation in Massachusetts that was actually proposing to end retail choice markets, but that didn't pass.

Daniel Raimi: Okay. Let's imagine that you, Jenya, are the queen of electricity markets, and you get to decide what we do in the future with retail choice. If you, again, could wave your magic wand and decide what would happen—I guess I'm conflating queens and magicians now.

Jenya Kahn-Lang: I can be a magical queen.

Daniel Raimi: Magical queen, yes. If you could, would you get rid of retail choice? Would you keep it, with reforms? Or would you go back to a more traditional model? What would you do?

Jenya Kahn-Lang: Well, I think the first thing I would do is get a new business card.

But seriously, first, my results suggest that society would be better off with some reform. Even if you don't care about the distributional impacts in the current markets, I show that we're leaving money on the table. We typically think of competition as incentivizing firms to compete by lowering prices. But I show that the inattention in this market is also causing suppliers to compete by increasing marketing to steal customers from competitors. And suppliers are spending a lot of money on this marketing that isn't providing any real societal value. I estimate almost $2 million a year in just the Baltimore metropolitan region.

Daniel Raimi: Can you say more about that? $2 million a year in what? Societal loss? Welfare loss?

Jenya Kahn-Lang: Yes. I was trying to avoid the econ jargon of “welfare,” but yes.

Daniel Raimi: Okay, got it. And when you say leaving money on the table, it sounds like people are actually paying more money than they should, and that is the welfare loss that's happening. So, we're having welfare loss, but that welfare loss is because people are paying too much rather than leaving money on the table, as it were.

Jenya Kahn-Lang: I should caveat that this is coming out of my model where I'm assuming that firms are not making any economic profits. So, it's not that the suppliers are getting more money from these higher prices. It's that any profits they get, they're then spending on marketing to get more customers.

Daniel Raimi: I see.

Jenya Kahn-Lang: So, on average, that does increase prices. Now, I'm not comparing this to the average price without retail choice. I don't have a good counterfactual there. There's a good argument that some amount of competition could put downward pressure on utility prices. So, I'm not really speaking to that specifically.

Daniel Raimi: Got it. One thing that I find so interesting in this paper, and totally ironic, is that in some parts of the energy system, the prices are so incredibly well-known. It's wild. The gasoline price is the most well-known price in the country, I'm sure. And here, you're finding this other really important energy price that people pay—nobody has any idea what it is, and it's leading to these weird outcomes. Have you thought about that?

Jenya Kahn-Lang: I think about it a lot. There's a lot of inattention in this market that's a little bit hard to explain. My biggest guess is it's hard to see electricity. Gasoline, it's liquid, you can tell how much you're putting in the tank. That's a little bit harder with electricity. But, also, in places like the United States, your bill comes after the fact. People can't really tell how much electricity they're using, and they just get a bill after it's all done, and I think a lot of people just pay it without really paying attention to it.

Daniel Raimi: Would it be a good idea if we made the electricity price much more well known somehow? Every time you get a utility bill, there'd be a huge number in red at the top of the bill that says, "You paid 11 cents per kilowatt-hour this month." Is that a good idea?

Jenya Kahn-Lang: I would think so. We're definitely thinking about ways to improve information in these markets. I should have mentioned, some of the reforms really do focus on changing the bills so that it's easier to make these price comparisons. So far, it seems to be small pennies. It's really hard to get people to pay attention in these markets, but I think it would help.

Daniel Raimi: That's interesting. Yeah, if you were queen, and I were king, the first thing I would do would be to change the bills to have really big numbers on them.

Jenya Kahn-Lang: Definitely.

Jenya Kahn-Lang: I did want to get back to that question you asked. I think I only talked about one of the three options.

Daniel Raimi: Great, please do.

Jenya Kahn-Lang: I think the question of reforming the markets versus getting rid of retail choice entirely—at least for residential customers; that's what I focus on—is a tougher choice. Ending retail choice would certainly be a straightforward way to protect vulnerable customers from excessively high prices. I'm definitely sympathetic to that argument. But I'd advocate for reform for two key reasons.

First, if you remember, the second motivation we talked about for retail choice was innovation. So far, the innovation that we've seen in these retail choice markets has been fairly limited. I do think there are real barriers to innovation in the current markets. But electric utilities definitely aren't known for being innovative. I think there's a good argument that, with some reforms, retail choice suppliers could be well positioned to deliver some important innovations in these markets going forward. For example, becoming demand-side aggregators and helping households' electricity usage become more responsive to grid conditions, kind of like what we talked about before with the rate design.

Second, we see customer inattention and barriers to search in all sorts of markets and industries. These two price discrimination channels that I look at, the misleading and aggressive marketing, as well as the price increases with automatic renewals—I think those are widespread across industries. And while ending competition is a real option, I think, in the electricity market, it's probably not a viable policy response in many other markets. It’s hard to imagine that for gyms or newspapers or apps on your phone. So, ending retail choice would do nothing in that sense to help our understanding of how to intervene in most of these other markets.

If nothing else, there's an argument for trying to improve retail choice markets, just because we're in a good position to analyze them. We have uniquely good data access, an essentially homogeneous and very simple good, and a clear agency to enforce and monitor many types of reform. So, I think these markets could provide a great learning experience about how to best protect consumers and promote efficient competition.

But, as a quick plug for any regulator or policymaker listening, this means we need to design the reform so that we can actually analyze their impact. That's really important.

Daniel Raimi: Interesting. Are you continuing to work on these topics? Are you looking at new data? Are you looking at new places? Are you working with regulators often? Are you talking to them?

Jenya Kahn-Lang: I am continuing to work on these projects. We're actually working with the Washington, DC Department of Energy and Environment on an information intervention. They administer some low-income subsidy funding. We are targeting their base of people that they're helping and looking at whether us providing information impacts their switching decisions and their electricity prices.

Daniel Raimi: That's great. Well, Jenya, this has been fascinating. I've learned a ton. I knew nothing about retail choice markets or virtually nothing before I read your paper and got to talk to you about it, so, I really appreciate it, and I'm sure our audience does too.

I'd love to ask you now the same question we ask all of our guests at the end of the show, which is to recommend something that's at the top of your literal or your metaphorical reading stack that you think is great. What would you recommend?

Jenya Kahn-Lang: Unfortunately, I don't have a lot of time to read for pleasure these days, with a four-month-old. So, this might be a little unconventional. There's an interesting lawsuit that I skimmed earlier this year and have been meaning to follow up on, and that's the CirclesX lawsuit. I don't know if you're familiar with that.

Daniel Raimi: I'm not.

Jenya Kahn-Lang: It accuses gas pipelines of strategically withholding gas to manipulate prices, and I think they argue that it ultimately caused the natural gas and electricity shortages during Winter Storm Uri in Texas. I just Googled it, right before the podcast, because I knew you'd ask me, and I saw an article from The Hill about it that says that the founder of CirclesX is actually a former Enron employee, who said that what he saw during Winter Storm Uri echoed Enron's market manipulation during the California electricity crisis. So, it should definitely be an interesting case to catch up on.

Daniel Raimi: I have not heard that specific accusation. I had heard similar accusations in the Northeast, actually, about suppliers withholding natural gas from the Northeast during some winter months. I haven't followed up on it to see where it's gone, but definitely a really interesting thing to look at. It's kind of wild in this world; we have such a huge glut of natural gas in this country. We're exporting tons of it, the prices are very low, and yet there are still these instances where there are significant shortages.

Jenya Kahn-Lang: Definitely.

Daniel Raimi: Well, one more time, Jenya Kahn-Lang, thank you so much for your work on this paper, thank you for coming on the show, and thank you for joining us here at RFF. It's great to have you.

Jenya Kahn-Lang: Thank you so much for having me. It's great to be here on the podcast and at RFF more generally.

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