Missouri Electricity Rates: A State in Transition

Missouri residents are experiencing increasingly rapid growth in electricity rates, a trend that threatens to push the state above the national average. While historically boasting some of the lowest rates in the U.S., Missouri now faces a critical juncture in its energy policy. Modernizing its regulatory structure and embracing competition are key to controlling costs and ensuring affordable electricity for its citizens and businesses.

Missouri’s Current Electric Market Structure

Like most of the United States, Missouri’s electricity system operates under a traditionally vertically integrated utility model established in the early 20th century. This model centers around a single utility owning and operating all aspects of the electric system – from power generation to local distribution – within a defined geographic area. These utilities are granted exclusive rights and obligations to serve customers in their territory.

State Public Service Commissions (PSCs) regulate these monopoly utilities, setting rates based on a cost-of-service model. The PSC acts as a proxy for competition, preventing utilities from overcharging customers. However, this model isn’t without its drawbacks. The cost-of-service model can incentivize utilities to overspend on infrastructure, passing the costs and risks onto ratepayers.

Over time, the concept of a “natural monopoly” in electricity has been challenged. Utilities began participating in organized wholesale markets, known as Regional Transmission Organizations (RTOs), introducing competition and cost containment. States also introduced competition in retail markets, allowing customers to choose suppliers, and in the generation market, permitting non-utility power plants to sell electricity.

While distribution systems may still exhibit natural monopoly characteristics, areas like generation and retail services often benefit from competition.

The Benefits of Electric Competition

The case for competition isn’t merely theoretical; it’s supported by decades of experience. Roughly one-third of U.S. States operate under “restructured” electric markets with retail competition, while another third participate in organized wholesale markets while maintaining vertically integrated utilities. Studies demonstrate that competitive systems outperform the traditional model across economics, reliability, environmental impact, and governance.

Economics

Competition lowers costs and benefits consumers. Competitive power markets improve investment decisions and encourage efficient operation of power plants, leading to significant efficiency gains in both fossil fuel and nuclear facilities. Free markets also manage and minimize risks more effectively than monopolies, as competitive generators have better access to private capital for investment, shifting financial risks away from ratepayers.

The increasing complexity of the grid – with growing demand, unconventional resources like wind and solar, and demand-side resources – further highlights the value of competitive markets. These markets are better equipped to address the “knowledge problem” inherent in forecasting future resource needs and planning system operations.

Competition also shields customers from the costs of servicing new, large-demand loads. Under a competitive system, suppliers and counterparties bear these costs and risks, rather than socializing them across all ratepayers.

The Midcontinent Independent System Operator (MISO), which covers parts of Missouri, calculates that its members receive over $3 billion annually in cost benefits from wholesale market participation – a 12:1 benefit-to-cost ratio. However, Missouri’s lack of retail and generation competition limits the extent to which ratepayers benefit from these savings.

Reliability

Competition also enhances the reliability of the electric system. Most outages stem from local distribution issues, unaffected by generation market structure. However, competition incentivizes generators to maintain plant availability to maximize revenue, reducing the risk of bulk-level reliability issues.

During extreme weather events like Winter Storm Elliott, monopoly utilities relied on power imports from competitive markets to avoid widespread outages. Strengthening ties to neighboring regions could further benefit Missouri customers.

The outages in Texas during Winter Storm Uri were not primarily caused by competition but by issues like insufficient gas supply, poor coordination between gas and electric systems, and inadequate winterization of infrastructure. Competitive generators in Texas actually experienced lower outage rates than monopoly utilities.

Environment and Governance

Competitive power markets also offer environmental advantages. More efficient plants pollute less, and uneconomic plants tend to have higher emissions. Markets also enable customers to choose “clean” or “green” energy options.

Competition fosters better governance by rewarding businesses that deliver quality services at low costs, while the cost-of-service model incentivizes utilities to seek favorable treatment from regulators and legislators. “Accountability through competition” remains a key benefit of market-based approaches.

Reform Options for Missouri

A recent state retail electric scorecard by the R Street Institute gave Missouri a “D” grade, comparable to Iowa but lower than Illinois’ “B+”. Illinois’ competitive electric market has delivered economic benefits to its residents. The average monthly electric bill in Missouri is approximately $20 higher than in Illinois.

Missouri regulators have taken initial steps toward competition, partially removing the prohibition on aggregators of retail customers (ARCs) in 2024, allowing large customers with demand over 100 kilowatts to participate in RTO markets. Further steps should be taken to allow all customers to benefit from competition.

Legislative proposals such as HB 2207, HB 2233, and SB 1411 aim to open Missouri’s electric market to competition by providing retail choice for all customers and creating a competitive generation market. These bills would require utilities to divest generation assets and allow market demand to drive future generation decisions. Consideration of this legislation could alleviate cost burdens on Missouri’s electric consumers and prepare the state for the evolving electric grid.