Amazon’s Electricity Sweetheart Deal
Just over a year ago, on September 7, 2017, Amazon began searching for a location for its second headquarters, HQ2. Though they haven’t made a public decision yet, meetings in prospective cities by some of Amazon’s leaders have created great hubbub and public interest.
The problem is that officials attempting to lure Amazon in with offers of tax incentives and other goodies may not see the benefits they expect. Instead these handouts are likely to shift the costs of government services like road maintenance and policing onto average citizens.
Not only is Amazon being offered tax breaks it doesn’t need, it’s receiving favorable deals on electricity from state-run utilities. In Ohio, for example, Amazon arranged for a discount on their electricity in addition to $77 million worth of tax incentives. Because energy markets are dominated by state-run monopolies, a savings for Amazon is a direct cost to consumers.
Some have called for increased transparency in how utilities set these special rates. But the best way to achieve that transparency is to open electricity markets to more competition.
In late August, for example, Bloomberg broke the story that Dominion Energy, Virginia’s largest utility company, got approval to pass onto its customers the $172 million cost of a power line that will run to Amazon’s new building. Since only a small part of Virginia’s energy market is open to competition, most Virginians are forced to buy electricity from Dominion and will be stuck with Amazon’s bill. One woman interviewed by Bloomberg had this response to the news: “Lord, have mercy.”
Virginia’s residential electricity market used to have a retail choice program where customers could select an energy supplier from the competitive market, but it was suspended in 2007. Those retail electricity providers use power lines and grid infrastructure to transmit power to their customers, but are not subject to state control under Virginia’s State Corporation Commission, as is Dominion. (In Virginia, consumers can today switch to a retail electricity provider only under a single, rare circumstance: if a customer wants to purchase 100 percent green power and the state-managed utility does not offer a completely renewable plan.)
Here’s where the transparency claims come in. The publicly released Amazon deal withholds information on the grounds that it is a trade secret. Edward Hill, an economist at Ohio State University argues that these kinds of discounts should be made fully available for evaluation by the public. That’s a good step, but it doesn’t go far enough. Virginia’s deal with Amazon is 78 pages long and filled with complicated legal jargon—beyond what the average customer has time to read and respond to.
A simpler and clearer metric would be electricity prices. Customers in a truly competitive electricity market can find everything they need to know in the price. If Virginia’s energy consumers had competitive options, they wouldn’t even need to be told that Dominion had struck a deal with Amazon to provide cheaper power. They could instead simply compare Dominion’s energy prices with those of its competitors and choose the cheaper electricity plan, free of the additional charges needed to pay for Amazon.
Competitive markets are excellent at facilitating these kinds of choices by consumers. Calls for transparency are a good start, but consumers learn more easily from prices than they do complicated regulatory filings. High electricity bills spur people to switch from their current providers to ones that are cheaper; they even draw in more competitors, who, thanks to competition, eventually pull prices down. The flight of customers from one electricity provider to another also signals to the company that they’ve made a mistake.
In a competitive energy market, these can be life and death decisions. But in a regulated energy market like Virginia’s, mistakes pile onto customers’ electricity bills instead. Given that Energy Information Administration data shows that one in five households struggles to pay its electricity bills without reducing basic necessities like food and medicine, these higher costs can’t be ignored.
A promising protection for consumers lies in removing the monopoly that utilities have on electricity production and letting competition guide companies away from sweetheart deals. Virginia should look into restarting its retail choice program instead of allowing current market regulations to benefit huge corporations at the taxpayer’s expense.
Josh T. Smith is a Young Voices contributor specializing in energy and environmental policy. You can follow him on Twitter @smithtjosh.