Whatever happened to efficient price signals?

Electricity Journal

Volumn 12, Issue 3, 1999, Pages 40-48

  Warner, Kellogg L ^a   Yoshimura, Henry Y ^a   Marston, Philip M ^a  

^a XENERGY Inc   (United States)

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EID: 0033114495     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(99)00008-1     Document Type: Article

References (6)

1. See, e.g., Paul Samuelson, Economics (8th Ed. 1970) at 480, n. 2, and 690, n. 2.
2. A word on terminology is appropriate here. We use the term "default" in the generic sense as the power supply service that the customer will receive if it does not purchase power service from a non-utility supplier. The term thus may include the "standard offer" service the customer receives prior to selecting a non-utility provider, as well as the service the customer may return to if the non-utility supplier subsequently fails to deliver contracted power. We understand that each state - and potentially each utility - has specific terminology for each of these various services, with particular rules and pricing that apply. Our intention here is to examine a fairly common general pricing structure and hence we must, of necessity, use general terminology. The interested reader should consult the particulars of the applicable statute, regulation, or tariff to "translate" this analysis into the specific terminology, services, and pricing that apply in that case.
3. The New Jersey legislature enacted restructuring legislation at the end of January (see News in Focus, page 4). It leaves to the regulatory commission the task of structuring the design and level of the "shopping credit" charge.
4. XENERGY has conducted a series of multi-client studies of retail electricity restructuring, beginning with the pilot programs adopted in a couple of states in the mid-1990s and continuing through the current, complete retail unbundling programs in such major markets as California, Massachusetts, and Pennsylvania. The studies have included tracking and analyzing customer, competitor, and regulatory issues.
5. The settlement for one utility, as approved by the regulatory body, provided as follows: In the event that the revenues billed by [the utility] do not recover [the utility's] payments to suppliers or [the utility] defers expenses to meet the inflation cap established in Section I.B.9, [the utility] shall be authorized to accumulate the deficiencies in the account together with interest calculated as above and recover those amounts by implementing a uniform cents-per-kWh surcharge on the rates for standard offer service, if and to the extent that the access charges billed by [the utility] to its retail customers are for any reason below the unadjusted access charge listed in Attachment 3. Under-recoveries, if any, that remain after the standard offer transition period ends on December 31, 2004, shall be recovered from all retail customers by a uniform surcharge not exceeding $0.005 per kWh commencing on January 1, 2005. Section I.B.5(c) of Restructuring Settlement Offer of Boston Edison Company, filed July 8, 1997 in D.P.U. 96-23. Similar provisions were included in other utilities' restructuring plans.
6. See, e.g. Kahn, Alfred E. Kahn,The Economics of Regulation: Principles and Institutions (reprinted 1989 with new Introduction: A Postscript, Seventeen Years After). Lamenting the difficulties of achieving efficient pricing during the continued regulation of the incumbent companies in the presence of freedom of entry of new, essentially unregulated competitors, Kahn observed in 1989 that: "[W]e cannot know to what extent the competition that has sprung up is competition on the basis of efficiency, to what extent instead it has been made possible only by the continued artificial restrictions on the prices and activities of the regulated companies. . . . [A] great deal of the competition we are witnessing in the public utility industries merely represents an evasion of sunk costs - or, in effect, their transfer to captive customers, service to whom continues to be regulated on the traditional basis. And there is, in these circumstances, no assurance that it is socially rational or conducive to economic efficiency." Kahn, supra, at xxxv-xxxvi.