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Rate Discounts Pave the Way for Restructuring

Fortnightly Magazine - January 15 1995

Much attention has been paid to revolutionary rate-reform plans advanced to meet perceived competition in energy markets. So much, in fact, that the increasing popularity of the special discount rate has gone virtually unnoticed. This traditional ratemaking mechanism has found new favor with state regulators as a tool to keep customers on the system.

Many states have allowed utilities flexibility to lower prices for large customers where they can show that the customer is likely either to move operations out of state or generate power on its own, usually through cogeneration. Gas utilities also have been granted permission to discount rates for customers with a demonstrated ability to switch to another boiler fuel, such as oil. Last year, the New York Public Service Commission (PSC) directly addressed the connection between the discount-rate phenomenon and the broader issues of industry restructuring. In an investigation of competition in electric and gas markets, the PSC adopted a set of general guidelines for electricity sales at flexible rates to customers with competitive opportunities. Re Competitive Opportunities Available to Customers of Electric and Gas Service, 154 PUR4th 19 (N.Y.P.S.C.1994). The PSC later explored a new regulatory regime for electric service in light of competitive opportunities available to customers. Re Competitive Opportunities Available to Customers of Electric and Gas Service, 154 PUR4th 35 (N.Y.P.S.C.1994).

While approving the new guidelines for flexible sales, the PSC found it "reasonable to assume" that utilities face a growing competitive threat, given the proliferation of onsite generation and plant closings. It concluded that using flexible or discount rates to retain contestable load was appropriate as long as utilities take steps to assure affordable service for captive customers and can justify any discount as necessary to meet a realistic competitive alternative. To protect customers and avoid discouraging truly economic onsite generation, the PSC set the floor price for flexible charges at the marginal cost of service plus 1 cent per kilowatt-hour (Kwh). It also warned utilities that shareholders would be called on to absorb part of any lost margins resulting from rate discounts, but added that the specific sharing percentages would reflect each utility's specific market and financial circumstances.

The Question of Authority

State regulators have embraced rate discounts with little hesitation. But, in many rate discount cases, parties have questioned the authority of state regulators to allow regulated companies to change rates without complying with full-fledged tariff procedures. Customers who do not qualify for the discounts have also made allegations of improper discrimination among rate classes. It appears, however, that state regulators have the authority to allow utilities to set special rates for clearly defined customer groups.

The Massachusetts Supreme Court recently ruled in favor of rate discounting in a case involving discounts for natural gas services. The court rejected challenges to state utility regulations allowing rate discounts to "noncore customers in the state." Massachusetts Oilheat Council v. Massachusetts Department of Public Utilities, No. S-6359, Nov. 14, 1994 (Mass.).

The Massachusetts Oil Heat Council had challenged the Massachusetts Department of Public Utilities's (DPU's) approval of a regulatory framework authorizing Boston Gas Co., a