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Financial News

Fortnightly Magazine - January 1 1995

thus be reduced only for eligible customers. Moreover, this discrimination would be exacerbated if regulators allow the utility to offset the revenue loss from retail wheeling by increasing rates for the rest of its customers.

The common element in these scenarios is unequal access to competitive market-based rates. Once some customers gain access to competitive rates, as is the case now, discrimination can be eliminated only by making access available to all (em that is, by providing retail wheeling to all customers.

Universal retail wheeling would give all customers access to competitive market prices. Effective marketplace competition for each class of customers would remove rate discrimination. Small as well as large customers could obtain competitive rates, and rates could not be raised for any customer class to offset the utility's loss of revenue from retail wheeling. All classes would benefit from competition, and no class would bear the discriminatory burden of ensuring that the utility meets its revenue requirement.

Extending access to market rates to all customers, of course, would eliminate regulators' ability to set rates at levels that will satisfy a revenue requirement and produce a specified allowed return. A utility that can fulfill its revenue requirement and achieve its allowed return at market rates would be unaffected; utilities that can't would suffer a shortfall in revenue and earnings.

Retail wheeling is not inherently discriminatory. It will contribute to a discriminatory rate structure only if it is made available to some customers and denied to others. Actually, universal retail wheeling offers the easiest and perhaps only way to eliminate the discrimination now creeping into utility rate structures. Traditional ratemaking can do little to check rate discrimination as long as retail wheeling is prohibited. Rate discrimination can only be reduced by giving all customers free access to competitive markets, and this can be done best by making retail wheeling universally available as quickly as possible.

While regulation cannot manage competition, it can promote equitable rate structures by ensuring that utilities and other power suppliers do not exercise undue market power. Rate structures will be nondiscriminatory only when there is effective competition for all customer classes. Otherwise there will be special rates for special customers. At least initially, competition will be more effective for large customers than small ones. And because suppliers of small customers will have undesirable market power, regulators will need to constrain that power to ensure that effective competition is extended to all customers. t

Charles M. Studness is a contributing editor of PUBLIC UTILITIES FORTNIGHTLY. Dr. Studness has a PhD in economics from Columbia University, and specializes in economics and financial research on electric utilities.

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