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Fortnightly Magazine - July 1 1995

to measure this overpayment by the difference between the utility's marginal cost and the QF's marginal cost. In an open marketplace, producers make economic profits whenever they are able to sell power above their marginal cost. The market price represents the marginal cost of the least inefficient producer that supplies power to the marketplace. The most efficient and lowest-cost producers make higher profits.

The "overpayment" problem actually stems from an erroneous assumption that you can get the prices "right" (em first by mechanically and administratively measuring a utility's avoided cost, and second, by requiring the utility to take all available power at that price. A not-too-surprising outcome is that utilities will pay more than their avoided cost, and retail customers will overpay for QF power. The "right" price is much more likely to result from the utility (em first, determining how much new capacity it will need, and second, executing some form of market-based procedure to establish the market price of this capacity. Utilities and state regulators are moving in this direction as exempt wholesale generators and other NUGs enter the marketplace.

I We seriously question whether retail customers would be best served by the absence of retail competition. Mr. Standish presumes that the utility can act as an effective middleperson in looking after the interests of retail customers. However, proponents of retail competition argue that only customers know what is in their self-interest; therefore, they should have the right to deal directly with generators, brokers, and other market participants. This means that retail customers, large and small, can only receive the full benefits of a competitive and more efficient market if they have the right to choose among services and service providers. We find this argument persuasive and consistent with the experiences of other regulated and unregulated industries.

I We disagree that the intent of Congress was clearly to prohibit the state from ordering retail wheeling. As mentioned in our article, we believe that the federal courts will ultimately decide this matter.

D The fact that state PUCs and legislatures are hesitant "to be first" perhaps most reflects the perception that retail competition will produce significant changes in the electric power industry. Historically, PUCs have tended to act cautiously. Those who have studied this issue know that "things won't be the same" after retail competition. Although some PUCs may be convinced that retail competition will only "redistribute costs," others are most concerned about the unknown. PUCs, as well as almost everyone, are uncertain about how retail competition will affect, say, future utility planning, operations, and pricing. They may consider retail competition unnecessary as long as the electric power industry seems to be performing reasonably well.

Overall, Mr. Standish's comments reflect a reactionary view of the changes occurring in the electric power industry. More and more of his colleagues in the electric power industry see retail competition coming and are preparing for it. Contrary to Mr. Standish, we also believe that retail competition is inevitable and, if done correctly, good public policy. The last point underscores the need for regulators and legislatures