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Regulation or Technology? Low-Income Electric Customers and the Transition to Competition

Fortnightly Magazine - November 15 1995

Twenty-five centuries ago, 300 steadfast Spartans, defending their sacred Greek turf, held up Xerxes's Persian army at the pass at Thermopylae just long enough for the Persians to lose the opportunity to conquer Greece. The world would have been quite different if the Spartans had just "given way."Contemporary state public utility regulators number just about that of those plucky Spartans. They too are defending their sacred ground. Like Xerxes's army in 480 B.C., American electric utilities today are trying to squeeze their way through a perilously narrow passageway. They are being pushed from behind by the force of competition, which is as tough a master as Xerxes ever was.

Will electric utilities, seeking the flexibility necessary to prevail in the competitive market, be delayed so long that they too lose the war?

Protecting the Residential

Customer

The sacred ground many regulators believe must be protected is the network of rules and regulations designed to protect residential customers from abuse by a monopoly utility service provider. Often, these rules and regulations have developed a special emphasis on the low-income customer, considered particularly vulnerable and in need of protection. Virtually every current utility regulation is held in place by three related regulatory predispositions:

s the expectation that a utility will do its best to extract monopoly profit from customers and take advantage of them because they have no alternatives, or only very expensive ones

s the view that residential customers, particularly low-income customers, need regulatory "protection" because they are either unwilling or unable to make the informed decisions required to function in a competitive environment (This notion is especially pronounced when competition initially appears on the horizon. In short, there is some underlying sense that customers may not be well equipped to make choices even to the extent that they are available.)

s the practice of embracing inter- and intraclass subsidies in the pricing of utility services. (These cross-subsidies are usually drawn from and distributed across wide groups of customers, rather than narrowly targeted to those falling below a maximum income threshold.)

In an era marked by increasing competition in the electric industry, the critical problem for electric utilities is not that the rules inhibit any inclination to exploit a monopoly position, but that many of the rules and policies significantly limit the flexibility they need to compete with new entrants. This flexibility is needed to maintain relationships with increasingly elastic customers able to extract concessions from their suppliers.

Also significant in propelling the market toward competition is the legacy of distorted pricing. Regulators have subtly conveyed subsidies to residential customers at the expense of business customers. These subsidies have become such an accepted feature of the utility landscape that residential customers have had no idea they were being subsidized. The resulting high prices charged to some business customers encourage entry and subvert economically rational pricing, which is imperative for utilities during the industry transition to competition.

The key lesson of transitions to competition in other industries (telecommunications, financial services, natural gas, airlines, trucking) is clear: Flexibility is crucial as the real action moves

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